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March 2003

Marine Transport
COMPILED BY: Tom Gosselin, Analyst, Tel +34 (956) 648 014 Email tom.gosselin@coreratings.com SHIP CLASSIFICATION AND REGULATION One of the most significant and immediate impacts on the shipping industry during the next ten years will be the obligatory phase-out of older vessels. The age of a vessel determines its suitability to carry hazardous cargo. Age determines the stress and corrosion of a vessels hull as well as determining the energy efficiency of its engines. Most major oil companies now have self-imposed age limitations on the vessels they charter and therefore, owners of modern fleets are set to benefit. Owners of older vessels, on the other hand, will have to sell their expired ships to less stringent operators, or to an increasingly glutted scrap market (see Shipbreaking below). As well as demanding younger, safer ships, oil producers will be pressured to ensure that their charters comply with other safety and environmental requirement. Pressure for increased responsibility for the safe transportation of oil and other polluting cargoes is also felt through the supply chain. Major oil companies rushed to release their transport policies in the wake of the Prestige spill. These companies set their restrictions internally and demand that the shipowners provide details of the construction, seaworthiness, updated certification, age and manning in order to corroborate suitability. Some companies (Maersk) may even make these questionnaires available for scrutiny to other clients and the public. As yet, few oil companies are concerned with issues outside the direct impact of their cargoes. In Scandinavia, the importance of double-hulled ships is of concern in the Baltic and the Barents seas. The Barents Sea, north of Norway, is seeing increasing traffic from the Russian ports of the Kola peninsula, and the Norwegian defence forces have stated that it is not equipped to handle a supertanker in need. Phase-out of old single-hulled oil tankers: MARPOL 13G, originated in the Oil Pollution Act timetable of 1990 (30 years) Revised 2001, post Erika (28 years) Revised 2002, post Prestige (23 years) James Leaton, Senior Analyst, Industrials Team Tel +44 (0) 207 553 5956 Email james.leaton@coreratings.com

The European Commission has set a March 2003 target date for revised tanker rules. No single-hull oil tanker will be allowed to carry heavy fuel oil in the European Union. Furthermore, all single-hull oil tankers "of Erika and Prestige type" aged more than 23 years will be "immediately banned from the Union," while the elimination of younger ones will take place earlier, between 2005 and 2010, according to a stricter calendar than provided for by current rules. In practice, France, Spain, Denmark and other European countries have unilaterally expelled single-hulled vessels from its waters since November 2002. Most regulation concerning age and hulls applies to oil tankers. Other vessels, including older double-hulled gas carriers, are being increasingly shunned by clients.

ENVIRONMENT & SAFETY Anti-pollution and safety measures are set by a variety of societies, conventions and insurers. The International Maritime Organisation (IMO) adopted the principal universal protections in conventions after the grounding of the Amoco Cadiz and the spilling 200,000 tonnes of crude oil in the late 1960s. These two conventions raised the liability for pollution dramatically and made insurance cover against cargo spillage compulsory: CLC Civil Liability Convention IOPC International Oil Pollution Convention

In 1973, MARPOL (The International Convention on MARine POLlution) was drafted by the IMO to supersede the above conventions but it wasnt till 1983 that 50% of the worlds fleet had ratified it. MARPOL was tailored to establish rules for operational pollution (where, when and how much waste oil can be disposed of) but later was amended to include chemicals and other waste. The controls over anti-fouling paint and the discharge of ballast water are planned for incorporation into MARPOL. Not included in the above international conventions is the US-implemented Oil Pollution Act of 1990 (postValdez). As the USA is the biggest oil importer in the world, any vessel supplying its ports must be in compliance of this. The legislation lays responsibility on the vessels owners. Just as the European Union was fearful in 1990 that unacceptable vessels then operating in US waters would end up in European waters, today there is the fears that substandard shipping will find itself removed from Europe just to end up in African, Asian or South American waters. This means that the shipowners may be exporting problem ships to markets where there are reduced controls and insufficient preparations to deal with eventual spills. Chemical tankers do not have the risk exposure faced by oil tankers. This is partly to do with the stringent requirements laid down by the cargo manufacturers themselves rather than shipowners. The Responsible Care programme covers manufacturing and distribution and the CDI (the Chemical Distribution Institute) is the industry body for ship inspections. Other environmental concerns that separate the leaders from the laggards is the issue of anti-fouling paint. These paints, often containing toxic elements that stop barnacles from attaching themselves to hulls, help to improve the fuel efficiency of a vessel. This issue is particularly important in the nearly landlocked Baltic. These paints now have to be phased out between this year and 2008. While some operators are resisting change, others are demonstrating that alternative solutions are commercially viable. Wallenius ferries, for example uses a slightly more expensive silicon paint whereas Silja Lines use divers to regularly scrape the hulls and a special paint used by icebreakers. LABOUR With human error being the leading cause of major accidents and spills, the use of certified, well-trained and responsible crew remains one of the pillars of responsible maritime transport. It has become a mandated requirement that all training establishments for crew must be approved by the IMO as part of the revised STCW (Standards of Training, Certification and Watchkeeping for Seafarers) convention. For Nordic shipping companies, the rise in costs and the avoidance of these has meant that many of these companies have opted for the cheaper alternative of now using foreign labour. Although trends have changed

over the years, presently Filipino crews are the norm and Eastern European or Indian labour is replacing Norwegian officers. Whereas some shipping companies have taken the opportunity to establish their own training academies, other operators have been known to employ under-trained crew supplied by crew suppliers using unethical practices. Crew providers have been known to demand considerable payments from applicants in exchange for contracts. This could have an impact on the company if it is reported to the ITF (International Transportworkers Federation) and the company gets added to its blacklist. Of the 33 companies presently on the ITF blacklist, 15 are manning agents and 14 of the 15 are manning agents based in the Philippines. Another risk posed by poorly trained crew is that shipping lines will face the cost of damages if an accident occurs. This happened in August 2002 when the Odfjell-owned ship Bow Eagle collided with a French trawler in the Bay of Biscay. The second mate and a seaman (both Filipino) never reported the collision when it happened. Of the seven fishermen aboard the French trawler, four drowned and the remaining three were recovered after eight hours at sea. During the trial in Bergen, the seaman said that the second mate had asked him not to tell the captain about the collision. While Odfjell recruits and trains its junior officers, when hiring our Philippine crew members, emphasis is placed on continuity and experience. FLAGS OF CONVENIENCE (FOC) One aspect of the current international shipping industry that poses a risk to all shipping companies is the practice of registering a ship in a country that does not reflect the country of beneficial ownership. The advantages to the companies are cheap registration fees, low or no taxes and freedom to employ cheap labour. Some of these registers have poor safety and training standards, and place no restriction on the nationality of the crew. Sometimes, because of language differences, seafarers are not able to communicate effectively with each other, putting safety and the efficient operation of the ship at risk. Once a ship is registered under an FOC many shipowners then recruit the cheapest labour they can find, pay minimal wages and cut costs by lowering standards of living and working conditions for the crew. Many FOC vessels are older than the average age of the rest of the world fleet. Casualties are higher among FOC vessels. In 2001, 63 per cent of all losses in absolute tonnage terms were accounted for by just 13 FOC registers. The top five registers in terms of numbers of ships lost were all FOCs: Panama, Cyprus, St Vincent, Cambodia and Malta. Of concern is also the destination of the monies paid in registry fees. Liberia, one of the largest FOCs, was accused by both the ITF and human rights group Global Witness, of using the revenues derived from its registry to finance rebel uprisings in neighbouring Sierra Leone. The Tongan Registry has been accused by the ITF of being connected to Al-Qaeda terrorists. Scandinavian exposure to FOCs is limited to a certain extent. The existence of Norwegian, Swedish and Danish international registers means that their ships can continue to use foreign labour without sacrificing safety and environmental controls found at home.

SCRAPPING The renewal of fleets is only half of the story. The fate of the scrapped ships is another area of responsibility that must be addressed. Around 600-700 vessels a year are taken out of service. The main countries for dismantling include India, Bangladesh, China, Pakistan, and Turkey. However not all vessels are reported through official channels, which makes it harder to trace their disposal. Regulation: The International Chamber of Shipping has produced guidelines based on the Basel Convention, which bans the international trade in toxic wastes. These have been supported by the International Maritime Organisation. However, by dealing with scrap merchants based in countries not covered by the Basel Convention it is still possible for ships to be sent around the world to be scrapped. The International Labour Organisation has produced draft guidelines on safety and health in shipbreaking to be discussed at a meeting in May 2003. State intervention: In May 2002 the Turkish Minister of Environment, Fevzi Aytekin, notified all relevant authorities that Turkey must not allow the French toxic ship for scrap "Sea Beirut" to enter the country. Turkish authorities conducted tests which confirmed asbestos was on board. In February 2003 a Belgian court ruled that a ship could not leave Antwerp without being decontaminated according to the Basel Regime Convention. NGO Campaigns: Greenpeaces shipbreaking campaign based in Amsterdam has produced a list of 50 target vessels. Greenpeace campaigners visited scrapyards in India in November 2002 to document the practices occurring there. This list, which is regularly revised, includes the 1980-built oil tanker Berge Pioneer. The list also states that Bergesen is the company with the greatest scrap record on its list, with Greek companies contributing a significant number. From 2001 till end of 2002, Bergesen disposed of thirteen vessels through scrapping, twelve of which were sold in 2002. One, the gas carrier Hesiod (built in 1973) was sold for scrap in February 2003. Greenpeace wrote to Bergesen in April 2002 requesting: 1. A list of remaining hazardous substances onboard the ship, which should be readily available if Bergesen is following the ICS guidelines as previously stated. 2. An inspection of the Berge Ingerid before it goes to scrapping. 3. Disclosure of the planned destination of the ship. Environment: Once tankers are withdrawn from service, there remains an unknown amount of toxic, hazardous substances on board, which should be disposed of responsibly. Areas around shipbreaking yards have suffered environmental degradation affecting local fisheries Social: On 25 February 2003, six workers died and five were injured in a ship-breaking explosion in Alang, India. Amina, a Greek owned ship operated by Chandris had only been at the port two days. Gases can be trapped in untreated ships, which then expode when torchcutters are used to dismantle the ships. Unprepared ships therefore also pose a significant health and safety risk. Vessels may contain a whole range of toxic substances, chemicals, hydrocarbons, or asbestos Financial: The average rate for a ship to be scrapped is USD 2 million, making the industry worth over USD 1 billion per annum. Over the last year, from scrapping eight vessels Bergesen has booked USD 14.4 million in profit. Given the income generated from the scrapping of these ships it seems reasonable for Bergesen to conduct and report on disposal in a responsible manner.

COMPANY EXPOSURE Shipbreaking is a poignant issue for Bergesen given that it owns a further 33 vessels built before 1980 within the fleet of 108 that it operates. The other Nordic companies assessed only minimal or no exposure to this risk. In terms of using flags of convenience, 46% of Frontlines fleet comes under this category. This is followed by Maersk with 30% and Bergesen with 14%. P & O Nedlloyd has taken the initiative and developed a recycling programme. As part of the development of this programme it havssigned an agreement with Chinese partners to assist in an environmentally responsible ship recycling process and to improve on safety procedures and standards at Chinese recycling facilities. It also continues to participate in the development of guidelines with relevant bodies. Company Bergesen Percentage of vessels built pre 1980 37% of complete fleet 39% of oil tankers 37% of gas fleet Percentages of FOC registers (Flags of convenience) 77% NIS 6% ATF 4% PAN (Panama) 4% BMU (Bermuda) 4% BHS (Bahamas) 2% LBR (Liberia) 2% LUX 1% KOR 1% SGP N/A 42% NIS 35% IOM 23% NOR 23% NIS 23% BHS 18% SGP 16% LIB (Liberia) 7% IOM 6% PAN 2% NOR 2% HK 1% BM (Bermuda) 50% SWE 25% FRA 16% IOM 8% NEL 2% NIS 2% NOR 26% LIB 16% SGP 16% DK 9% ITA 7% UK 5% NOR 5% IOM 3% TUR 2% USA 2% MAR (Marshall Islands) 2% HK 2% PAN

Odfjell Farstad Frontline

18% all chemical tankers 2% all oil services vessels 5% all oil tankers

Brostrom

6% oil and chemical tankers

Maersk (Handytankers, LR2, Crude & Shuttle)

0% Crude division has 38 double-hulled to 5 single hulled vessels.

SUMMARY Attempts to elicit a commitment from Bergesen regarding the responsible disposal of scrap vessels beyond compliance with legislation have so far failed. The development of appropriate codes leaves no room for excuses, with both the maritime bodies and the ILO producing guidelines. Companies such as Bergesen will continue to face reputational risk due to pressure from NGOs such as Greenpeace, and the potential for accidents causing injuries at yards with inadequate safety standards. Increased transparency over the fate of scrapped ships is vital to ensure risks are effectively managed. The development by P & O Nedlloyd of a scrapping agreement with Chinese yards to improve knowledge of practices is an industry leading position. The high proportions of Frontlines and Maersks fleet register under FOCs indicates a higher risk of poor labour conditions, lower health and safety standards and makes accidents more likely. The alternatives available to Nordic companies which allow overseas labour mean that the minimal cost savings offered by FOCS are outweighed by the potential liabilities.

SOURCES OF INFORMATION Basel Action Network http://www.ban.org/ Secretariat of the Basel Convention http://www.unep.ch/basel/ ILO http://www.ilo.org/public/english/protection/safework/sectors/shipbrk/draft_guide.pdf Draft guidelines on safety and health in shipbreaking Greenpeace http://greenpeaceweb.org/shipbreak/ Shipbreaking site Head campaigner on shipbreaking: Marietta Hariono, based at Greenpeace International, Amsterdam International Maritime Organisation http://www.imo.org/index.htm International Chamber of Shipping http://www.marisec.org/recycling/code.pdf Industry Code of Practice on Ship Recycling International Transportworkers Federation http://www.itf.org.uk FOC Campaign Tankseminar, Bergesen d.y. 20 June 2000 MARPOL http://www.imo.org/Conventions/contents.asp?doc_id=678&topic_id=258 Responsible Care http://www.americanchemistry.com/rc.nsf/open?OpenForm Oil Pollution Act (OPA 90) http://www.epa.gov/region09/waste/sfund/oilpp/opa.html International Convention on Oil Pollution Preparedness, Response and Co-operation(IOPC) http://sedac.ciesin.org/pidb/texts/oil.pollution.preparedness.1990.html

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