Oil and gas shippers may shun Suez as piracy escalates

Nov 19, 2008 01:00 AM

by Alaric Nightingale and John Martens

Ship-owners controlling almost a fifth of the world's oil supertankers may shun Egypt's Suez Canal after an escalation in pirate attacks off the east coast of Africa, potentially increasing the cost of delivering crude.
Euronav and TMT, owners of ships designed to haul Middle East crude to Europe and the US, joined Frontline, the largest operator, in saying they are reviewing whether to divert carriers around South Africa. Bergen, Norway-based Odfjell, the world's largest owner of chemical transporters, already said it won't sail past Somalia while BW Gas, the biggest liquefied-gas shipper, may do the same.

"We've always told our captains to stay far from the coast in that region, but that may not be enough now," Euronav's Chief Financial Officer Hugo De Stoop said from Antwerp, Belgium. "Terrorists or pirates, I don't really see the difference."
Frontline, Euronav and TMT together control 90 supertankers, enough to carry more than two days of global demand, according to Athens-based Optima Shipbrokers. A decision to avoid the Suez Canal, Egypt's third-biggest foreign-currency earner, would delay oil deliveries and reduce the supply of available vessels. A trip around South Africa may add another 25 days to chartering and fuel costs.

Securing routes
TMT Chief Executive Officer Nobu Su "urged" other owners to take the same action to secure trade routes. Jens Martin Jensen, interim chief executive officer of Hamilton, Bermuda-based Frontline's management unit, said he may also divert ships. Somali pirates on Nov. 15 seized their largest ever prize, a Saudi Arabian supertanker laden with 2 mm barrels of crude, worth about $ 108 mm at current prices. The ship itself is worth about $ 148 mm.
Teekay, the world's largest oil-tanker owner, said it was still transiting through the region "but monitoring the situation closely and taking extra precautions," spokeswoman Alana Duffy said.

Ransom payment
The Sirius Star is now anchored in Somalia's northern Eyl coastal region with the hijackers negotiating a ransom payment with Vela International Marine, a Saudi Arabian state-backed oil-tanker company.
There have been at least 88 attacks against ships in the area since January and Somalian pirates are holding 250 crew hostage on board 14 merchant vessels. Shippers sailing to the US and Europe from the Middle East would instead have to take vessels around South Africa's Cape of Good Hope rather than the Suez Canal. The waterway links the Mediterranean and Red Seas.

Customers have been given "the option to safeguard their cargo," BW Gas Chief Executive Officer Jan Hakon Pettersen said from Oslo. "For us, we would prefer them to use the cape route."
The Joint Hull Committee, representing ship insurers, is advising ship-owners to "seriously consider" avoiding Somalian waters, Chairman Simon Stonehouse said.

Damaging business
Insurance premiums will rise and unless the Egyptian government becomes "more actively interested" in combating piracy in the region they risk damaging the business of the Suez Canal, Stonehouse said.
"If they stop shipping through the Suez, going round Africa instead, that's going to reduce supply," said Glenn Lodden, an analyst at DnB NOR Markets in Oslo. "There's a clear incentive for owners to go around Africa." Other ship-owners are likely to follow should Frontline, Euronav and TMT choose to divert vessels and after the Joint Hull Committee has urged companies to do so, Lodden said.

Tanker owners may elect to charge more for sailing through Somalia's waters rather than re-routing, Per Mansson, managing director of shipbroker Nor Ocean Stockholm, said.
"Maybe one or two will avoid, but most will go there against a premium to start with," Mansson said. Still, "one more hijacking of a tanker and the situation is in a different light."

Contracts advance
Derivatives contracts indicating the December cost of shipping Saudi Arabian crude to Japan, the industry benchmark,advanced 6 % to 71 Worldscale points, Justin King, a broker of the contracts at Tradition Financial Services in London, said.
Worldscale points are a percentage of a nominal rate, or flat rate, for more than 320,000 specific routes. Flat rates for every voyage, quoted in $ a ton, are revised annually by the Worldscale Association in London to reflect changing fuel costs, port tariffs and exchange rates.

The fact owners say they are considering rerouting is buoying demand for the contracts, said Ben Goggin, a broker at SSY Futures, a unit of the world's second-biggest shipbroker.
The European Union in October joined the North Atlantic Treaty Organization, India, Malaysia and Russia in deploying vessels to combat piracy.

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