BETTING $20 BILLION IN THE T-A-Y'(ER GLA_!-1E Shipowners won big in last year's market, and then put their winnings back on the table. Now the Arabs have changed the rules.

by Lewis Beman

Starting a generation ago with some war-surplus ships, a few dozen independent oil-tanker operators have built a great industry and, in some cases, become very, very rich. Along the way, they have also built a reputation as gamblers-men who skillfully play for high stakes in a treacherous and unpredictable market. Last year, the independent operators placed their biggest bets ever. They ordered $20 billion worth of ships, enough to double their tonnage in the next four years. And they did so without any assurance that the ships would be needed.

As things turned out, they could not have placed those orders a t a worse time. Shipowners based their judgment of the need for ships on the assumption that the oil-consuming countries would import rapidly increasing amounts of cheap crude from the Middle East. The trebling of oil prices after the Arab embargo has, a t the very least, assured slower growth in demand than the industry had expected. To make matters worse, the ship- owners bet most of that $20 billion on very large crude carriers (VLCC's), as they call the giant supertankers designed to bring oil from the Persian Gulf. In the wake of the changes that the Arabs are forcing upon the oil busi- ness, many maritime experts think smaller, more versa- tile ships may be needed. Some worry that the VLCC's will prove to be as overspecialized as the brontosaurus.

A son too intelligent In any other industry, decisions on investments so huge

would be wrapped in the full panoply of managerial sci- ence--economic forecasts, cash-flow projections, feasi- bility studies, and the like. In shipping, however, the in- dividual capitalist still reigns supreme-often a t the head of a family firm that includes his deferential sons and

Reseal-ch associate : An% Hengstenberg

nephews. Each fleet is customarily treated as an exten- sion of one man's personality-never "National Bulk Carriers" or "Olympic Maritime" but "Ludwig" or "Onassis." And it is generally accepted that the head man is entitled to play his hunches. Norwegian shipown- e r Erling Naess, who started his tanker fleet on $30,000 in 1946 and sold i t to Zapata Corp. for $48 million twenty years later, is representative of the breed. "I tell my son Michael that he is too intelligent," Naess says. "I use my nose." (Michael graduated second in his class a t Harvard Business School in 1969.)

Individualists though they are, independent tanker operators have worked out a symbiotic relationship with the giant international oil companies. For reasons of financial and operational flexibility, the "majors" own only about a third of the ships they require to move crude oil and refined products through their distribution sys- tems. They get the rest of the ships they need from the independents, on time charters or in the spot market.

Scandinavians take the big risks This oil-industry practice gives owners sevt~ral stra-

tegic options. Accepting a time charter guarantees the owner a definite income for a certain period. For a VLCC of 250,000 tons, a five-year time charter has averaged about $2.50 per deadweight to11 1)t.r month, or $7.5 million a year. A single-voyagtl chatrl cr i n the spot market, on the other hand, offers thrt possibility of extra- ordinary profits when there is a. s h ~ b r t i ~ ~ t * o f ships-at the risk of heavy losses when tht* d~l ica t r balance of supply and demand tips the other way. Tht) owners tend to develop distinctive strategies for playing the tanker mar- ket, depending mainly on their willingness to accept risk.

That willingness seems to vary roughly by nationality.

'aul Weller FORTUNE August 1974 145

The moat daring of Norway's rnterpr~srng shipowners, Hilrnar Reksten has comm~llcd nlne supertankers to seeking cargo in Ihe spot markel, where rates I luc lu~!c w~ldly, from gloriously profitable lo below breakeven. Many shipowners consider Rek- sten too daring To lhem he replies "I've been in the business for thirty years-and lhal counts lor something "

Chinese and Japanese owtiers tend to run very large fleets on relatively couservtiti ve p1.i nciples. They have generally orclerecl ships olily after securing a long time chartei. from H mtt,ior oil coniptt~ty, rind they almost never ru1111 ship 011 the hnrl.owi~~gly volttlile spot mnrket. Some Greeks h a w also I )u i l l up huge fleets oti the churter- first policy, but most have tendetl to concentrate on smaller and olcler vessels, running many of them in the spot, market (see "The (hime of the Greeks" on page 148). But the real gttrnb1ei.s are the Sc~nclir~uvians, who have been forced by circumstances illto the riskiest game. Norw7egians ow11 less t h ~ n 15 percent of the world tanker fleet, but account for ttetirly 50 pellc.eltt of the ton- nage in the spot market.

Talking about the spot market, a IJonclon tanker broker observes with only milt1 exagger~rt i o i ~ : "One ship too few in the Persinu Gulf cii11 setid rclles so;rring through the roof: one ship too mnny call sent1 thtlm crashing through the floor." The i'ctter. are calci~lritecl on a complex "world- scale" intlex atloptcd by inrlusti*). ~ g t ~ c o m i ~ n t and designed to equ~lize the revenue pel. ton prr (lily on any voyage. During three weeks i t i May, 1073, the index rose for VLCC's from worldscitle 92.5 to wt)~~ldscale 210 ; over a similar period last fall, rates fell from worlclscale 410 to worldscale 57. The difference betweeti what a 250,000-ton

supertanker could have grossed on @.single voyage at the top of the market last fall and what i t had to settle for a t the bottom last winter came to a startling $8 million.

The Sit1 Cl~nrles Ha~j&b?.o, a 28@,000-ton supertanker launched from a Norwegian shipyard only last year, has already experienced the best and the worst that the spot market has to offer. The vessel slipped away from the shipyard dock in Bergen on July 4, threaded through the rocky cliffs of the Kloster Fjord, aild took the 11,600-mile passage around the Cape of Good Rope. A month later the ship arrived a t the Persian Gulf in the middle of a bull market and picked up a cargo from Gulf Oil a t world- scale 250, which netted something like $3 million on the maiden voyage, Returning to the h l f in early October, the Hamb?.o arrived near the peak of a wild scramble for tonnage and took on a cargo for Shell a t worldscale 380. Brokers estimate that the trip earned more than $7 million, a triumphal voyage that ranks beside Sir Francis Drake's return with the Spanish treasure.

"I was in the best pmltion" The Hantb~~o set out on a third voyage after the

Arabs had unsheathed their "oil weapon" and returned with a record of a different sort. Starting for the Persian Gulf in mid-November, the ship did not get another cargo until mid-May, and even then had to accept worldscale 52.5, barely enough to cover the operating costa for the trip back home. Brokers estimate that the wait cost the Hambs.o's owner, a Norwegian named Hilrnar Reksten, more than $3 million.

Like a high-stakes poker player who has survived more than his share of second-best hands, Hilmar Reksten can contemplate the vagaries of fortune with philosophic de- tachment. Six years ago, after a long depression in freight rates, people in the industry were saying Rek~ten was near bankruptcy. Legend has him actually on the way to tell his bankers the bad news on June 6, 1967, the begin- tliiig of the Six Day War, But the closing of the Suer, (:atla1 generated a huge demand for additional tonnage, "People called me broke," Reksten says, "but I was in the best position of any owner-I had 1.7 million tons 011 the starting line." With that appraisal most in the industry agree. Says C. Y. Chen, founder of what is now the shipping subsidiary of General American Transporta- tion : "Mr. Reksten overnight made more money than anyone, probably, in the history of the business."

Virtually unknown outside the tight community of in- ternational shipping, Reksten, a t seventy-six, has earned a certain notoriety among his peers. They know him, in- deed speak of him with awe, as the only man who ever dared to commit an entire fleet of supertankers to the pot market. In an industry that discusses the quirks and foibles of shipowners the way s p ~ ~ t s writers talk about quarterbacks, Reksten tends to be put in a special cate- gory. Being unique, his business strategy is generally attributed to personal eccentricity of an extreme sort.

146 FORTUNE August 1974 I

Reksten says his strategy was not entirely a matter of choice, but was compelled by economic necessity. "It's been said I'm a gambler," he says. "I admit that, if you understand why." According to his account, he was forced into the spot market because he could not compete for time charters with such Greeks as Onassis and Niarchos. By law, Norwegian owners must run their ships under the Norwegian flag. They pay considerably high* crew costs than the Greeks, who may, and do, run under flags of convenience, mostly Liberian and Panamanian. ( In addi- tion, Reksten preferred to buy his ships in Scandinavian yards, though he could have bought them more cheaply in Japan, a s did the Greeks.)

"I was told you couldn't take a 200,000-ton tanker and run i t in the market-it was too risky," Reksten says. "I thought about it a bit, I hesitated a bit, but I did it. I t was not that I was by nature courageous. I t was the only way I could get a freight rate that would not only be profitable but would allow me to renew my ships when they got old."

Like maneuvering an army In the mid-Sixties, shipowners were routinely leasing

supertankers to the oil companies for periods of ten years o r more. To do that, Reksten felt, would not only prevent him from earning sufficient income, but also force him to relinquish control over his fleet to the char-

and was interested in three of our ships. I took the phone, said, 'It's me,' and asked, 'What is the rate?' The broker said 140. I liked the rate and asked whether Exxon wanted to take on another ship, too. Exxon's man said simply, 'It's a deal.' The whole transaction took only a few min- utes and I had signed up four ships for six voyages each."' I t was not the peak of the market, but that single con- tract, which ran out only last month, brought Reksten revenues of $80 million, much of which came in after the market dropped.

"I maneuver my fleet the way you would maneuver an army," Reksten says. His ships are of only marginal sig- nificance in normal times (repres'enting perhaps 1 percent of world t,anker tonnage), but of critical im- portance a t times of peak clemancl. Most of the tankers in the spot market are under 100,000 tons, and VLCC's can carry oil long distances a t half their cost per ton. As Reksten sees it, by running the most efficient ships in the spot market, he is offering oil companies a valuable ser- vice a t the lowest possible cost. He bristles at charges that he is a profiteer. I n fact, he considers the freight rates experienced a t the top of last year's boom unhealthy. "We never demanded those rates. When they got that high we .just said, 'Do you want to offer the market?' This

Bv re~utation the most cautious of Norwegian shipowners, terers. "The bankers told us thev wouldn't finance a shir> ~kval 'Bergesen has stayed out of the unpredictable spot mar-

unless we had a wit., a major oil company. Othek k 2 and chirtered his ships long term to earn assured revenues Wh~le other owners were eagerly ordering big tankers last year.

owners went along with them ; 1 said no. Eventually Bergesen shrewdly refrained Says he "That's the difference my position was accepted by my bank, Hambro's, who between pess~rn~sts and optirn~sts "

understood what I was trying to do." (The Sir Charles HarnB9-o is an obvious tribute, standing out in a fleet of ships almost all named for Roman emperors.)

Winnings in the spot market have allowed Reksten to amass more assets than many businesses on FORTUNE'S list of the 300 largest industrial companies outside the U.S. Reksten's ten ships add up to 2,330,000 tons. At today's prices, the fleet would be worth easily half a bil- lion dollars. If Reksten had been willing to charter his ships long term, he would have assured revenues of per- haps $6 million a month. But in the six months that marked the peak of the market last year, he was probably making three times that much.

The spot tanker market is no business for men who like regular hours. When it is early afternoon in the mid- Manhattan offices of the world's principal charterers, i t is well into the evening in Norway. Reksten's office sits, as he puts it, "in the corner of my garden" across the road from a Bergen nursery school. I t operates, in shifts, eighteen hours a day.

Reksten's fond recollection of an episode in May, 1973, illustrates the way he likes to do business: "It was late in the evening. I stopped by the chartering room. The telephone rang. It was a large London ship broker who said that Exxon was on the other line from New York

FORTUNE AUgUSt 1974 147

is very important to me because I never demanded ex- orbitant rates. I don't like it. It's crazy. But when rates get tha t high you can't just simply si t and say 'no.' I made so much money that i t was not sound."

Now a different kind of unsoundness afflicts the busi- ness. With the market teetering toward disaster, Rek- sten's subordinates must strain to get the best rates they can. Even after the Arab embargo ended last March, the Persian Gulf continued to be a depressed area for ships operating in the spot market. While a brief shortage of small tankers sent rates up 150 points for vessels under 40,000 tons, the rate on a VLCC stayed a t around world- scale 70, just about enough to cover operating expenses.

An expenslve waiting game Toward the end of May, a temporary firming in the

Persian Gulf market brought hope in Bergen that lSates were again on the way up. The action in the chartering room was close enough to a real poke13 game tha t i t seemed appropriate when visitors were presented with decks of cards bearing the Reksten flag. Reksten played n steel-nerved waiting game by transatlantic telephone. He was offered a voyage a t worldscale 85, which he turned down in the hope that a little patience would bring the bid to over 100. That fifteen points would have been worth $340,000 on the 230,000-ton Falkefjell, one of three VLCC's that Reksten has "chartered in" from other owners. (Time charters between owners a r e not unusual, but only Reksten has chartered in supertankers to run on the spot market.) Perhaps more important. than the additional money was that a higher rate would have estab- lished a better climate for Reksten's Kong Hnakon V I I , which in two weeks was due "off Dubai-load-ready any Persian Gulf port."

The waiting game turned out to be a costly play. Oil companies flooded the spot market with "relets"--ships tha t they had chartered long term but had no cargo for- and knocked the rates way down. After a week, the Falkefjell accepted worldscale 70 from British Petroleum. Adding the $340,000 loss from the slippage in rates and the $25,000 a day he was paying to charter the ship, Rek- sten had maneuvered himself out of a half million dollars.

The Falkefjell, moreover, was only one of five super- tankers Reksten deliberately left idle for periods of up to

1 -1 six months in the vain hope that the tide would turn in " : the tanker market. For all his philosophic nature, Rek- . sten is uncomfortable reflecting on that decision. "It was

, , . a mistake," he readily concedes. He attributes his action in part to a miscalculation ("I thought the Arabs would at least maintain production"). He also says he made a I deliberate sacrifice, similar to the sacrifice that the leader of an underwriting syndicate is supposed to make in a bear market ("I am watched very closely and did not want to add to the panic"). Whatever the reason, the gesture cost him $5.5 million of those "unsound" profits he had earned the year before,

continued page 220

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THE GAME OF THE GREEKS:

Greelc shipow~~ers seem to relish their popular im- age as daring gamblers, but they don't really live up to it-at least not compared to the Scandinavians. ,410ng the l)ar~.en coasts of the Aegean, endurance has a special value. As Basil P. C;oulanclris puts it, "the prime motivation of shipowners is not to mnke money, but to survive." The Greeks have generally followed a policy of chartering their supertankers long term to earn an assured income. When they play the risky spot market, they do so j~rimarily with smaller ships that have been paid offFf.

Goulantlris (like Aristotle Onassis and Stavros Niarchos) has amassed a huge fleet of supertankeis. Rut most Greek ships are under 100,000 tons, half of what i t now takes to be called a supertanker. Costas Lemos, one of the largest Creek shipowners-and, some say, the ~ichest-has only four supertankers. Twenty-five of his tankers are under 100,000 tons;

Goulandris

Karageorgis

iURVlVAL COMES FIRST

several of them are more than fifteen years old. Greeks run smaller ships than the Scandinavians,

it1 part tterause the Greeks pay their crews less. Since small ships are relatively more labor intensive than large ones. the (:reeks have an advantage in that segment of the hi~siness. Over the years, the Nor- wegi;~r~s have tl'atlecl up. selling their older ships, freqilently to the Greeks. Last year the prices paid for the shills halloonecl: the cost of a 25,000-tonner shot up from 52 million to $5 million. Now that freight rates have collapsed. it. seems obvious that some buyers paid too much. Says Manual Kulukun- tlis, the elder statesman of Greek shipping: "The most vulnerable are small owners who bought ex- ~'ensive second hantl ships a t the top of the market."

'I'he Creeks have aiso ordered some 20 million tons of new shil)s. Sevc?ml have bought supertankers for the first time. Minos Colocotrol~is, who currently

owns no ships larger than 150,000 tons, ordered two 375,000-tonners. Michail Karageorgis, on the other hand, stood by that old Greek preference for small ships. He has twice as much tanker tonnage on order as is in his existing tanker fleet, but none of the orders are for supertankers. "We anticipated that the Suez Canal would reopen," he says, "and then smaller ships would have an advantage."

Most if not all Greek shipping companies are fam- ily firms. Sometimes, indeed, it seems as if all Greek shipowners are related. When people said during the buying spree that everybody and his brother were ordering ships, it might have been tcue. John M. Carras, whose daughter is married to a competitor, thinks private family companies have an advantage. "If you make a mistake," he says, "you don't have to go before your stockholders and explain." Maybe only your father-in-law.

The Tanker Game continued from page ircr The massive losses Reksten had to swallow periodically

reinforced the views of other owners that his type of spot-market g?me was far too risky-at least as a full- time occupation for their supertankers. Other owners have dabbled in the spot market in hopes of winning big, but a t the same time they have taken precautions that minimize their risks. Playing the spot market with older ships that are fully paid for is one way to limit exposure. Another, used for ships under construction, is to contract a time charter that will take effect several months after the new vessel comes out of the yard. In the unchartered months, the owner may try his luck on the spot market, comfortable in the knowledge that he won't be subject to its whims forever.

Never in a bad market

Some owners play the spot market with "combination ships" that can carry oil or dry cargo. Although combina- tion ships generally cost 15 percent more than straight tankers, they enable the owner to switch out of the oil business entirely if the rates become unremunerative. They can also pick up ore or coal on a t least part of the "ballast leg," where a straight tanker would be traveling empty. Halfdan Ditlev-Simonsen Jr., a Norwegian, plays the spot market with six oil-bulic-ore carriers. He and other Oslo shipowners share in some contracts to carry coal from the U.S. and iron ore from Brazil. Last year, when tanker rates reached record highs, Ditlev-Simonsen and other owners of oil-bulk-ore carriers "chartered in" dry cargo ships to meet their commitments to carry coal and ore. They wanted to speed their own vessels back to the Persian Gulf to capitalize on the lucrative oil business.

Shipowners who prefer time charters may occasional- ly put their supertankers into the spot market and wait for time-charter rates to go up. While time charters fluctuate less violently than single-voyage rates, they can vary by several dollars per ton per month between peaks and troughs. Hagbart Waage, seventy-five, who owns one of Oslo's largest tanker concerns, follows the maxim : "Never fix a time charter in a bad market." When the 225,000-ton Sysla was delivered during a slump in the spring of 1972, Waage sent her to the Persian Gulf on spot rather than take a low time-charter rate. Her first cargo was a t worldscale 15, the lowest rate any tanker has ever accepted. The ship grossed only $300,000-little more than enough to cover the fuel bill. After a few barely profitable voyages in the fall and winter, she finally hit i t big in the booming market in the spring of 1973, earning $20 million on six trips. But Waage found i t easy to avoid the temptation to let his winnings ride in the spot market. When Shell offered to charter the Sysla for two years a t $30 million, he snapped up the deal.

By the time Waage took delivery of the 280,000-ton Radny in November, however, the bull market had evap-

220 FORTUNE August 1974

orated. Slow steaming to the Persian Gulf (partly to save on fuel, partly to delay the inevitable), the Radny had to wait three weeks before picking up a spot cargo on which she barely broke even. A sister ship, to be delivered this month, will soon be competing for cargo with the Raclny in a spot market that has since grown even worse.

Even when a shipowner can sign up a time charter, he is playing a riskier game than he has in the past. In the Sixties, many VLCC's were chartered out for periods of up to twenty years a t rates as low as 88 cents per ton per month--or $2,640,000 a year for a 250,000-ton vessel. The owners expected those charters to yield moderate but predictable profits. The deals assured them a steady flow of income and the risks seemed low.

To the owners' surprise, their "quiet game" turned hazardous in an era of inflation and currency chaos. Charters had been written with the expectation that crew costs would go up about 5 percent a year ; actual costs rose several times that fast. The costs of repair and mainte- nance, expensive items for large ships that can be handled by only a few drydocks, have gone up even faster. Insur- ance costs have doubled. And the devaluations of sterling and the dollar, the currencies in which most charters were written, have hurt the owners badly. Independent oper- ators are now running heavy losses on long-term charters. The losses for 1974 are estimated to total $375 million.

They need permission to hush a cat During recent years, as the risks in long-term charters

became evident, many shipowners felt forced to play, if not Reksten's game, something approaching it. Says Greek shipowner Basil P. Goulandris, who had chartered out long term: "Reksten took too many risks, but he foresaw the situation better than we did." Like most other owners, Goulandris has had reservations in recent years about signing a time charter of more than five years. This short-charter policy has some characteristics similar to playing the spot market. With ships coming off charter more frequently, the probability increases that an owner will be stuck with a vessel nobody wants to charter. On the other hand, of course, having a ship come on the market a t the right time can be very rewarding.

Last fall, in the rising market, Swedish shipowner Sven Salen fixed three-year charters on two VLCC's for $80 million, enough to pay the full purchase price of the ships, after all expenses. Manager of a fleet founded by his father in 1915, Salen is well aware of the ups and downs of shipping. "We have tended to order in bad markets with the idea that the ships would be delivered when the market is good," he says. Compared with last year's per- fei t timing, he fears that circumstances might be different next year, when he has to find charters for three new 350,000-ton tankers and four older VLCC's that are com- ing off charter. "But that's the way the business is," he says. "We have always had great swings in the past, and the last two years have been very good."

continued page 995

The Tanker Game continued

The largest of all the Norwegian shipowners, Sigval -' Bergesen, stands out a s an extraordinary case of a tanker . man who still charters long term. By reputation, Bergesen

is the most conservative of the Norwegians. He owns 5.5 ., million tons and he commands respect, in the most literal

sense. As he puts i t : "I run a one-man show. Nobody here says hush to a cat without consulting me first." Son of a shipowner, Bergesen struck out on his own during the Great Depression when his father, seventy-two, showed no signs of retiring. He himself is now eighty-one and enjoys piloting an Italian speedboat across a Norwegian fjord a t forty miles an hour. Rergesen concedes Ibat in- flation has greatly increased the risk of long-term char- ters, but he says: "It is better to take a long time and a not-so-good charter than to have no charter a t all."

Keeping enough millions at hand To focus on Re~.gesen's chartering tactics, or to accept,

uncritically his reputat.ion for conservatism, would be to miss the real game he is p1:~ying. Bergesen makes his big money not in chartering but in the buying and selling of ships. Last year, he sold six supertankers-includj17g four 400,000-tonners on which construction had not even begun

. . -for a net profit of more than $200 million. Pl;iying this . . game takes a lot of cash. "I always make i t a point to have a sufficient number of millions at hand," Rergesen says. I t also takes a fantastic credit rating. "Three years ago," Bergesen says, "during a two-week period, I ordered five ships, 400,000 tons each. I t was done casually, like we are sitting here, talking. To finance the ships, T had to get a loan of one and one-half billion Norwegian kroners [about $300 million]. I picked up the phone and called Den Norske Creditbank in Oslo and Hambro's bank in London. Whcn I put the receiver back on, I had made oral deals for the sum-half from each bank."

Of course i t was not really all thnl casual. As Bergesen puts it : "I always prepare my project over a long period of time-then decisive action only takes seconds. Fantasy and thoroughness a re key words for me." Indeed, Berge- sen seems to have displaycd a genius for timing. Last year he was noticeably absent from the great "ordering orgy" that now threatens to bring on an overabundance of su- pertankers. "I joined the ordering boom a t the beginning but backed out and sold six VLCC's. My company will probably not order any more supertankers for some time." A lot of other shipowners now wish they had been gifted with that sense of timing.

The big surge of orders resulted in par t from that natural instinct that makes eager gamblers return to the tables af ter a big win. But there were also other influ- ences a t work on the shipowners, including the tax laws. Norwegians are subject to some of the world's steepest income taxes, but their profits are almost completely sheltered to the extent that they reinvest the money in

shipping or related activities. Thus the big profits of 1973 led almost automatically to big investments.

Some new considerations also encouraged the owners to order more and bigger ships last year. The supertanker had been developed to bring crude from the Middle East to Europe and Japan, But when U.S. oil production peaked out in 1970, Venezuela, the main foreign supplier to the U.S., was not capable of filling the higher demand. Oil exports from the Middle East to the U.S. doubled in 1971 and went up an additional 26 percent in 1972. When the U.S. eliminated its quotas on oil imports in May, 1973, the owners believed that more and more of the U.S. needs for oil would be filled from the Persian Gulf.

To tanker owners, a barrel of oil from the Middle East is the equivalent of several barrels from anywhere else. The trip around the Cape of Good Hope to the Eas t Coast of the U.S. takes more than a month, compared with the week or so it takes to bring oil from Venezuela. While only a little more than two million tons of tanker capacity are required to transport one million barrels a day from Mari- caibo, more than ten million tons are needed to carry the same amount from the port of Ras Tanura in Saudi Arabia. Shipowners believed the bulk of the increased trade would go to the supertankers because they were the most economical. Never mind that the U.S. had no ports that could handle the big ships-the Americans would build them.

Like buying a diamond Optimistic shipowners found plenty of people who were

eager to encourage their buying. After a tanker boom in 1970, shipyards invested heavily in new facilities geared specifically to the construction of VLCC's. When the tanker market hit one of its periodic lulls in 1971, new orders were slow in coming. When the new boom came along, shipbuilders saw i t a s a time to recoup-and to ensure employment of their facilities f a r into the future.

Numerous U.S. banks, looking for action on the Euro- dollar market in the early Seventies, discovered the ship- ping industry's huge appetite for capital. The correspond- ingly huge profits made the shipowners appear to be good risks. Merchant banks in London put together syndicates that made i t easy for the newcomer banks to invest in what looked like a sure thing. Shipping experts a t the established international banks say the easy terms offered by the syndicates encouraged some owners to get in over their heads. Predicts a London-based officer of a major Manhattan bank : "We might see some midwestern banks in the business of operating supertankers."

The easy money also sucked in some shipowners who were new to the supertanker game. Says a Norwegian operator who does not relish the additional competition: "The trouble with a boom like last year's i s that the banks find out how much money we make and then finance someone who doesn't know what it is dl about," Fully half of the owners who have supertankers on order now

continued page 286

pi? own none a t all. Some owners have ordered several times

, . more tonnage than they now own. To order a million tons takes a minimum of $175 million, but somehow more than

, thirty independents have come up with enough money for a t least the down payment.

.I The boom helped send ship prices climbing by a s much : as 60 percent in Japan over the course of the year. But I .

3 that didn't slow down the buying. The tanker menthought

I .

the price of ships would rise even higher in the future, and

1 . they considered ships a safe haven for their capital. "They - bought ships the way you'd buy a diamond," says Con-

: - stantine Gratsos, who heads U.S. operations for Aristotle Onassis. "But with a diamond you can just put i t in a safe and wait. A ship costs thousands of dollars a day

'. t o maintain and it's a little difficult to visualize that as protection. We shipowners are full of excuses for the

IF

, mistakes we commit."

Intimidating arithmetic 1. Watching from the sidelines, oil-company executives

were startled by the surge of new shipbuilding contracts , being placed by the independents. In the days when the in- . dependents fixed a long-term charter before they ordered

a new ship, the ordering spree probably would not have occurred. The oil companies wouldn't charter what they

, didn't need, and without the charters, the ships woultln't . be built. The movement away from the charter-first policy

in the Seventies cut the independents off from oil-com- $ pany planning. They no longer had a way of equating ' future supply with future demand, and an important

constraint was removed from their gambling instincts. Christopher J . Chrven, manager of Exxon's transporta-

tion operations, predicts that by 1978 one-quarter of the tanker fleet-more than 100 million tons-will be surplus. Most operators ridicule such dire predictions. Some dark- ly suspect an oil-industry slrategy to frighten them into signing charters a t low rates. But even the most optimistic owners can't help but be intimidated by the arithmetic.

The industry as a whole will have 600 supertankers coming on the market in four years. Eleven independeni. owners of VLCC's will each have to find employment for more than two million tons in that period. To employ all the ships will require an increase in oil consumption of more than 13 percent a year, with most of the additional supply coming from the Persian Gulf. Even in the Sixties, world oil demand increased by only 7.5 percent a year. And now that the Arabs have run a successful embargo, consuming nations will t ry to hold down their purchases from the Persian Gulf for strategic reasons. Grand ges- tures such a s "Project Independence" may not fully pan out, but consuming countries will almost certainly have some success in turning away from the Arabs. The North Sea, for instance, is thought to be capable of supplying a quarter of Europe's energy requirements.

The reopening of the Suez Canal, expected next year, will deal another blow to the owners of supertankers.

228 FORTUNE Auausl !1974 I . ;**

Vessels of 80,000 tons or less, capable of moving t h r o u g ~ the canal fully loaded, can cut twenty-five days off a round tr ip to Europe. Some tankers up to 200,000 tons can make the ballast leg back to the Persian Gulf through the canal, saving twelve days or so. These savings would eliminate the need for 200 supertankers. Unless the Egyptians undertake the expensive task of dredging for deeperdraft vessels, the canal will tend to put small ships back on a n even footing with the supertankers trading between the Persian Gulf and Europe. And if the Arabs build the huge new refineries they are talking about, they will further depress demand for supertankers. The VLCC's cannot be used for carrying refined products, which require smaller, more complex vessels.

Chastened by developments over the past eight months, even Hilman Reksten now worries that what the Arabs are doing to the oil industry may permanently alter the ianker game. "The war in the Micldle Eas t was something T didn't anticipate a t all," he says, "and I admit that I face an international economic and political situ;~t,ion I don't fully understand. So, for the first time in my career, I think I will just have to sit here in the corner of my garden and watch and not do anything."

"You have to be an optimist" Considering their exposure, i t is difficult to see how

independenl tanker operators can sit comfortably, whether in a garden in Norway or on :L yacht i n the Aegeah. They are used to periodic recessions, but if the dire forecasts are anywhere near the mark this time, even the strongest owners will be in trouble. I-1au11ted for years by the specter of an unemployed superta~lker draining their cash reserves, many owners fear they will have no option but to have their big ships join the Reksten fleet shopping for scarce cargo.

Halfdan nitlev-Simonsen expresses sentiment to which mosl shipowners appear to su1)scribe: "You have lo be an optimist or life woulcl be intolcrJ~l(-i." Thc owners leaven their collcern for tho future with a rcc.il.ation ol factors that might frustrate the forec.asLs. First of all, they think profligacy i l l oil consumption is a habit that will not be blunted merely by increased prices. They expect that a l te r a period of adjustment,, dc~n:incl for oil will begin rising a s fast as ever. They also h:wte~l Lo ob- serve that, paradoxically, higher oil prices can increase the demand for tankers in one way. The higher cost of fuel encourages owners and charterers Lo reduce speeds. Slowing down by two knots can save as much as 25 per- cent on the fuel bill-about $150,000 on the round trip between Europe and the Persian Gulf. If the entire tanker fleet engaged in the practice of slow steaming, i t would increase the effective demand by about 20 million tons.

I t seems absurd that nothing can be done to forestall an outpouring of supertankers for which the keels have not yet been laid. Owners have reason to hope that circum- stances will keep a t least some new supertankers from

eontinzed page 228

- The Tanker Game continued

coming into the market on schedule. They expect more ' than the usual amount of slippage in the delivery sched-

' ules. Steel supplies are tight and shipyard unions are ' notoriously strike-prone. Many supertanker orders may be converted into orders for smaller tankers and carriers of refined petroleum products. Past recessions bave brought outright cancellations. But under some current k . contracts, shipowners would have to forfeit a down pay- ment of as much as $20 million to cancel construction of a very large ship.

While many owners will have a tough time making a profit on ships ordered in 1973, many shipyards face a loss on almost every ship ordered before then-inflation hit the shipyards, too, particularly in Japan. This situa- tion would seem a natural for a "walkaway deal," in

' which owners and shipyards agree to cancel a number of $ . .old and new orders. But it does not really seem probable - t h a t many such deals will come about. Shipyards and the

governments that subsidize them would rather build . . L . , money-losing ships L;han let facilities stand idle.

- I . . Eventually, almost everyone concedes, hard choices " will have to be faced. (Such is the optimism of shipown- '

ers that most expect the hard choices will have to be w . '

t ' l

faced by others.) In every recession a certain number of I

v-a ships are laid up or scrapped. In the current climate the# is considerable uncertainty about which ships will get pushed out of the market first. Normally they have been the older, smaller, less efficient ships. But there are so many VLCC's coming along, and so few ports to handle them, that many experts think supertankers will soon join the lay-up fleet.

Well, maybe there will be a war In the past, the tanker industry has often been bailed

out by political disturbances that increase the demand for ships. The instinctive feeling of shipowners is that history will repeat itself. One veteran shipowner, speak- ing with extreme candor, puts the proposition baldly: "War is the rule of existence, and war is good for busi- nes.s--especially the shipping business. Between 1945 and 1974 we've had four wars. The odds are for some kind of conflagration. The way humanity is led today you never know what is going to happen." The man does not go home a t night and pray for war. He simply sees himself as a realist.

Shipowners are also fatalists. They face with equa- nimity levels of risk and uncertainty that woulcl paralyze others. I n the words of C:onst,antine Gmtsos, the Onassis man : "The cards have already been dealt ; all you can do is pick up your hand." E N D

Gas Man from Idaho continued from page 173

cajoling from the sidelines paid off. In ;. April, 1973, Flavio Guimariies was sum- . , I; moned to a meeting in Hrasilia with the

Brazilian Minister of Mines and Energy, the president of the country's National Petroleum Council, the president of Petrobrks, and the president of the mu- nicipally owned gas company in Rio clc Janeiro. Brazil and Bolivia, i t was an- nounced, had agreed that a pipeline should be built, and that negotiations would begin the following month.

Three years after Ralph Gibson first set foot in S l o Paulo, Comgks is prepar- ing for an incredible metamorphosis. Once a local joke, and a bad one a t that, the company is now in a position to be- come one of the largest gas utilities in the world. In the wake of the pipeline agreement, Comgb has negotiated ex- clusive rights to pipe gas to around 20 million people-more than a fifth of the nation's population.

The metamorphosis will have to be a gradual one, however. The supply of gas

from Bolivia will riot be sufficient for 20 million people. Barring the discovery of some other source of natural gas, Com- gLis will continue to rely heavily on man- ufactured gas; i t has immecliate plans to build four more naphtha plants. The company will also have to import lique- fied natural gas from Algeria, Nigeria, and elsewhere. Moreover, i t will take many years, and cost billions of tlollars, to install the necessary gas mains in the expandetl Cjorngits territory.

The highest honor

To Ralph Gibson, the Brazilian-Ro- livian pipeline represents, as he puts it, "the greatest achievement of my busi- ness carecr." Those are strong words for someone who servecl twelve years as president of an important U.S. company. Rut Gibson insisk he isn't exaggerating. "The pipeline," he says, "will affect more people, and do more for the people, than anything I've done before."

Gibson's pride of accomplishment was heightened considerably last June when the Brazilian government gave him its treasured Cruzeiro do SuI-the South-

' .*.. ern Cross award. Gibson now has pal-

I--

pable evidence of his accomplishments : J d

a hantlsome gold meclal and a sheepskin certificate. But in an official decree ac- ' companying the award, the Brazilian Foreign Ministry omitted any mention of the pipeline. Instead, it spoke in the most general terms of Gibson's "out- st:intlinx service to Iirazil in connection with his 1.E.S.C:. projects here." When a reporter pressed the point, a Foreign Ministry spokesman denied that the award hat1 anything to do with the pipe- line. IIe explitined that i t was simply a tribute to Gibson's "disinterestetl, decli- cated services to Corngb."

I t should be pointed out, however, that Brazil does not bestow the Southern Cross lightly. The medal is the nation's highest honor, normally reserved for for- eign heads of state and for the elite of Brazil's own government. Over the yerrrs, more than three hundred I.E.S.C. consultants have offered their help to Brazilian businesses, and most of them have provided "disinterested, dedicated" service. Only Ralph Gibson has received the Southern Cross. E N D