FREIGHT MONTHLY

COMPILED ON THURSDAY, 02 JUNE 2011

If you would like to receive this news brief via email please register at http://salesandtrading.thomsonreuters.com/commodities _preference/ TABLE OF CONTENTS (Click the below headlines for the full story) SECRET NOTE ON IRAN SHIP SCANDAL SPOOKS ISRAELIS

SECRET NOTE ON IRAN SHIP SCANDAL SPOOKS ISRAELIS FACING PIRACY, SHIP SECURITY FIRMS SET ETHICS CODE OIL LAWSUIT MAY BE US "REVENGE" FOR BP SPILLMAGNATE JAPAN'S ONAHAMA OIL TERMINAL TO OPEN TO OCEANGOING SHIPS IN JUNE SANCTIONS, UNREST HURT SYRIA'S OIL TANKER TRADE DESPERATE GAS MAJORS SEEK SCARCE LNG TANKERS BRAZIL PORT TO SHIP MORE SUGAR, BUT QUEUE TO RECUR SHIPPING MAGNATE FREDRIKSEN IN EYE OF STORM TEEKAY SEES TANKER MARKET IMPROVING IN 2012-13 IRAN SHIPPING COMPANIES FACE MORE SANCTIONS HEAT SHIPPERS EYE CUTS, NICHE PLAYS IN WOEFUL MARKETS WORLD'S BIGGEST SHIP TO CHILL AUSTRALIAN GAS FOR ASIA NATO SAYS STOPS TANKER EN ROUTE TO GADDAFI SHIP BREAKERS SET FOR BOOM TIME IN BANGLADESH DRYSHIPS EYES OCT-NOV FOR TANKER IPO U.S. TO BE A TOP COAL EXPORTER AGAIN, THANKS TO ASIA KNIGHTSBRIDGE TANKERS' PROFIT FALLS ON OVERSUPPLY CONTAINER FIRMS PASSING ON RECORD BUNKER FUEL COSTS TO CLIENTS HIGH OIL PRICES MAY STRANGLE DEMAND: OVERSEAS SHIPHOLDING UK REGULATOR APPROVES BALTIC SHIP FUTURES SCREEN EXPANDED PANAMA CANAL TO BYPASS COAL FREIGHT TRADE CHINA COAL IMPORTS TO DOUBLE IN 2015, INDIA CLOSE BEHIND SPECIAL REPORT-IN LIBYAN OIL SHIPMENT, SANCTIONS PROVE DUMB
------------------------------------------------------------------------------------

By Dan Williams JERUSALEM, June 1 (Reuters) - A secret note passed in parliament to halt a televised oversight committee meeting has stoked a scandal in Israel over a major shipping firm accused by Washington of doing illicit business with Iran. Ofer Brothers Group, owned by Israel's richest family, denied wrongdoing after its surprise inclusion on a U.S. State Department blacklist last week, but its refusal to address a slew of media speculation about past links with Israel's security services only deepened the mystery. Prime Minister Benjamin Netanyahu, seeing influential compatriots charged with undermining the sanctions against Tehran that he has championed, gave a muted response, saying that his government had approved no deals with the Iranians. Lawmakers met on Tuesday to discuss legal aspects of the case in an economic oversight panel. But the meeting, aired live on television, was adjourned abruptly within minutes after the chairman, Carmel ShamaHacohen, received a note from an aide. The freshman legislator, a member of Netanyahu's right-wing Likud party, went stone-faced and did not reveal its contents. "Let's just be clear the note is not from a political figure and not from a business figure," Shama-Hacohen said, leaving open the possibility of an appeal by the defence establishment. "It turns out that reality is much more complex, much more complicated and touchy than the average imagination can handle." Such obliqueness excited an Israeli media long attuned to signs of a shadow war against Iran and its nuclear programme. The sea is a key arena. According to authorised accounts and espionage exposes, Israeli commercial ships sometimes provide transport or camouflage for intelligence missions, extending the reach of the small, coastal Jewish state in a hostile region. "ODD JOBS" "The Ofer Brothers are in a bind because they are a multinational company that can ill afford publicity about them having done 'odd jobs' for the country," said Amnon Abramovitch, commentator for Israel's top-rated Channel Two television news. "The Israeli government is also in a bind, because it can ill afford publicity about it having exploited multinational commercial companies for 'odd jobs' on behalf of the country." Asked by Reuters to comment on such reports, Ofer Brothers said it deferred to government statements about the need to maintain sanctions targeting Iran's nuclear programme. The U.S. State Department accused Ofer Brothers Group and a Singapore-based affiliate, Tanker Pacific, of selling Iranians a ship for $8.65 million. Ofer Brothers Group denied it. Tanker Pacific has since said its ships have docked lawfully in Iran. Some Israeli opposition figures have accused the government of trying to avoid bringing Ofer Brothers to account over possible misconduct.

FREIGHT MONTHLY Thursday, 02 June 2011

Pressed on Wednesday to explain his actions, Shama-Hacohen cited warnings by security officials that the forum might have witnessed statements "that would have caused damage". He also faulted Ofer Brothers for failing to send a representative. "Yesterday was their opportunity to come, have their say, and prove their truth," he told Israel Radio. "They chose to be absent and as long as they do so their credibility will suffer." Shama-Hacohen played down the likelihood of significant, continuing collaboration between Ofer Brothers and Israeli intelligence: "The Americans would not have imposed sanctions (on the company) for no reason. The prime minister of Israel would not have disavowed this (affair) in such a sharp and clear manner." Gad Shimron, a retired Mossad officer who writes on security affairs, said whether Ofer Brothers had helped or hindered the national interest would emerge in the proceedings against them. Israel previously threw the book at its citizens who dealt with Iran in violation of global sanctions and local laws. "If there is a big investigation and prosecution, then this was probably simple malfeasance on the part of the Ofer Brothers," said Shimron. "If not, draw your own conclusions." -----------------------------------------------------------------------------------Dalby said the IAMSP had over 400 members, including former marines and special forces from Britain's Special Boat Service and the United States' Navy Seals, comprising "half of the reputable industry". Overstretched international navies have proved unable to contain piracy in the Indian Ocean due to the vast distances involved. The crisis is costing world trade billions of dollars a year. "The need to employ armed guards is an indication of the lack of political resolve to control the spread of Somali-based piracy across the northern Indian Ocean," said Peter Hinchliffe, secretary general of the International Chamber of Shipping. "The lack of regulation in the private security sector in the maritime domain is a problem and this is leading to growth in the sector which suggests that standards may be very variable." ARMS TRADE David Stone, a licenced and registered arms dealer, director of maritime security company APPDS Ltd and an IAMSP member, said "fly-bynight" security companies had to buy their weapons on the black market in places such as Djibouti. When approaching a 12-mile territorial zone close to a port, operators dumped their illicit weapons over board, he said, in order to avoid getting caught breaking the law. "It means when they do another transit they will have to buy more arms. So it's a vicious circle of the proliferation of illegal arms," Stone said. "This is something that the IMASP is trying to stop because it is illegal and gives a bad name to everyone in the business." The safety committee of the International Maritime Organization, a United Nations agency, will this week discuss the development of guidance on employing maritime security companies. Many in the security industry have called for an amendment related to the position of private armed teams, which is not addressed under international maritime conventions. Maritime lawyers say armed private security guards involved in a killing on board a ship may run the risk of criminal prosecution in some countries. "Whereas in the past it could be argued that non-lethal countermeasures would be enough to deter pirates, as the threat escalates, not being armed is now becoming more of a challenge to justify," said Red Cell's Buston, whose firm provides training and advice to maritime security professionals. "Those that are in control of potential lethal force ... must have clear and agreed procedures to work under. Without this, the already grey area of armed guards at sea could turn into a real mess." ------------------------------------------------------------------------------------

FACING PIRACY, SHIP SECURITY FIRMS SET ETHICS CODE

By Jonathan Saul LONDON, May 9 (Reuters) - Maritime security firms have come together to create a code of conduct and ethics, prompted by alarm over the rising number of companies without seaborne experience aiming to cash in on the surge in Somali piracy. Increasingly violent attacks on merchant ships and crews by Somali gangs have led more ship owners to consider deploying private security teams on board vessels, attracting companies previously operating in Iraq and Afghanistan. "There are literally hundreds of Iraq and Afghanistan 'expatriates' setting up shop, never having been aboard a ship before, much less knowing how to defend it," said John Dalby of security company Marine Risk Management. "We have fears that a glut of inexperienced and unqualified so-called maritime security operators are bringing the legit guys into disrepute." Dalby is one of the founders of the International Association of Maritime Security Professionals (IAMSP), a self-regulated, voluntary body seeking more transparency in the sector. Its code of conduct includes ensuring members are properly trained, abide by laws and regulations where they operate, act ethically and do not accept bribes. "Private security in the marine sector is currently not regulated in the way that it is on land. There is a big worry this could be opening the doors to a lot of cowboys," said Andrew Linington with seafarers' union Nautilus International. PDF version: http://link.reuters.com/mep39r Officials say it costs around $55,000 to deploy an experienced fourman security team on a 10-12 day transit between Suez and Galle in Sri Lanka. Firms touting for business without experience have offered teams at $15,000 to $20,000. "Security companies and individual professionals who are trying to operate to high standards get undercut by the competition which is clearly less than satisfactory and provides a less than satisfactory service," said David Buston, managing director of security firm Red Cell and an IAMSP founder.

OIL LAWSUIT MAY BE US "REVENGE" FOR BP SPILL-MAGNATE

By Gwladys Fouche OSLO, May 26 (Reuters) - Billionaire shipping tycoon John Fredriksen said a U.S. lawsuit against his oil trading companies may be a bid to extract revenge for BP's oil spill last year by targeting former BP traders who now work for him. Fredriksen, a self-made magnate whose nickname is "Big Wolf," said he was shocked by the lawsuits and insisted his oil trading firms did nothing illegal in 2008, a period when U.S. regulators allege they manipulated world oil markets to pocket $50 million in illicit profits. Instead, Fredriksen said a civil suit brought by the U.S. Commodity Futures Trading Commission this week may be targeting crude traders James Dyer and Nicholas Wildgoose because they once worked for British oil giant BP Plc , the company behind the worst oilspill in U.S. history last year.

FREIGHT MONTHLY Thursday, 02 June 2011

"Maybe the problem is that these guys (the traders) worked for BP and they made a lot of money for BP before," Fredriksen, looking relaxed but perplexed by the media attention directed at him in the past two days, told Reuters in an interview. "Maybe they (U.S. authorities) are trying to get some revenge," he added, referring to BP's deepwater spill in the U.S. Gulf of Mexico last year. In one of the biggest ever crackdowns on oil price manipulation, U.S. regulators on Tuesday sued the traders at two of Fredriksen's firms, Arcadia Energy and Parnon, for allegedly squeezing markets in early 2008. Fredriksen said the activity was a normal practice for oil traders. Arcadia has also rejected the suit, saying it never held enough oil to influence the global oil benchmark. Link to Arcadia news release: http://r.reuters.com/xag79r Link to text of lawsuit: http://link.reuters.com/xac79r Graphic on trading play: None of the traders were reachable for comment. Dyer has worked for Arcadia since at least 2005; he travelled to the United States to recruit Wildgoose, who had run BP's Cushing oil trading book, in 2007, according to the CFTC lawsuit. A third member of that BP trading team in Chicago, Paul Adams, is another current executive at Fredriksen's oil trading firms, and is listed as Parnon's acting CEO. Adams is not cited in the CFTC lawsuit. In recent years, BP has pared back its global oil trading activities, and many of its former star traders have left for competing firms, including those run by Fredriksen. BP has also sold off all of its Cushing storage tanks. The CFTC said Dyer and Wildgoose amassed large physical positions at Cushing, Oklahoma oil storage hub -- the delivery point for the U.S. oil futures contract -- to create the impression of tight supplies that would boost crude spreads, or the difference in prices between one month and the next. Later, they dumped those barrels back onto the market, causing prices to crash and racking up profits from short positions they had accrued in futures markets, the suit said. "NOT AN EXPERT ON OIL TRADING" Fredriksen told Reuters that, while he is no expert on oil trading, he is confident Arcadia and Parnon traders followed standard practices in 2008. "It is quite normal. It is the same for Glencore, and Vitol, and these other guys... It is nothing," he said, referring to other major global oil trading firms. Fredriksen was "shocked" to learn about the CFTC investigation, he added. "I did not know a thing about it -- I have about 50 companies, how can I follow everything?," said Fredriksen, whose wealth is estimated at $10.7 billion by Forbes. "Oil traders, they are supposed to buy and sell," Fredriksen said. "I don't think it is illegal but I am not an expert on oil trading, so I don't see the problem." The trading firms on Wednesday denied any wrongdoing. Also on Thursday, a derivatives trader filed a case in New York federal court against the two companies. HIGH FLYING TRADERS While there seems no clear link between the former BP traders and U.S. anger over BP's current production and exploration practices, the strategy laid out in the lawsuit rang bells for industry veterans who recall the kind of leveraged trading plays that proliferated earlier this decade. Dyer and Wildgoose were both high-flying traders on the company's coveted "Cushing book" in Chicago in the early 2000s, known for making profits of more than $100 million a year for the firm and receiving multi-million dollar annual bonuses. Other traders said that BP had a built-in advantage because it owned a large share of the storage tanks in Cushing, even after regulators forced it to sell off some holdings following its purchases of Arco and Amoco in the late 1990s. It was also a time when BP's aggressive trading practices were beginning to land it in hot water with authorities. BP paid a record $2.5 million fine to the New York Mercantile Exchange in 2003 for alleged violations of oil trading rules; that case did not include any allegations of misconduct by Dyer or Wildgoose. In 2007 it paid a record $303 million fine to the CFTC to settle charges it had manipulated propane markets in early 2004. The lawsuit seeks class-action status on behalf of other investors he says were also harmed by the alleged market manipulation in 2008. ------------------------------------------------------------------------------------

JAPAN'S ONAHAMA OIL TERMINAL TO OPEN TO OCEAN-GOING SHIPS IN JUNE

TOKYO, May 31 (Reuters) - Repairs to a major oil terminal near Onahama port in northeast Japan damaged by the March 11 earthquake and tsunami are mostly complete and it will open to ocean-going ships in early June, Mitsubishi Corp said on Tuesday. It said its unit Onahama Petroleum Co, the terminal's operator, has already opened it to coastal vessels. The terminal resumed operations as a shipment base for oil products to areas devastated by the quake on March 19 at the request of Fukushima prefecture government, initially using material stored before the quake, a company spokesman said. The terminal is located 50 km (30 miles) south of Tokyo Electric Power Co's Fukushima Daiichi nuclear plant, where engineers are still battling radiation leaks that began after the disaster knocked out reactor cooling systems. It has storage capacity for 1.22 million kilolitres (7.69 million barrels) of crude oil and 281,000 kilolitres of C-fuel oil, and the users it supplies include thermal power plants, factories and gas stations. ------------------------------------------------------------------------------------

FREIGHT MONTHLY Thursday, 02 June 2011

SANCTIONS, UNREST HURT SYRIA'S OIL TANKER TRADE
By Jonathan Saul and Dmitri Zhdannikov LONDON, May 26 (Reuters) - Syrian oil shipments are virtually paralysed as tighter bank credit lines, sanctions and violence deter trade with ship owners wary of growing risks to their vessels, trade and shipping sources say. Syria, a relatively minor crude exporter but one for which oil revenues are important, has seen demonstrations against President Bashar alAssad's authoritarian rule. Protests have focused mainly on demands for political freedoms but economic hardship and a rising cost of living have fuelled discontent. Developments around Syria's oil trade echo those in Libya, a much bigger producer, where unrest and international sanctions first deterred major players and banks at the beginning of the year before fully shutting exports down. "The situation obviously has already affected shipping operations driving freight rates up, because shipowners are reluctant to accept cargoes bound for Syrian ports," said Jakob Larsen, maritime security officer with BIMCO, the world's largest private shipowners' association. "As always when risks are high, those willing to take the risk are rewarded but only if things go well." Syria produced 380,000 barrels per day (bpd) of oil in 2010, down from 600,000 bpd in 1996 and has typically exported six to eight cargoes a month on tankers of mostly sour Souedie crude. Those volumes are enough to feed only a mid-sized European refinery and are only a fraction of Libya's pre-war exports of 1.3 million bpd. The International Institute of Finance has estimated that Syria's economy will shrink by 3 percent this year, a steep fall from 4 percent growth in 2010, following the unrest. Oil revenues can reach over a quarter of the country's total income. Rates on the benchmark Mediterranean route for aframax tankers, which can carry up to 600,000 barrels of oil, from the Syrian port of Banias have jumped in the past week to their highest in two months. Cross-Mediterranean aframax tanker rates reached W126.25 in the Worldscale measure of freight rates on Thursday or $18,858 a day when translated into average earnings -- close to their peak of $21,383 a day last Friday which was the highest since late March, Baltic Exchange date showed. Tanker brokers said shipowners were demanding a 20 to 30 point premium in Worldscale rates to travel to Syrian ports. "Few owners are taking the risk of calling at Syrian ports because of the sanctions," a shipping source said. "If there are more cargoes the market will rocket." Maritime group Inchape Shipping Services said the Syrian ports of Tartous, Latakia and Banias were working normally. "Further unrest in the main cities is expected on Friday, however, after Friday prayers," it said. For graphics package, click on http://r.reuters.com/nym77r For an interactive factbox on protests in the Middle East and Africa, click on http://link.reuters.com/puk87r SANCTIONS The European Union imposed sanctions on Assad and other senior officials this week, following a move last month by the United States that included asset freezes and bans on U.S. business dealings. That does not yet make oil trade with Syria illegal, but most banks and firms have been deterred by the developments. "There used to be two to three banks still doing business with Syria, now this number has fallen maybe to one," said an oil trader in the Mediterranean. Syria's two key production streams are the sour and heavy Souedie crude, which yields lower quality products, and the sweet and lighter Syrian Light grade. Lifters of Souedie sour crude -- the only exported grade -- include energy groups ENI , Arcadia, Petraco. "Syria is becoming a hot topic as credits have become a big problem and that could create some tensions in the sour market," said a source at one of the lifters. "Volumes are not that great, but it used to be six to eight cargoes in the past." A separate source at another trader said some trade was still continuing with Syria's state oil export monopoly Sytrol. "We are directly dealing with Sytrol. We do not have any problems with dealing with them directly," the source said. Rights groups say security forces have killed around 1,000 civilians in the unrest that broke out in mid-March. Syrian authorities, who blame the violence on armed groups, say at least 120 soldiers and police have been killed. ------------------------------------------------------------------------------------

DESPERATE GAS MAJORS SEEK SCARCE LNG TANKERS

By Edward McAllister NEW YORK, May 25 (Reuters) - Veteran oil tanker executive Ulf Ryder isn't used to getting personal calls from energy company executives desperate to lease his ships. But after his Swedish shipping company Stena Bulk recently bought its first three liquefied natural gas vessels, his phone won't stop ringing. For now, though, he's turning down bids, confident that a chronic shortage of LNG tankers will push up rates as much as 50 percent to record highs this summer. "I have never, in forty years in tanker markets, had the pleasure of an oil company executive calling me up to say they are interested in chartering a ship," Ryder told Reuters in an interview. But that's changed since Stena Bulk bought the three tankers from Taiwan's TMT in a deal announced on Wednesday. Ryder says he has received calls from "all the majors" in the LNG market, but has turned down offers at $110,000 per day in the hopes of achieving something closer to $150,000. The very small spot LNG tanker market is heading into a second year of short supply as shipbuilders fail to keep pace with new export projects, and strong demand from Asia -- particularly Japan, where gas demand has jumped after March's nuclear disaster -- has prolonged shipping times by pulling more vessels from the Atlantic Basin. "There are too few vessels to cover all this physical movement," Ryder said. Availability of short-term tankers is further limited by the fact that most of the world's 320 LNG vessels are already committed to a single route, locked for decades into a round-trip voyage from gas plant to import terminal and back again. AIMING HIGHER Ryder has already turned down offers for charters at $105,000 to $110,000 per day for up to two years, reckoning that Stena Bulk can secure rates between $120,000 and $150,000 per day, he said. The tankers are expected to be ready for loading by July. "We have declined offers so far. We think we can get better than that," he said.

FREIGHT MONTHLY Thursday, 02 June 2011

In April, short-term LNG shipping rates were at $92,000 per day, according to Drewry Shipping analysts, up from $36,000 in 2009 when the LNG shipping market was amply supplied. Ryder said there is a need for 60-70 new LNG tankers to satisfy rising demand to 2014. "There are only seven yards in the world that can build these ships and it takes 24 months to build them," he said. "We see a window of three years where additional tonnage cannot come in and we will utilize this as best we can." Stena Bulk, a subsidiary of Sweden's Stena Group, bought the three tankers from TMT for 4.5 billion Swedish Krone ($710 million), it said in a statement on Wednesday. The deal was for two new tankers -- the 174,000 cubic meter Stena Clear Sky and Stena Crystal Sky -- and the 145,000 cm Stena Blue Sky which was built in 2006 and is chartered by Russia's Gazprom. These are Stena Bulk's first LNG tanker purchases, Ryder said. The company currently operates 80 oil tankers. -----------------------------------------------------------------------------------Easing the pressure this year are new rules being negotiated with unions that should soon enable the port to make its four daily shift changes without a time-consuming shut-down of loaders required under existing rules, each time. "With each shift change you can lose half an hour. That is two hours a day. The unions have understood the need for this," he said, adding this procedure was now being trialed. A second major advance was the dredging in January of the port's berths, taking their draught to 12 to 12.5 meters (39 to 41 feet), up from as little as 9 meters previously. The dredging was the first at the berths in six years and the benefits have been immediate. "Ships can load more. Last year they would be leaving with about 50,000 tonnes. This year they're taking 65,000 or 70,000," he said. Larger loads are much more time efficient. By Wednesday, there were 64 ships loading or arriving at Brazil's southeastern ports. Fifteen were at Paranagua and most of the rest were at the biggest port, Santos. The queue was caused mainly by the slow start to the sugarcane harvest that meant sugar supplies were not always available to meet ships as they arrived. FASTER LOADERS Regardless of how this cane harvest unfolds, plans for 2 billion reais in investments, mostly funded by the central government, should confront the port's bottlenecks head-on for sugar and grains, for which it is also second most important. Works will include the addition of dedicated piers for loading of sugar and grains, extra warehousing capacity and works to improve access to the docks, Fregonese said. "In the next three and a half years we should deliver to Brazil a highly functional, first-world port," he said, adding that the projects were still being developed and had yet to be submitted to and approved by the government. The works would raise throughput capacity for sugar to around 10 million tonnes, he estimated, about a quarter of typical annual output in the center-south region. The private sector and the port itself would contribute to the total sum. Separately, the port is seeking to install bulk loaders that can handle one third more cargo, meaning a rise to 2,000 tonnes of bulk goods like sugar or grains per hour, up from the current equipment's 1,500 tonneper-hour capacity. ------------------------------------------------------------------------------------

BRAZIL PORT TO SHIP MORE SUGAR, BUT QUEUE TO RECUR

By Peter Murphy BRASILIA, May 25 (Reuters) - Brazil's No. 2 port for sugar exports expects throughput of the sweetener to leap by as much as half and for ships to face shorter waiting times to load in the current harvest, its commercial director told Reuters. Exports of mostly bulk sugar through the port could climb to 5 million or 6 million tonnes this season, up from 4 million last year, said Lorenzo Fregonese, out of expected total production from the center south cane belt of nearly 36 million tonnes. Brazil's sugar output is expected to rise by about 2.7 million tonnes to 40.9 million tonnes this year and Paranagua has been working to attract more exporters to its facilities. Graphic on Brazil cane crop:

SHIPPING MAGNATE FREDRIKSEN IN EYE OF STORM

By Jonathan Saul and Terje Solsvik LONDON/OSLO, May 25 (Reuters) - He rose from humble working class origins to become the shipping world's leading magnate by following his gut instincts and taking huge risks. The throughput target looks ambitious given the long line of ships that queued as long as a month last year at Paranagua and other ports, to load at the harvest's peak but Fregonese said streamlined operations and dredging had raised capacity. He said queues would inevitably recur again at the port this year as it expected to handle even more sugar, but waiting times would be less severe than last year, falling to around 15 to 20 days at their worst. "I think the queue could be the same or a little shorter. It will all depend on the climate," Fregonese said. The severity of the queues last year, largely due to frequent rains on the coast that halted loading amid a surge in import demand for sugar from Brazil with weaker Asian output, pushed futures higher then as competition grew for supplies. Secretive Norwegian billionaire John Fredriksen, known as "Big Wolf" and more widely as "Big John" in the shipping industry, came under scrutiny this week when U.S. regulators launched one of the biggest ever crackdowns on oil price manipulation. Fredriksen, 67, who has rivalled earlier tanker tycoons such as Greece's Aristotle Onassis, is now embroiled in a case in which two of his trading firms are accused of making $50 million by squeezing markets in 2008. "He is a rough businessman," said editor Gunnar Stavrum of Norway's Nettavisen, who has written two unauthorised biographies about Fredriksen. "He has been involved in speculative trading before, among other things in currencies. It's too early to say if these claims of illegal oil trading will hold up."

FREIGHT MONTHLY Thursday, 02 June 2011

Fredriksen began his career as a messenger boy at a shipping company in Oslo, later establishing himself on the shipping scene during the 1960s and 1970s in Singapore and New York. He made his fortune in the "tanker wars" of the 1980s during the IranIraq conflict, when his vessels risked missile fire to load and then transport crude oil cargoes from the conflict area. ESTIMATED $10.7 BILLION FORTUNE "He is not someone who likes to follow rules," said a ship industry source. "Fredriksen by his very nature is a massive chancer, he's not an analyst or an academic kind of guy -- he does things by gut feel which is no different from any other big players in the past like Onassis." Fredriksen's aide Tor Olav Troeim was not immediately available for comment on Wednesday. Players in the industry when contacted were hesitant to offer views on Fredriksen, who has long shunned the media. "He is the biggest ship owner in the world and has built up everything from scratch. Impressive is my only comment," said one oil tanker source. Forbes magazine has named Fredriksen as among the world's 100 richest billionaires with an estimated fortune of $10.7 billion. Norwegian business magazine Kapital puts his fortune at a similar level. Fredriksen is a widower with two daughters, 27-year old twins, who have increasingly become involved in the running of his businesses in recent years. "John just turned 67 the other day, but he says he hasn't made enough money to retire," Troeim said earlier this week. The magnate, an avid soccer and fly-fishing fan, consolidated his position in shipping through Oslo-listed Frontline , the world's largest independent oil tanker company, which he controls. He has also taken a large stake in the lucrative Norwegian fish farming industry. TANKER BOOM Frontline enjoyed the boom in freight rates over the past few years which saw average earnings on the benchmark Middle East Gulf to Japan route rocket up to $180,000 a day before economic turmoil in 2008. Average earnings have slumped to as low as under $400 a day this year, prompting Frontline to announce on Wednesday it may divest assets as the sector struggles with a prolonged downturn and mounting fleet growth. Fredriksen's vessel the Sea Empress went down on the rocks off Milford Haven on Britain's west coast in 1996, in one of the country's worst environmental disasters. In the mid-1980s, he was briefly held by Norwegian police investigating the disappearance of oil from some of his crude carriers, which it later emerged was used as fuel. The practice was seen as unsafe, and the case was later settled with a fine. In recent years, Fredriksen has been seen as a leader in oil tanker safety, introducing double hulls and other measures to avoid oil spills. Fredriksen's energy empire also includes liquefied natural gas company Golar and leading offshore driller Seadrill as well as a controlling stake in dry bulk group Golden Ocean . He also controls the world's biggest fish farmer Marine Harvest . But it's two of Fredriksen's energy trading companies that have caught the attention of U.S. regulators. The Commodity Futures Trading Commission (CFTC) said on Tuesday traders James Dyer of Oklahoma's Parnon Energy, and Nick Wildgoose of Europe-based Arcadia Energy, amassed large physical positions at a key U.S. trading hub to create the impression of tight supplies that would boost oil prices. Later they dumped those barrels back onto the market, causing prices to crash and racking up profits from short positions they had accrued in futures markets, the suit said. Both companies are controlled by Fredriksen's Farahead Holdings, based in Cyprus. Arcadia rejected on Wednesday the CFTC claims saying it was "wrong on both the facts and the law". "Like anyone who runs VLCCs (super tankers), oil is their lifeblood and he fancied himself as a bit of an oil trader which is why he bought Arcadia. It's still a small enterprise," said the ship industry source. While he took Cypriot citizenship in 2006, Fredriksen runs his businesses from London. According to the websites of companies he controls, he established a series of holding companies "indirectly controlled by trusts established for the benefit of his immediate family". Many of his companies are registered in Bermuda, with operations located in offices around the world, including Norway. Fredriksen has also been a vocal activist shareholder in German travel group TUI in which he owns a minority stake and has been fighting for a seat on the board for years. Before patching up differences this year he had accused other TUI stakeholders for their support of what he called "incompetent" management. ------------------------------------------------------------------------------------

TEEKAY SEES TANKER MARKET IMPROVING IN 2012-13

By Gwladys Fouche OSLO, May 25 (Reuters) - Teekay , a major crude oil and petroleum product transporter, expects the depressed crude tanker market to pick up in one to two years' time, its chief executive told Reuters on Wednesday. "You will see it (the market) tip back in 2012-2013," Peter Evensen said in an interview, pointing out that demand for oil was steadily coming back in the wake of the economic crisis. "You can only point at all the different markets: look how fast LNG (liquefied natural gas) clicked back, look how fast container ships clicked back. I think it (the crude oil tanker market) will click back at a certain point." Evensen also said Teekay was not looking at acquisitions at the moment. "We are looking at organic growth," he said. ------------------------------------------------------------------------------------

IRAN SHIPPING COMPANIES FACE MORE SANCTIONS HEAT

By Jonathan Saul LONDON, May 24 (Reuters) - The European Union has targeted more Iranian shipping companies as part of moves to tighten sanctions imposed on the Islamic Republic. EU foreign ministers agreed on Monday to add more than 100 new entities to a list of companies and people affected by EU sanctions, designed to put economic pressure on Tehran to abandon its atomic programme. Adding further pressure, the United States on Tuesday announced sanctions on Venezuela's state oil company PDVSA and six other oil and shipping companies for engaging in trade with Iran in violation of a U.S. ban. The EU move, reflecting mounting frustration over a lack of progress in nuclear talks with Tehran, has added a number of holding companies owned or controlled by the Islamic Republic of Iran Shipping Lines (IRISL).

FREIGHT MONTHLY Thursday, 02 June 2011

"Iran in general and IRISL and its affiliates in particular face a largely unified front, one that is systematically, if somewhat slowly, closing the loopholes and forcing it to expend scarce resources on ever increasingly complex evasive manoeuvres," said J. Peter Pham with U.S. think tank the Atlantic Council. "At some point or another, Iran's shrinking pool of partners will conclude that the cost of doing business with it is too high." IRISL was not immediately able to reply to questions from Reuters. In recent months IRISL has faced sanctions-related pressure from both the EU and the United States, which have said the shipping line has engaged in illegal activity. IRISL Chairman Mohammad Hossein Dajmar told news site Jamejam Online last year that sanctions "could not paralyse the shipping line". "Our strategy is to deal with this issue. It means we won't let them to reach their goal," Dajmar said. The new EU measures have targeted over 30 IRISL holding companies based in Germany, Malta, Hong Kong and the Isle of Man in the UK. All the companies were listed at the same address in each location, the EU's Official Journal showed on Tuesday. Among the shipping companies targeted by the EU were Safiran Payam Darya Shipping Lines, which it said took over IRISL's bulk services and routes and used vessels previously owned by IRISL. Companies covered by the U.S. sanctions included Singapore-based Tanker Pacific and Israel's Ofer Brothers Group, both of which the U.S. State Department said "did not heed publicly available and easily obtainable information that would have indicated that they were dealing with IRISL". Ofer Brothers said it had "never sold ships to Iran", adding the Israeli government would support its claims. SHIP INSURERS The new EU measures, asset freezes and visa bans add to a range of financial and trade sanctions the EU's 27 governments have already imposed on Tehran. Iran said on Tuesday the new round of EU sanctions was contradictory to the bloc's stated desire to return to talks. IRISL was originally designated by the U.S. Treasury in 2008 for alleged involvement in illicit arms shipments. The Treasury has said the shipping line used deceptive behaviour to try to mask its activities including falsifying shipping documents, changing nominal ownership of its ships and repainting them to hide the fact that they are part of IRISL. "U.S. and U.N. sanctions encouraged IRISL to become more active than before and play an active role in the international scene," Ali Ezzati, IRISL's director of strategic planning and international affairs, said on the company's website this month. IRISL said in April the last of five cargo ships seized following sanctions had been released. IRISL's blacklisting meant its P&I insurance cover was terminated in 2009 by providers belonging to the International Group of P&I Clubs. "Following the introduction of legislation in the UK, that cover was terminated and they are no longer covered within the International Group," Andrew Bardot, executive officer with the International Group of P&I Clubs, told Reuters. "There is quite a complicated matrix of sanctions legislation and regulation and careful investigation and inquiry is necessary to make sure that the cover provided does not infringe the EU or U.S. regulations." World powers suspect Iran is trying to develop atomic weapons under the cover of its declared civilian nuclear energy programme, but Tehran says it needs nuclear power to meet growing domestic demand for electricity. ------------------------------------------------------------------------------------

SHIPPERS EYE CUTS, NICHE PLAYS IN WOEFUL MARKETS

By Gwladys Fouche and Joachim Dagenborg LILLESTROEM, Norway, May 24 (Reuters) - Shipping companies must cut overheads as fuel costs rise, and diversify into niche markets such as building floating power stations to ride out the current depressed market, top shippers said on Tuesday. Oil tanker freight rates have hit their lowest levels since 2009 in recent months and dry bulk earnings have also struggled as a glut of vessels hitting the market has outpaced demand. Profitability in shipping has also been hurt by rising operating costs resulting from a spike in oil prices which are near multi-year highs due in part to political unrest in the Arab world. "The market today is the worst since the Black Plague," quipped Tor Olav Troeim, vice-president of Frontline , the world's biggest independent oil tanker group, during a shipping conference, revealing the mindset of many shippers. He added that the downturn in the oil tanker market had only begun and could take five years before it may improve again. "How we can survive this cycle? We need to make sure costs are low ... (This) will be important in the years to come." Another executive expected the market to pick up earlier than Frontline anticipated. "One would hope that by 2013 you start seeing the (supply-demand) gap closing and the market improving," Graham Westgarth, head of INTERTANKO, an association whose members own the majority of the world's tanker fleet, told Reuters. "We have to anticipate that 2011 and 2012 are potentially going to be fairly weak markets." Peter Evensen, chief executive of major crude oil and petroleum product transporter Teekay , shared Troeim's view on the importance of cutting costs. "Fuel costs we see going forward are going to be higher than the capital costs," Evensen told the conference. "We are moving into optimisation ... We are thinking about fuel-efficient ships ... specifically designed for future trades." NEW MARKETS Another way forward, both executives said, was to move into markets in which the shipping industry is only beginning to develop, such as building floating power stations or build more liquefied natural gas (LNG) ships and production vessels, as energy demand rises, especially in Asia. "I see much more growth in niche areas, especially those related to offshore development," said Evensen. "We are going to see (more) floating LNG terminals." Oil major Shell said earlier this week it would go ahead with building the world's biggest ship, Prelude, in order to produce gas offshore Australia, in the first project of its kind. "The next thing will be floating power stations. This is an opportunity we see," added Troeim. Russia is mulling floating nuclear power stations to cope with the country's growing needs for energy. "LNG is under-shipped, there is not enough tonnage," Troeim said. "The whole market is eaten up in one year of demand. it is a promising market."

FREIGHT MONTHLY Thursday, 02 June 2011

In the meantime, the oil tanker market is in need of consolidation and Troeim expect it to happen soon. "We see that consolidation works when a lot of people have problems and that's what we see these days," Troeim said. -----------------------------------------------------------------------------------It would use 260,000 tonnes of steel and be designed to withstand a Category 5 cyclone. Shell's Malcolm Brinded on Reuters Insider: http://r.reuters.com/den69r Graphic on LNG exports:

WORLD'S BIGGEST SHIP TO CHILL AUSTRALIAN GAS FOR ASIA

By Rebekah Kebede PERTH, May 20 (Reuters) - Shell is to anchor the world's biggest ship -six times heavier than the largest aircraft carrier -- off Australia to supply liquefied natural gas to energy-hungry Asia in a project likely to cost over $10 billion. Royal Dutch Shell expects to start chilling gas into liquid form from around 2017 aboard the Prelude floating LNG vessel, which will be longer than four soccer fields and will be built at a shipyard in South Korea. "LNG is a very fast growing part of our business," Malcolm Brinded, Shell's executive director of upstream international, told Reuters Insider television. "Floating technology is an exciting innovation, complementary to onshore LNG, which can help accelerate the development of gas resources." Brinded said floating LNG, which allows gas companies to tap fields in more remote offshore locations with no need for pipeline links to land, would revolutionise the LNG industry, with several other projects following close behind Shell's lead. Shell's overall upstream investment in Australia would reach some $30 billion over the next five years, the energy company said, but declined to give exact details on the Prelude's cost. Brinded said the capital expenditure for Prelude would be similar to recently approved LNG projects at around $3 billion to $3.5 billion per million tonnes of LNG per year. That would indicate costs for the 3.6 mtpa project of around $10.8 billion to $12.6 billion. LNG BOOM Australia, already one of the world's largest LNG exporters, has around A$200 billion ($214 billion) worth of LNG projects on the drawing board and aims to triple current production to 60 million tonnes a year by 2020 to help meet surging demand in Asia. "It's significant from Australia's perspective because it's another project under construction," said Craig McMahon, an analyst at Wood Mackenzie. "During 2011 you could have seven projects under construction at the same time -- all the talk and potential is becoming a reality." The Prelude project off northwest Australia will extract gas and chill it to liquid form before loading it onto smaller ships for export mainly to Asia, where demand for LNG is set to double this decade. "In terms of who is producing LNG, there is going to be a shift towards Australia," said an analyst at Bernstein Research in London. "Australia has got a huge amount of gas, it's close to the Asian sources of demand for LNG." Qatar is the world's largest LNG exporter with a capacity of 77 million tonnes a year. Shell said it was now ready to start detailed design and construction of its Prelude floating LNG (FLNG) facility. When fully equipped and with its storage tanks full, it would weigh around 600,000 tonnes -- about six times as much as the largest aircraft carrier, Shell said.

JAPAN WANTS MORE Increased LNG demand from leading importer Japan after a tsunami ruined several nuclear reactors and prompted the closure of others has improved the prospects for all gas exporters. Japan has increased its LNG imports by 20 cargoes a month by some estimates and the tsunami may result in Japan bumping up LNG imports by 7 to 8 million tonnes from 70 million tonnes of LNG in 2010, analysts say. China imported just over 9 million tonnes of LNG in 2010, but its consumption is expected to rocket five-fold to 46 million tonnes by 2020. Earlier this week, Shell signed an agreement to supply Taiwan's CPC Corp with 2 million tonnes of LNG per year for 20 years. Analysts said the deal is likely linked to Prelude LNG. Shell has secured an offtake agreement with Osaka Gas for 0.8 mtpa from the Prelude project. Shell's technology is also due to be used in a planned floating LNG plant for the Greater Sunrise field in waters between East Timor and Australia with Woodside Petroleum . East Timor is disputing the plan and wants an LNG plant built on its shores. ------------------------------------------------------------------------------------

NATO SAYS STOPS TANKER EN ROUTE TO GADDAFI

By David Brunnstrom and Jessica Donati BRUSSELS/LONDON, May 20 (Reuters) - NATO said it had intercepted an oil tanker that the alliance had reason to believe was set to deliver fuel to military forces headed by Libyan leader Muammar Gaddafi. Gaddafi's government is seeking to raise fuel imports for military purposes and to keep civilian vehicles running in areas he controls. International sanctions do not include a fuel embargo. "NATO naval forces can deny access to vessels entering or leaving Libyan ports if there is reliable information to suggest that the vessel or its cargo will be used to support attacks or threats on civilians, either directly or indirectly," NATO spokeswoman Carmen Romero said on Friday. On Thursday the Malta-flagged Jupiter, with a capacity to carry between 10,000-15,000 tonnes of gasoline, was the first fuel tanker bound for a west-Libyan port known to have been forcibly diverted.

FREIGHT MONTHLY Thursday, 02 June 2011

The move comes ahead of a possible European Union initiative to tighten sanctions on the government of the Libyan leader by blacklisting ports to prevent exports of oil and imports of fuel. United Nations resolution 1973 authorised the enforcement of a no-fly zone over Libya and "all necessary measures" to protect civilians. "If they can choke off supplies, then it will make a difference. They (NATO) are ratcheting up the war effort to try to finish it off quickly," said Charles Gurdon, managing director of London-based political risk consultancy Menas Associates. The NATO spokeswoman denied that the diversion represented a change in policy, adding that decisions on whether to divert vessels would be taken on a case-by-case basis. DIVERSIONS The tanker is now in the Tunisian port of Zarzis, according to three shipping sources, who added that the vessel had not yet unloaded its cargo because of fighting near the Libyan border. The Jupiter was carrying gasoline bought from the Saras refinery in Sardinia by an unknown buyer and was bound for Malta, where it was instructed to head for a port in Libya, according to a shipping source. It was not immediately clear who chartered it. NATO said it hailed and boarded a Libyan-flagged vessel owned by state-owned shipping company General National Maritime Transport Company in late April but let it go on the grounds it was empty. Trading sources said the latest NATO move was likely to deter other firms from oil trade with west Libya. "I thought that NATO was going to allow commercial shipping traffic including oil. But if they are intercepting vessels, then who knows what they will do next," said a source in an oil trading firm active in the Mediterranean. "For us it's just not worth it." A crude oil tanker owned by Libyan shipping company GNMTC was due to arrive empty on Thursday at the Gaddafi-controlled port of Ras Lanuf but has since switched its destination to Malta and is sailing nearby, according to AIS live tracking data on Reuters. Reuters reported earlier this week that a fuel tanker, the Libyan-flagged Cartagena, was on its way to west Libya after visiting Turkish and Georgian ports. It was last seen on Friday near Malta, AIS data showed. Shipping sources said it was also expected to arrive in Tunisia early on Saturday. -----------------------------------------------------------------------------------The court's decision in March to lift the ban, initially triggered by fears over the industry's impact on the environment and workers' health, comes as a relief to Hossen and his fellow workers, but shipowners are hurting. Freight rates have fallen to two-year lows this year as the expansion of the global fleet far outstripped demand, especially in the dry bulk and oil tanker markets. The dry bulk fleet, responsible for shipping iron ore, coal and other commodities, was expected to grow 13 percent this year to top a record 600 million deadweight tonnes in 2011 despite demand rising by just 5 to 8 percent, analysts said. Overzealous shipowners went on a buying spree before the economic downturn two years ago and those vessels are only now arriving from the shipyards. The oversupply problem, coupled with high prices of steel and bunker fuel, have made scrapping vessels an attractive financial alternative. A surge in the scrapping of older ships is considered key to pulling back into balance the supply and demand fundamentals in the freight market. That could happen within the next three years if the volume of ship recycling matches expectations. "There has got to be a massive quantity of recycling to eliminate this oversupply," said Edward McIlvaney, managing director of EBM Shipbroking. "I can see it being bleak on the freight side, particularly for the dry bulk market, well into 2014 and possibly into 2015." SCRAP MONEY Maritime firms were expected to scrap more than 30 million deadweight tonnes this year, surpassing last year's 26.6 million and the figure of 28.3 million in 2009, industry experts said. If Bangladesh quickly ramps up its capacity, shipowners could scrap near the world's capacity of 38 million dwt, a level not seen for decades, McIlvaney said. In the demolition market, the average dry bulk carrier traded above $520 per lightweight tonne in the Indian subcontinent, the highest since September 2008, according to the Baltic Exchange. That translates into more than $10 million for a typical 25-year-old capesize carrier, the largest vessel in the dry bulk fleet. "Demolition is continuing strongly in 2011 with the help of high commodity prices," said Theodore Ntalakos, a broker with Athensbased Intermodal Shipbrokers. "Had it not restarted I would have been compelled to stop sending my children to school." Hossen and other ship breakers earned a monthly average of 10,000 taka ($137), an income stream that vanished for the last year, forcing them to turn to other jobs such as unloading trucks and fixing cars. Dry freight index vs demolition market:

SHIP BREAKERS SET FOR BOOM TIME IN BANGLADESH

By Nizam Ahmed and Randy Fabi CHITTAGONG, Bangladesh/SINGAPORE, May 19 (Reuters) - Abul Hossen is preparing for the arrival of dozens of ships that promise to carry his family and hundreds, if not thousands, of other Bangladeshis out of a life of poverty. Instead of sailing to another country, however, the 45-year-old father of four will help to torch, hammer and rip the fleet into pieces of moneymaking scrap metal, after a court ordered Bangladesh to free up its ship breaking industry. Maritime recycling yards in the Indian subcontinent and China could see a boom that could run until 2013 as shipowners rush to get rid of ageing vessels, driven by an oversupplied freight market, low shipping rates and high steel prices. "The restart of ship breaking has given me a new life," Hossen told Reuters on an oil-besmirched beach in Chittagong, home to one of the world's biggest ship recycling yards.

FREIGHT MONTHLY Thursday, 02 June 2011

"In terms of the number of vessels, we have seen almost the same demolition fixtures as we did in all of last year." Scrapping reached a peak of 42.58 million dwt in 1985 when Taiwan, Korea and many other countries were involved in the ship breaking business. The industry has since undergone considerable consolidation as rising labour costs and environmental regulations forced the closure of most ship breaking yards in developed countries. Today, four developing nations, all with an abundance of cheap labour, control more than 90 percent of the market. "Following the court ban, Bangladesh has now become the smallest of the major ship breakers that include Pakistan, India and China," said Amzad Hossain Chowdhury, a senior official with the Bangladesh Ship Breakers Association. To catch up for lost time, Bangladesh's 110 ship breaking yards have already purchased dozens of vessels in the last few months with at least 35 waiting for environmental clearance to come onshore in Chittagong. Bangladesh, the top ship recycling nation from 2004 through 2008, hopes to bring in around 300 ships by the end of next year, up from 220 in 2009 before the ban, traders said. Before the ban, Bangladesh's ship breaking industry was worth $1.5 billion and was considered a key contributor to the overall economy, providing steel mills with half of their supplies and employing as many as 150,000 workers in one of the world's poorest countries. The average salary for a 12-hour day of labour intensive work was around $5.50, a decent wage compared to the nearly 40 percent of Bangladeshis that live on less than $1.25 a day. UNCERTAIN FUTURE Rights activists in Bangladesh say the cost to the environment and health of employees has been too high, however, with more than 1,000 workers killed on the job since 1996. A 2003 government study found nearly 90 percent of workers suffered some form of accidental injury -- from foot injuries to serious accidents - while working in Chittagong yards. The World Bank in December reported widespread contamination of lead, mercury, and oil in the soil and water of Chittagong's beaches. A court only lifted the ship breaking ban this year after industry vowed to adopt strict rules to protect workers, such as an age limit of at least 18, training and proper safety gear, and cleansing of toxic material from ships prior to arrival. The federal court has given the industry until mid-July to prove itself or face reimposition of the ban. "We still fear there will be more casualties in ship breaking yards, as we do not see any precautionary steps being taken," said Mohammad Ali Shaheen, head of the Chittagong-based rights group Young Power in Social Action, which says it has worked on the issue for nearly 15 years. "We do not believe the ship breakers as they have become used to exploiting poor workers." Activists were waging similar campaigns against ship breaking in neighbours India and Pakistan, and China. But the pay is worth it, say Hossen and other workers, who don't want to see the ban return. "The rights and environment activists live off the purse of others, so they don't understand the need for money, which we earn by risking our lives and investments," Hossen said. -----------------------------------------------------------------------------------Leading U.S. producers, with wallets bulging from high world prices, are jostling to boost their Asian presence.

DRYSHIPS EYES OCT-NOV FOR TANKER IPO

By Krishna N Das BANGALORE, May 13 (Reuters) - DryShips Inc expects an initial public offering of its tanker business in October or November, as it puts more tankers into the market amid high oil prices , a top executive said. The Greece-based company may also look to sell a stake in its Ocean Rig drilling unit and pay a dividend in Ocean Rig shares to DryShips' shareholders. DryShips owns 39 drybulk carriers and 12 tankers, 9 of which are yet to be delivered. It also owns 8 ultradeepwater oil and gas drilling units, 4 of which are to be handed over this year and in 2013. The company, which in December said it would buy 12 new tankers for $770 million as it seeks to enter the oil transportation business, expects improved tanker demand in the second half as companies exhaust their oil stocks. "As the market is turning around and rates are going up, we will have four ships on the water; I think that sounds like good timing (for the IPO)," Chief Operating Officer Pankaj Khanna told Reuters by telephone from the Greek capital, Athens. DryShips had earlier said the tanker business IPO was likely "sometime in 2011." Khanna said the company plans to float the tanker business in the United States. DRILLING DELIGHT DryShips said on Thursday it won a $1.1 billion drilling contract from Brazil's Petrobras . It has now managed to find work for all its drillships that are to be delivered this year. "We could sell down some stake in Ocean Rig and raise cash for DryShips, and take advantage of the distress in the market," said Khanna, a former head of vessel sales and purchase at Teekay Corp . "We can also pay a dividend of Ocean Rig shares to DryShips shareholders." The company has not paid a dividend since late 2008. Ocean Rig shares are to be listed in the United States and a secondary listing is expected in Oslo, he said, adding the company is looking at a valuation for the drilling unit of $25-$26 a share. "Norway is a special market as far is shipping and energy is concerned. The risk appetite of investors there is very different from the United States, but the liquidity is of course in the U.S. market," he said. Khanna said the company has started marketing the two new drillships it exercised options on last month. But it is in no hurry to take up the option on two more drillships with Samsung Heavy Industries . "We have very good relations with Samsung. We will be able to extend the (options exercise) date if need be," he said. Shares of DryShips, which posted a market-lagging profit on Thursday, fell 3 percent to $4.55 in morning trade on Nasdaq. The stock is down 17 percent so far this year, while the S&P 500 index has gained more than 7 percent. ------------------------------------------------------------------------------------

U.S. TO BE A TOP COAL EXPORTER AGAIN, THANKS TO ASIA

By Bruce Nichols and Jackie Cowhig HOUSTON/LONDON, May 12 (Reuters) - The United States could vault back into the top rank of coal exporters for good this year thanks to Asia's fuel demand -- just as surging gas output and tougher environmental laws threaten mainstay domestic sales.

10

FREIGHT MONTHLY Thursday, 02 June 2011

Their only problem is squeezing enough coal through over-stretched ports and railroads, but efforts are underway to open new outlets thanks to surging confidence in the sector. "We see it as a structural change," said Deck Slone, chief spokesman for Arch Coal Inc , the second largest U.S. producer after Peabody Energy Corp . Arch has agreed to buy International Coal Co and has opened a Singapore-based subsidiary to boost its export presence. Analysts say total U.S. coal exports could amount to around 100 million tons (91 million tonnes) this year, leaving only Australia and Indonesia above it in the world export rankings, and putting it above Russia, Colombia and South Africa. It exported 81.5 million tons in 2010. A short ton is 0.907 metric tonnes, the latter used in markets outside the U.S. The economic boom in China and India has been the driver, but the developing world is also turning more to the United States to make up for supply shortfalls, particularly buyers who want very high energycontent U.S. fuel regardless of its high-sulphur content. Miners in the U.S., the world's second-largest greenhouse gas emitter, have been hit by weak domestic coal sales and fear President Barack Obama's tough climate change policies will further cut coal demand. "U.S. policy toward coal has been negative," said analyst David Khani of FBR Capital Markets. "Add having extra natural gas and every coal producer wants to ship every ton they can out of the U.S." The opening up of the export market puts them in a more profitable, long-term position U.S. miners are now rushing to open Asian marketing offices and to merge, amalgamate and expand their output with their eyes on the export prize U.S. output/export growth graphic: Optimism dominated analyst conference calls to discuss quarterly earnings as coal company executives forecast historic shifts and big growth. Arch executives noted that, while 35 gigawatts of U.S. coal-fired generating capacity, 11 percent of the total, could be shut down in the next 10 years, 249 gigawatts of new coal-fired power plants are under construction worldwide. "This is going to require almost 800 million tons of new coal supply during this time period," Arch President John Eaves told investors. Total seaborne thermal and coking coal trade in 2009 was 1 billion tons a year, according to the World Coal Association. "Coal is expected to fuel more incremental generation over the next decade than gas, oil, nuclear, hydro, geothermal and solar combined," Greg Boyce, CEO of Peabody Energy, told investors. "It's something unprecedented in human history, arguably, 3 billion people going through an industrial revolution at the same time," Arch's Slone said. STRAINING INFRASTRUCTURE To a large extent fluctuating freight rates dictate whether U.S. coal exports are competitive with other coal origins. Another risk is limited U.S. rail and port capacity. Although nameplate capacities are higher, practical U.S. export capacity is estimated at a maximum of 120 million tons. "Finding international buyers isn't the problem," an industry insider said. "The bottleneck in the supply chain longterm will be getting the transportation secured." U.S. coal is already flowing in every direction, and many of the routes are new. Ports on Chesapeake Bay, at Mobile, Alabama, and the lower Mississippi River around New Orleans, are at maximum capacity. New flows are coming to Corpus Christi and Houston, Texas, on the Gulf Coast. A test cargo has been sent across the Great Lakes and down the St. Lawrence River to Europe. Arch is exporting small amounts of Colorado coal through Long Beach, California, a past coal export site that fell into disuse. Other U.S. coal is flowing into the Pacific Basin from Vancouver and the newer port of Prince Rupert in northern British Columbia, both in Canada. U.S. steam coal is even going to usually self-sufficient South America. Canadian National Railway's terminal upriver from New Orleans is turning away calls from producers who cannot find a way out, terminal president Bruce Conti said. GOOD TIMES Annual U.S. coal exports have hit or exceeded 100 million tons only six times in the last 50 years. Exports have been sporadic depending on international prices and freight costs. But world prices of over $100 a tonne (more than $110 a ton) seem here to stay due to strong demand, logistical bottlenecks and slow export growth in major producers this year. Increased U.S. exports are unlikely to bring prices lower, traders say, but will compensate for delayed coal from Australia and will be smoothly absorbed by the Asian market. This could not come at a better time for U.S. coal miners who face slowgrowing domestic consumption amid tough environmental rules and competition from plentiful, cheap, cleaner natural gas surging from new shale plays. More tonnage is going to midstream Mississippi River operators, who use cranes floating in the middle of the river to transfer coal from domestic barges to ocean going ships. "We're doing more coal than we've ever done historically," said John Crane of St. James Stevedoring in New Orleans. ------------------------------------------------------------------------------------

KNIGHTSBRIDGE TANKERS' PROFIT FALLS ON OVERSUPPLY

May 10 (Reuters) - Knightsbridge Tankers Ltd , a marine crude oil and dry bulk cargo transporter, reported a 16 percent drop in quarterly profit as ship-oversupply hurt sales. Capesizes, or the largest dry bulk vessels, barely managed to cover their running costs during the first quarter. Demand was hit by the flooding in Australia and the tsunami in Japan.

11

FREIGHT MONTHLY Thursday, 02 June 2011

Knightsbridge noted the Very Large Crude Carriers (VLCCs) fleet totalled 565 vessels at the end of the first quarter, up 3 percent from the end of the previous quarter. VLCCs are amongst the biggest marine oil transporters. The company's fleet consists of four VLCCs and two capesize vessels. The company's January-March profit fell to $8.6 million, or 35 cents a share, from $10.2 million, or 60 cents a share, a year ago. Operating revenue fell 7 percent to $22.4 million. Analysts had expected earnings of 41 cents a share on revenue of $24.6 million, according to Thomson Reuters I/B/E/S. The company's shares were up half a percent at 22.89 on Tuesday on Nasdaq. ------------------------------------------------------------------------------------

HIGH OIL PRICES MAY STRANGLE DEMAND: OVERSEAS SHIPHOLDING

By Krishna N Das BANGALORE, May 5 (Reuters) - Overseas Shipholding Group Inc , the world's second-largest independent tanker company, warned that rising crude oil prices could crush demand for a marine transport industry already struggling with an oversupply of ships. Ship operators may idle vessels, reposition them or just drive them slower to try to mitigate oil prices that have risen to 2-1/2-year highs before Thursday's sharp drop. The global tanker fleet is forecast to grow by 10 percent to 450 million deadweight tonnes this year, while demand is seen rising by only 2 percent. "Oil prices staying high and choking off demand is a big negative," Overseas Shipholding's CEO Morten Arntzen told Reuters by telephone from London. "When Americans start cutting back on driving because of higher gasoline prices, that's a negative." Arntzen said more tanker companies should opt for so-called "slow steaming" -- slowing down vessel speeds to save fuel. This would also require more ships to shift the same cargo, helping ease the ship glut. "Slow steaming is here to stay and it will absorb some of the incremental tonnage that's coming in," said Arntzen, who was visiting the English capital for business meetings. JAPAN, LIBYA, PIRATES Rising fuel prices, tumbling freight rates, piracy and radiation fears from the Japanese earthquake in March could make this year one of the toughest in decades for the maritime industry, forcing some shippers out of business. Spot rates for the benchmark Arabian Gulf-Far East voyage for Very Large Crude Carriers (VLCCs) -- among the biggest ocean-going transporters -- recently fell below the actual cost of fuel for the trip, raising the possibility that shippers may decide to taking vessels off the market. "We have no intention to lose money on a voyage, it doesn't make sense. I think people will reposition ships," said Arntzen, who has been at the company's helm for seven years. He said his ships were not avoiding Japan, where the March 11 quake and tsunami crippled a power plant and sparked the worst nuclear crisis in a quarter of a century. "We are being very careful about which ports (in Japan) we go to. We don't do a lot of business there ... (we) move some LNG occasionally and some products," Arntzen said. He also urged governments to curb the menace of Somali pirates in the Arabian Sea. "We're taking all the measures, including substantial route deviation, to ensure our ships are safe," he said. On Tuesday, New York City-based Overseas Shipholding posted a narrower-than-expected first-quarterly loss -- its eighth in a row -- as a jump in its U.S. business revenue offset the fall in the rates it charges. ------------------------------------------------------------------------------------

CONTAINER FIRMS PASSING ON RECORD BUNKER FUEL COSTS TO CLIENTS

By Randy Fabi SINGAPORE, May 10 (Reuters) - Global container shipping firms are passing on record bunker fuel costs to retailers, manufacturers and other clients reliant on vessels for exporting their goods, an industry consultancy group said on Tuesday. Singapore's benchmark bunker fuel price surged to 2-1/2 year highs last month in tandem with a rise in Brent crude futures to $127, the highest since August 2008. Both markets, however, have since plummeted with bunker prices down nearly 8 percent last week following a broad sell-off in commodities. The world's leading container lines, including A.P. Moller Maersk and Mediterranean Shipping Company (MSC), have been able to protect their profit margins from volatile fuel costs through bunker adjustment factor (BAF) clauses contained in contracts with customers. Exporters face average bunker fuel costs of around $776 per twenty-foot equivalent unit (TEU) for a container vessel travelling from Asia to Europe in June. That is up from the previous record of $766 in September 2008, according to a poll of 12 carriers by leading consultancy group Alphaliner. "BAF has remained a bone of contention for shippers, who argue that it is used by shipping lines to generate additional revenue," Alphaliner said in its weekly newsletter. "Carriers maintain that it is used to recover additional bunker costs linked to unexpected fluctuations in the price of fuel." Bunker surcharges ranged between $703 per TEU, charged by Japan's Nippon Yusen Kaisha , to $832 from Tokyo's Mitsui-OSK Lines . Despite passing on record high bunker fuel costs to their customers, carriers still faced freight rates at multi-year lows. Spot rates from the Far East to North Europe have tumbled to $900 per TEU, down from above $1,300 earlier this year, due to an oversupply of vessels, traders said. "So far we do not see any interest in reducing capacity on the AsiaEurope routes and we do not expect to see any laying up to happen in the coming weeks," said GFI Brokers in its weekly note. "We reckon no carrier will take any action to adjust capacity before the middle of the third quarter." Overall capacity on the Asia-Europe trade route has increased by 6 percent since March following the introduction of three new high capacity strings, Alphaliner said. ------------------------------------------------------------------------------------

UK REGULATOR APPROVES BALTIC SHIP FUTURES SCREEN

By Jonathan Saul LONDON, May 4 (Reuters) - The Baltic Exchange has won UK regulatory approval to run a platform for centralised electronic trading of dry freight derivatives, which will go live shortly with support from some brokers, the exchange said. Freight forward agreements (FFAs), which allow a buyer to take a position on freight rates at a point in the future, are not currently traded on an exchange.

12

FREIGHT MONTHLY Thursday, 02 June 2011

The Baltic said on Wednesday the Financial Services Authority (FSA) had authorised subsidiary Baltic Exchange Derivatives Trading Ltd (BEDT) to run a multilateral trading facility for the screen service called Baltex. "We are pleased to have finally received the FSA's approval, and Baltex will be opening for business very soon," Baltic Exchange Chief Executive Jeremy Penn said in a statement. Of eight brokers that now trade dry freight derivatives, three have signed up for Baltex, a market source said. "I believe FFA brokers will join this initiative based on preparatory work and agreements being put in place between brokers and principals," the source said. "Some brokers are more proactive than others." Plans for central electronic trading have been held up as FFA brokers, fearing a loss of commission business in this niche market, have objected to an FSA regulatory requirement that would take away fees that brokers had received in every trade. "We are optimistic of support at the start from at least some of the brokers," Penn told Reuters. "It is very disappointing to the extent that we have not been able to build a real consensus of support yet amongst the brokers. We do think it will change over time." Janet Sykes, chair of the dry FFABA, an association which represents the views of freight derivatives brokers, said it was aware of the basis that the FSA had granted approval for Baltex. "We continue to have a dialogue with the Baltic in the hope that we can find a way forward in the future that is satisfactory to everyone," she told Reuters. Sykes, who is also head of marketing at Clarksons Securities Ltd, one of the biggest freight derivatives brokers, said it had not signed up yet for the screen. TRANSPARENCY The FFA market, which began in 1985, grew to an estimated value of $130-$150 billion in 2008 before the financial crisis. The value of dry transactions fell to around $27 billion last year, and a lower value is expected this year in a weaker market. The advisory Freight Market Information Users' Group (FMIUG), whose members include Cargill, Morgan Stanley and BHP Billiton , said in February Baltex was moving too slowly and that rivals could launch a platform. "I welcome today's announcement. In view of the changing regulatory environment and the increasing needs for transparency in the financial realm, Baltex can help the freight community in living up to these challenges," FMIUG dry bulk chairman Stefan Albertijn told Reuters. "By launching Baltex, the shipping community also makes sure that it retains ownership of this market," he added. Penn said the screen would go live in a matter of weeks. "We are optimistic that we can build liquidity pretty quickly." The screen will provide live FFA prices and will support straightthrough processing to international clearing houses CME, LCH, NOS and SGX. The transaction's clearing status will be displayed in real time, the Baltic Exchange said. "Baltex also has provisional approval from the Swiss Financial Market Supervisory Authority and Monetary Authority of Singapore, subject to receipt of letters to them from the FSA," said Paul Over, chairman of the BEDT subsidiary, and authorisation from other jurisdictions is expected in the coming months. ------------------------------------------------------------------------------------

EXPANDED PANAMA CANAL TO BYPASS COAL FREIGHT TRADE

By Jonathan Saul and Jackie Cowhig LONDON, May 31 (Reuters) - The new deeper, wider Panama Canal will make little difference to the flow of world coal trade from exporters in the Americas to big Asian clients. Even when the work is finished in 2014 it is likely to still be as cheap to take ships around the Cape of Good Hope, as rates are expected to stay depressed, and the improvements to the Canal will still not be enough to let the biggest coal ships through. Coal traders had expected the canal expansion to boost coal traffic from Colombia to Asia using smaller panamax vessels. But exporters are likely to cut costs by going around South Africa's Cape of Good Hope using larger 180,000 deadweight tonne (dwt) capesize vessels, used mostly for iron ore and coal. "The canal expansion is largely irrelevant to the flow of coal to Asia especially while capesize freight rates remain so low," said one of Colombia's biggest coal exporters on condition of anonymity. "Currently and for the foreseeable future, it makes sense to be shipping from Colombia to China in capes and going around Cape Horn." The expanded canal will also be geared towards containerised shipping -- transporting consumer goods, manufacturing components -- rather than for dry bulkers for commodities including coal. "The canal is not built for either dry or bulk trades -- it's being expanded for the liner trades," said Sverre Svenning, director of research at ship broker Fearnleys. North American and Colombian coal exporters started shipping 150,000 tonne capesize cargoes to China in 2010 because demand was stagnant in Europe and low freight rates made the long voyage time around Cape Horn economically viable. Capesize rates have slumped to record lows as mounting fleet growth has battered sentiment with ship supply outpacing commodity demand. Average daily capesize earnings have fallen to below $5,000 a day this year compared with high of over $230,000 a day in mid 2008 before economic turmoil took its toll. Average capesize earnings reached $10,275 a day last Friday, barely covering operating costs, estimated around $8,000 to $10,000 a day. "A reduction in voyage time by using the Canal wouldn't make much difference to costs, and it's not clear yet what size vessels can use the canal," the Colombian exporter said. "Colombia will continue to see Europe as the key market for coal but increased production will also be targeted at Asia, when it makes sense," he added. Asia's hunger for long-haul imported coal, led by China, has drawn in steam coal for power generation and coking coal for steelmaking from almost every producing country. China imported a record 165 million tonnes of coal in 2010, of which around 10 million tonnes came from Canada and the U.S. and around 4 million from Colombia, official customs data showed. NEW SHIP CLASS The main beneficiaries of the new improved canal are likely to be a new breed of shallow drafted post panamaxes of 90,000 to 120,000 dwt, which have been designed specifically to maximise vessels cargo capacity for canal transits, shipping and coal market sources said. "These 90,000-115,000 tonnes vessels are very hard to place at the moment and the assumption is that they'll be used primarily for traffic through the canal. They're broader in the beam, quite shallow," one senior shipping source said.

13

FREIGHT MONTHLY Thursday, 02 June 2011

The expanded canal will more directly benefit owners who have struggled to find uses for post panamax vessels which could carry more coal to Chile, Mexico and Peru, which are all increasing coal imports, or to Japan and South Korea when the capesize market is tight. Ship and coal industry sources said the transit draft limit, which will be boosted to 15 metres from 12 metres as part of canal expansion, still meant fully loaded capesize vessels at over 18 metres draft would not be able pass through the canal. "Such tonnage gets no benefit as it would have to cut cargo size dramatically or offload and reload at each end which would kill the economics," said Nigel Prentis, head of research, consulting & advisory with HSBC. "All the new canal has done is create a new ship segment while, in the process, making conventional panamaxes less relevant." -----------------------------------------------------------------------------------The index for Australian coal on the globalCOAL index closed at $119.47 a tonne on Friday, down from more than $140 in January when prices were driven up by flooding and wet weather in Australia's eastern Queensland state. WHO BUYS MORE FROM INDONESIA? India will overtake Japan as the biggest buyer of Indonesian coal in 2011, staying ahead of China in the competition for supply from the world's top thermal coal supplier. Most of India's coal imports come from Indonesia. India's domestic shortfall in coal supplies to meet power demand will spur the country to import up to 60 million tonnes from Indonesia this year, five million tonnes more than last year and surpassing Japan as top importer, said Bob Kamandanu, chairman of the Indonesian Coal Mining Association. Imports from Indonesia to India, Asia's third-largest economy, would race to 90 million tonnes by 2013, Kamandanu told Reuters. "Japan has traditionally been the leader at importing Indonesian coal, but now India is surpassing it," Kamandanu said on the sidelines of the conference. "In terms of tonnage, India is moving towards 50-60 million tonnes... very strong. Demand from India's growing number of independent power producers would push the country's imports, Kamandanu said. Japan, which suffered a massive earthquake and tsunami in March, would import 57 million to 58 million tonnes of Indonesian coal this year, down from previous peaks of around 65 million tonnes and unchanged from 2010. The disaster in Japan shut down some coal-fired power plants along the northeastern coast, crimping demand. Japan's thermal coal imports in April fell 13.4 percent on the year to 6.591 million tonnes. CRANKING UP OUTPUT Indonesia's coal mining companies are already cranking up production to meet the fast pace of demand growth, and the country and Kamandanu forecast the country would produce 340 million tonnes this year up from 320 million tonnes in 2010. "All the big guys are increasing their numbers," he said. Bayan Resources Tbk , the country's eighth-largest coal miner, is projected to more than double its output to as much as 25 million tonnes by 2013 versus last year, said chief financial officer Alastair McLeod. The company's main focus was on striking long-term supply deal to India, he added. Bayan expects to produce 14.5 million to 15.5 million tonnes in 2011, up from 11.9 million tonnes in 2010, he told Reuters in an interview. "We started two new mines in 2008 and two new mines in 2009, therefore they have a ramp-up profile over four or five years before they get up to their capacity," McLeod said. "We'll be continually ramping up -- our target by 2013 is to get to 20-25 million tonnes." The flow into China, which emerged as the world's second-largest coal importer after Japan last year, fluctuates according to domestic coal prices and whether or not those are high enough to encourage more electricity output from coal-fired power producers. China boosted power prices on Monday in an attempt to ease its worst power shortages since 2004. That may encourage more coal imports to boost power supply. India's thermal imports could rise to more than 100 million tonnes by 2015, from around 67 million tonnes in 2011, Dhar said. Imports would jump by almost 10 million tonnes this year, he added. Despite a bullish long-term outlook, Asian coal prices have been depressed in recent months, largely due to the aftermath of the Japanese quake and tsunami in March that knocked out some coal-fired plants. Another major Indonesian coal producer, Bhakti Energi, is also eyeing the stiffening competition between China and India for Indonesian supplies. "India has no alternative for its energy resources. India will become a very good importer for Indonesia," said Bhakti's president director Jeffrey Mulyono. "China is different. China is growing well in demand but they still have alternatives for fulfilling (coal) combinations with their own development." Mulyono expects Indonesian coal output to rise at least 10 percent annually over five years, and sees the easternmost province of Papua tapping into its huge coal reserves longer-term.

CHINA COAL IMPORTS TO DOUBLE IN 2015, INDIA CLOSE BEHIND

By Rebekah Kebede and Michael Taylor NUSA DUA, Indonesia, May 30 (Reuters) - Top coal consumer China should see import demand more than double in the next four years and India will be close behind as both hoover up supplies on international markets to feed rapidly growing power industries, industry executives said on Monday. China's thermal coal imports could rise to 200 million tonnes in 2015 from around 90 million tonnes in 2011, Neil Dhar, executive vice president of trading house Noble Group , told the Coaltrans Asia conference. At 90 million tonnes, China's 2011 imports would be steady from 2010, he said. That would indicate shipments would rise for the rest of the year, as China's imports in the first four months of 2011 were down a quarter on 2010. India's growing coal imports:

14

FREIGHT MONTHLY Thursday, 02 June 2011

SPECIAL REPORT-IN LIBYAN OIL SHIPMENT, SANCTIONS PROVE DUMB
For a PDF: http://link.reuters.com/hyt59r By Emma Farge LONDON, May 16 (Reuters) - The deal was struck in early April. Two weeks after the U.N. Security Council vote that saved rebel-held Benghazi from near-certain defeat, Libya's ragtag rebels agreed to the first shipment of oil from the chunk of territory they held. The sale promised to bring in much-needed cash for their bid to set up a parallel Libyan government. If they could pocket just a portion of oil export revenues -- worth around $145 million a day on current prices -they could also buy the weapons they needed for their fight against Muammar Gaddafi. Bypassing the naval blockade and braving NATO bombs, the Liberianflagged Equator sailed into the eastern port of Marsa el Hariga in the first week of April. There, it loaded up to one million barrels of the light, sweet crude so prized by refiners before setting sail through the Suez Canal for east Asia. Oil traders believed it would unload in China. It never made it. Since refuelling in Singapore on April 28, the Equator has sat anchored off the archipelago. AIS live ship tracking data on Reuters, based on satellite signals sent from the vessel, shows its massive iron hull immersed in 15 metres draft of water -- indicating it was still carrying cargo on May 10. The Equator's final destination is now unclear -- and the subject of much speculation among traders and shipbrokers in an industry with a long history of finding ways around sanctions. What does seem likely, more than a dozen shipping and sanctions experts have told Reuters, is that the tanker's expensive cargo has been caught in a legal and political limbo created by international sanctions on Libya. Western governments seem happy for the rebels to sell their oil, and a few western companies may even be ready to buy it and ship it out. But the sanctions, which never anticipated the emergence of two Libyas, make that a dangerous gamble. The ship's fate illustrates the often blunt nature of sanctions regimes. Diplomats and international legal experts who design sanctions often talk about making them "smart" or "targeted", and say they can be used to hurt governments without hitting citizens. But in the case of a country divided, sorting friend from enemy can be next to impossible. Put simply, when Libya split in two, it created a contradiction between the West's political aims and the legal tools it was using to achieve them. The sanctions were designed to weaken Gaddafi. But the Equator shows they may be hurting the rebels more. And if western powers do turn a blind eye to rebel violations of the sanctions, that could undermine the credibility of the sanctions regime and the authority of the Security Council. It would also give Russia and China an excuse to do the same with Iran and North Korea. "There are some issues with the design of the targeted sanctions. It wasn't the best idea to impose an arms embargo on the entire country which technically prohibits support to the anti-Gaddafi forces. But the sanctions were brought in very quickly and the Security Council wasn't anticipating the stalemate and potential partition of the country," said Thomas Biersteker, professor of international security and conflict studies at the Graduate Institute in Geneva, who is an expert on UN sanctions. "These are policy instruments designed by committee. The outcome is that they are sometimes irrational in design because each one is the product of a political compromise." While the shipping industry puzzles over the legality of the shipment, western powers are also setting up a special fund to transfer cash to the rebels -- something they wouldn't have to do if they hadn't imposed sanctions in the first place. NO TAKERS? On its journey, the ship's destination seems to have changed. AIS data at one stage showed it was destined for Honolulu, indicating a possible U.S. buyer. But the final port changed in early May, prompting talk that its owners may have had second thoughts about the legality of the sale. The latest AIS shows the vessel is due in Singapore on May 18, probably to unload its oil at one of the city's many storage caverns from where it can be resold. One source familiar with the tanker's movements said the ship's cargo had already been sold and was on its way to Hawaii. But others said this was unlikely. While ships sometimes switch off their signal to avoid scrutiny or dupe ship-spotters -- including curious journalists -- the Equator has sent regular updates, with the exception of a few days. That's not enough time to travel to Hawaii and back. But it would be enough time to transfer the oil from one ship to another. A spokesman at the Honolulu harbour-master's office told Reuters a crude oil tanker was due on May 23 -- around the date the cargo could be expected to arrive from Singapore. Whatever the case, nobody will own up to buying the oil. China's big four state oil companies deny taking it. Vitol, the Swiss-based, publicity-shy oil trading firm that booked it, and the ship's owners, Greek-based Dynacom Tankers Management, are both declining official comment. By most accounts the cargo is now in limbo, and trade sources say Vitol has sold it on but it's not clear who owns it. "Even with east Libya, you could end up with a legal quagmire," said one oil trader formerly involved in buying Libyan oil for the Asian market, who asked not to be named because of company policy. REWARDS, FEAR If the risks are so high, why would anyone do business with the rebelheld chunk of Africa's third largest oil producer? Because the potential rewards are even higher. Firms that land early contracts with the now rebel-controlled Arabian Gulf Oil Company (Agoco) are likely to earn political points with the rebel Libyan National Council. That would come in handy if the rebels ever become the legitimate government and are able to ramp up production to normal levels. If the rebels lose, though, firms doing business with them are likely to bear the brunt of Gaddafi's wrath, including a probable ban from dealing with the country, which has proven reserves of 41 billion barrels. Before the Libyan conflict, Agoco sold almost one quarter, or 430,000 barrels a day (bpd), of Libya's daily oil production. Some of that output was produced in joint ventures with foreign major oil companies -which have moved out since the violence. Most oil firms working in Libya before the conflict -- Exxon Mobil and Total among them -- stopped trading with the country after the United States, European Union and United Nations imposed sanctions against Tripoli in late February and early March. Traders at western firms say Vitol's leap of faith has done nothing to change that stance. This is despite assurances from the United States -U.S. lawyers say Washington's sanctions are the most stringent -- that a deal with the rebels would not be subject to sanctions, and despite the fact that OPEC member Qatar is marketing rebel oil and rebels have received some payments through a Qatari trust fund. In the weeks since the rebels' initial oil sale there have been very few, if any, copy-cat deals; a fact that won't be missed by investors mulling future projects. Even if western capitals give a nod to doing business with the rebels, market players will be wary without clear guidance from the UN sanctions committee.

15

FREIGHT MONTHLY Thursday, 02 June 2011

Vitol rival Trafigura expressed interest in early April in exporting oil from the eastern towns of Benghazi or Tobruk but has so far held off, traders say. The firm declined official comment. Even Vitol, which, like other oil trading firms tends to have a greater appetite for risk than big oil companies and banks, may be deterred from further shipments, traders and analysts say. "The irony is that the Vitol transaction was aligned with what western powers wanted to achieve politically," said a western diplomatic source, who declined to be named because he is not allowed to speak to the media. "Because of the complexity of sanctions on the EU, UN and U.S. levels, it meant the company, which wanted to support the political cause, was doing it without any political cover and support." "PROVING A NEGATIVE" It doesn't take long to see why dealing with Agoco could be dangerous. The rebel-held firm is so bound up with the sanctions-listed Libya's National Oil Company that international lawyers say it would be a struggle to prove the connection had been truly severed. Not only was Agoco formerly a subsidiary of Gaddafi's National Oil Company, many of its senior executives have worked at both. The original U.S. sanctions list even included Agoco. Despite a subsequent clarification that crude oil sales by rebels will not be subject to sanctions if completed outside of the NOC or any other entity connected to Gaddafi's regime, legal experts worry that a deal with Agoco might still breach sanctions. "It's difficult to prove a negative. You need to prove that you had no cause to suspect that the party involved is owned or controlled by the Gaddafi regime and, in the case of the UK, getting it wrong is backed by criminal penalties," said Susannah Cogman, partner in the corporate crime and investigations team of law firm Herbert Smith. It's a similar story with UN sanctions. The United Nations never had any intention of imposing an Iraq-style oil embargo on Libya. But diplomats from Security Council member states have told Reuters a de facto oil embargo has emerged anyway, because companies are worried about what would be legal. The best way to deal with the situation would be to use the UN Security Council's sanctions committee to clarify which firms are allowed to export or import oil. But a political deadlock on the UNSC caused by China and Russia's doubts about the bombing campaign has made agreement on changes to the sanctions harder to reach, diplomats close to it told Reuters. It's not just a firm buying the crude that should be worried, lawyers say. If there is any doubt about the legal status of a cargo, this could apply all the way down the supply chain until the oil is converted into fuels. "Is it Agoco's oil? What happens if the rebels lose and the National Oil Company goes after the 'stolen' oil? If, say, (Italian oil firm) Eni buys a cargo, and the rebels lose, what's the chance that they get kicked out of Libya forever? It's a real can of worms," said a European crude oil trader, who asked not to be named because of company policy. LOOPHOLES The worries in the rebel-held east of the country are echoed in the Gaddafi-controlled west. The naval blockade and the sanctions have so far mostly stopped the Gaddafi regime selling oil. Only Eni, with a more than 10 percent stake in Libyan oil fields, has publicly said it was trying to export oil from its own fields in Libya, although industry sources said only one of two planned cargoes has made it. Despite the blockade, military and oil analysts think the regime can survive for months. Gaddafi's biggest immediate need is for fuel to continue the war effort and the pounding of Misrata. In particular, gasoline has become a precious commodity as government forces have ditched easy-to-spot tanks for four-by-fours. Reuters revealed in late April that Gaddafi's government had imported gasoline to western Libya using previously unknown middle-men who transfer the fuel between ships in Tunisia. Trade sources say fuels are also being smuggled over the border with Tunisia. In March, residents reported long lines and even gunfights at petrol stations as people tried to stock up, but the supply situation has since improved. Analysts expect western governments to tighten sanctions to address these issues. "The reality is Gaddafi is still terrorising the population and still not meeting the demands of the UN, so the West and especially Britain and France, see sanctions as a way of continuing the fight," said Charles Gurdon, managing director of London-based political risk consultancy Menas Associates. The western diplomatic source said European countries are mulling tighter sanctions against the Gaddafi government, including a fuel embargo. These could work much like those imposed on Iran's oil industry in the middle of 2010. Those measures have drastically reduced the number of gasoline suppliers into Iran. "It would be a logical next step to create a fuels embargo and it's a little surprising they haven't done this already... It would severely restrict the ability to get fuels for the war machine itself," said Saket Vemprala, analyst at Business Monitor International. If the military stalemate persists and a de facto border is drawn through the Sahara, it may also be possible to implement sanctions on a regional basis, lawyers say. The "border" might be drawn along similar lines as the colonial borders which once split the western regions of Tripolitania and Fezzan from the eastern region of Cyrenaica. "One option is dividing up the country by making sanctions territorial and putting an embargo on all of west Libya ... The advantage would be preventing authorities from having to establish that entities in the west are controlled by the Gaddafi regime," said Harry Clark, partner at New York-based law firm Dewey & LeBoeuf, who specialises in trade and investment rules. The United Nations has previously used targeted territorial sanctions in the Democratic Republic of Congo and more recently against parts of Sudan. In theory, the source of oil could then be easily identified by chemical analysis. This would allow for a "vetting scheme" similar to the Kimberley Process which is used to identify "blood diamonds". Some Libyan grades should be easily identified, though the regional origin of oil pumped from deep in the desert, such as that from the Sirte Basin which holds 80 percent of the country's proven reserves, will be hard to prove as it can flow both east and west. As the Equator shows, though, the debate is dizzyingly complex. Experts say policymakers, including UN sanctions committees, may lack the political will to address the issue at all. That bodes badly for the rebels, and could hurt their chances for victory.

16

FREIGHT MONTHLY Thursday, 02 June 2011

Your subscription: Editorial:

If you have not already registered and would like to receive future copies of this news brief or would like to subscribe to other commodities news briefs from Thomson Reuters please click here Thomson Reuters commodities news briefs: Inside Oil Inside Commodities Inside Agriculture Metals Insider Biofuels & Renewables Weekly Inside Dry Freight Freight Monthly India Agriculture Monthly Oil Swaps Forward Curve Monthly

Richard Mably (Global Editor, Commodities & Energy) +44-207-542-6280, richard.mably@thomsonreuters.com Camila Reed (Editor, Commodities and Energy, EMEA) +44-20-7542-8065, Camila.Reed@thomsonreuters.com Jonathan Leff (Editor, Commodities & Energy, Americas) +1-646-223-6068, jonathan.leff@thomsonreuters.com Sambit Mohanty (Editor in Charge, Commodities & Energy, Asia), sambit.mohanty@thomsonreuters.com +65-6870-3084

Privacy statement:

To find out more about how we may collect, use and share your personal information please read our privacy statement here

For more information on Thomson Reuters Commodities Briefs subscription details please click save this

To unsubscribe to this news brief click here If you have any subscription queries please email: vijay.vora@thomsonreuters.com

For more information:

Learn more about our products and services for commodities professionals, click here Send us a sales enquiry, click here Contact your local Thomson Reuters office, click here

2011 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. "Thomson Reuters" and the Thomson Reuters logo are trademarks of Thomson Reuters and its affiliated companies.