BETTING $20 BILLION IN THE T-A-Y'(ER GLA_!-1E

Shipowners won big in last year's market, and then put their winnings back on the table. Now the Arabs have changed the rules.

by Lewis Beman

Starting a generation ago with some war-surplus ships, nephews. Each fleet is customarily treated as an exten- a few dozen independent oil-tanker operators have built sion of one man's personality-never "National Bulk a great industry and, in some cases, become very, very Carriers" or "Olympic Maritime" but "Ludwig" or rich. Along the way, they have also built a reputation as "Onassis." And it is generally accepted that the head gamblers-men who skillfully play for high stakes in a man is entitled to play his hunches. Norwegian shipown- treacherous and unpredictable market. Last year, the er Erling Naess, who started his tanker fleet on $30,000 independent operators placed their biggest bets ever. in 1946 and sold it to Zapata Corp. for $48 million twenty They ordered $20 billion worth of ships, enough to double years later, is representative of the breed. "I tell my son their tonnage in the next four years. And they did so Michael that he is too intelligent," Naess says. "I use my without any assurance that the ships would be needed. nose." (Michael graduated second in his class at Harvard As things turned out, they could not have placed Business School in 1969.) those orders at a worse time. Shipowners based their Individualists though they are, independent tanker judgment of the need for ships on the assumption operators have worked out a symbiotic relationship with that the oil-consuming countries would import rapidly the giant international oil companies. For reasons of increasing amounts of cheap crude from the . financial and operational flexibility, the "majors" own The trebling of oil prices after the Arab embargo has, at only about a third of the ships they require to move crude the very least, assured slower growth in demand than the oil and refined products through their distribution sys- industry had expected. To make matters worse, the ship- tems. They get the rest of the ships they need from the owners bet most of that $20 billion on very large crude independents, on time charters or in the spot market. carriers (VLCC's), as they call the giant supertankers designed to bring oil from the Persian Gulf. In the wake of Scandinavians take the big risks the changes that the Arabs are forcing upon the oil busi- This oil-industry practice gives owners sevt~ralstra- ness, many maritime experts think smaller, more versa- tegic options. Accepting a time charter guarantees the tile ships may be needed. Some worry that the VLCC's owner a definite income for a certain period. For a will prove to be as overspecialized as the brontosaurus. VLCC of 250,000 tons, a five-year time charter has averaged about $2.50 per deadweight to11 1)t.r month, or A son too intelligent $7.5 million a year. A single-voyagtl chatrl cr in the spot In any other industry, decisions on investments so huge market, on the other hand, offers thrt possibility of extra- would be wrapped in the full panoply of managerial sci- ordinary profits when there is a. sh~brti~~t*of ships-at ence--economic forecasts, cash-flow projections, feasi- the risk of heavy losses when tht* d~licatrbalance of bility studies, and the like. In shipping, however, the in- supply and demand tips the other way. Tht) owners tend to dividual capitalist still reigns supreme-often at the head develop distinctive strategies for playing the tanker mar- of a family firm that includes his deferential sons and ket, depending mainly on their willingness to accept risk. Reseal-ch associate :An% Hengstenberg That willingness seems to vary roughly by nationality.

'aul Weller FORTUNE August 1974 145 supertanker could have grossed on @.singlevoyage at the top of the market last fall and what it had to settle for at the bottom last winter came to a startling $8 million. The Sit1 Cl~nrlesHa~j&b?.o, a 28@,000-ton supertanker launched from a Norwegian shipyard only last year, has already experienced the best and the worst that the spot market has to offer. The vessel slipped away from the shipyard dock in on July 4, threaded through the rocky cliffs of the Kloster Fjord, aild took the 11,600-mile passage around the Cape of Good Rope. A month later the ship arrived at the Persian Gulf in the middle of a bull market and picked up a cargo from Gulf Oil at world- scale 250, which netted something like $3 million on the maiden voyage, Returning to the hlf in early October, the Hamb?.o arrived near the peak of a wild scramble for tonnage and took on a cargo for Shell at worldscale 380. Brokers estimate that the trip earned more than $7 million, a triumphal voyage that ranks beside Sir Francis Drake's return with the Spanish treasure.

"I was in the best pmltion" The Hantb~~oset out on a third voyage after the Arabs had unsheathed their "oil weapon" and returned with a record of a different sort. Starting for the Persian The moat daring of 's rnterpr~srngshipowners, Hilrnar Gulf in mid-November, the ship did not get another cargo Reksten has comm~llcdnlne supertankers to seeking cargo in until mid-May, and even then had to accept worldscale Ihe spot markel, where rates Iluclu~!cw~ldly, from gloriously 52.5, barely enough to cover the operating costa for the profitable lo below breakeven. Many shipowners consider Rek- trip back home. Brokers estimate that the wait cost the sten too daring To lhem he replies "I've been in the business for thirty years-and lhal counts lor something " Hambs.o's owner, a Norwegian named Hilrnar Reksten, more than $3 million. Like a high-stakes poker player who has survived more Chinese and Japanese owtiers tend to run very large than his share of second-best hands, Hilmar Reksten can fleets on relatively couservtiti ve p1.i nciples. They have contemplate the vagaries of fortune with philosophic de- generally orclerecl ships olily after securing a long time tachment. Six years ago, after a long depression in freight chartei. from H mtt,ior oil coniptt~ty,rind they almost rates, people in the industry were saying Rek~tenwas never ru1111ship 011 the hnrl.owi~~glyvolttlile spot mnrket. near bankruptcy. Legend has him actually on the way to Some Greeks haw also I)uill up huge fleets oti the churter- tell his bankers the bad news on June 6, 1967, the begin- first policy, but most have tendetl to concentrate on tliiig of the Six Day War, But the closing of the Suer, smaller and olcler vessels, running many of them in the (:atla1 generated a huge demand for additional tonnage, spot, market (see "The (hime of the Greeks" on page "People called me broke," Reksten says, "but I was in 148). But the real gttrnb1ei.s are the Sc~nclir~uvians,who the best position of any owner-I had 1.7 million tons have been forced by circumstances illto the riskiest game. 011 the starting line." With that appraisal most in the Norw7egians ow11 less th~n15 percent of the world industry agree. Says C. Y. Chen, founder of what is now tanker fleet, but account for ttetirly 50 pellc.eltt of the ton- the shipping subsidiary of General American Transporta- nage in the spot market. tion : "Mr. Reksten overnight made more money than Talking about the spot market, a IJonclon tanker broker anyone, probably, in the history of the business." observes with only milt1 exagger~rtioi~ : "One ship too few Virtually unknown outside the tight community of in- in the Persinu Gulf cii11 setid rclles so;rring through the ternational shipping, Reksten, at seventy-six, has earned roof: one ship too mnny call sent1 thtlm crashing through a certain notoriety among his peers. They know him, in- the floor." The i'ctter. are calci~lriteclon a complex "world- deed speak of him with awe, as the only man who ever scale" intlex atloptcd by inrlusti*).~gt~comi~nt and designed dared to commit an entire fleet of supertankers to the to equ~lizethe revenue pel. ton prr (lily on any voyage. pot market. In an industry that discusses the quirks and During three weeks iti May, 1073, the index rose for foibles of shipowners the way sp~~tswriters talk about VLCC's from worldscitle 92.5 to wt)~~ldscale210 ; over a quarterbacks, Reksten tends to be put in a special cate- similar period last fall, rates fell from worlclscale 410 to gory. Being unique, his business strategy is generally worldscale 57. The difference betweeti what a 250,000-ton attributed to personal eccentricity of an extreme sort.

146 FORTUNE August 1974 I Reksten says his strategy was not entirely a matter of and was interested in three of our ships. I took the phone, choice, but was compelled by economic necessity. "It's said, 'It's me,' and asked, 'What is the rate?' The broker been said I'm a gambler," he says. "I admit that, if you said 140. I liked the rate and asked whether Exxon wanted understand why." According to his account, he was forced to take on another ship, too. Exxon's man said simply, into the spot market because he could not compete for 'It's a deal.' The whole transaction took only a few min- time charters with such Greeks as Onassis and Niarchos. utes and I had signed up four ships for six voyages each."' By law, Norwegian owners must run their ships under It was not the peak of the market, but that single con- the Norwegian flag. They pay considerably high* crew tract, which ran out only last month, brought Reksten costs than the Greeks, who may, and do, run under flags of revenues of $80 million, much of which came in after convenience, mostly Liberian and Panamanian. (In addi- the market dropped. tion, Reksten preferred to buy his ships in Scandinavian "I maneuver my fleet the way you would maneuver an yards, though he could have bought them more cheaply army," Reksten says. His ships are of only marginal sig- in Japan, as did the Greeks.) nificance in normal times (repres'enting perhaps 1 "I was told you couldn't take a 200,000-ton tanker and percent of world t,anker tonnage), but of critical im- run it in the market-it was too risky," Reksten says. "I portance at times of peak clemancl. Most of the tankers in thought about it a bit, I hesitated a bit, but I did it. It the spot market are under 100,000 tons, and VLCC's can was not that I was by nature courageous. It was the only carry oil long distances at half their cost per ton. As way I could get a freight rate that would not only be Reksten sees it, by running the most efficient ships in the profitable but would allow me to renew my ships when spot market, he is offering oil companies a valuable ser- they got old." vice at the lowest possible cost. He bristles at charges that he is a profiteer. In fact, he considers the freight Like maneuvering an army rates experienced at the top of last year's boom unhealthy. In the mid-Sixties, shipowners were routinely leasing "We never demanded those rates. When they got that supertankers to the oil companies for periods of ten high we .just said, 'Do you want to offer the market?' This years or more. To do that, Reksten felt, would not only prevent him from earning sufficient income, but also force him to relinquish control over his fleet to the char- Bv re~utationthe most cautious of Norwegian shipowners, terers. "The bankers told us thev wouldn't finance a shir> ~kval'Bergesenhas stayed out of the unpredictable spot mar- unless we had a wit., a oil company. k2and chirtered his ships long term to earn assured revenues major Othek Wh~leother owners were eagerly ordering big tankers last year. owners went along with them ; 1 said no. Eventually Bergesen shrewdly refrained Says he "That's the difference my position was accepted by my bank, Hambro's, who between pess~rn~stsand optirn~sts" understood what I was trying to do." (The Sir Charles HarnB9-o is an obvious tribute, standing out in a fleet of ships almost all named for Roman emperors.) Winnings in the spot market have allowed Reksten to amass more assets than many businesses on FORTUNE'S list of the 300 largest industrial companies outside the U.S. Reksten's ten ships add up to 2,330,000 tons. At today's prices, the fleet would be worth easily half a bil- lion dollars. If Reksten had been willing to charter his ships long term, he would have assured revenues of per- haps $6 million a month. But in the six months that marked the peak of the market last year, he was probably making three times that much. The spot tanker market is no business for men who like regular hours. When it is early afternoon in the mid- Manhattan offices of the world's principal charterers, it is well into the evening in Norway. Reksten's office sits, as he puts it, "in the corner of my garden" across the road from a Bergen nursery school. It operates, in shifts, eighteen hours a day. Reksten's fond recollection of an episode in May, 1973, illustrates the way he likes to do business: "It was late in the evening. I stopped by the chartering room. The telephone rang. It was a large ship broker who said that Exxon was on the other line from New York

FORTUNE AUgUSt 1974 147 . . ~...... , . : f J.24 . . .. ., . ' .:ijN7.,,.?~>~f .."~b... " .. dl.~., *I, .: %.? ?.,I ,;? ., !f. ;-, .!i, .. R..ind. is very important to me because I never demanded ex- orbitant rates. I don't like it. It's crazy. But when rates get that high you can't just simply sit and say 'no.' I made so much money that it was not sound." Now a different kind of unsoundness afflicts the busi- ness. With the market teetering toward disaster, Rek- sten's subordinates must strain to get the best rates they can. Even after the Arab embargo ended last March, the Persian Gulf continued to be a depressed area for ships operating in the spot market. While a brief shortage of small tankers sent rates up 150 points for vessels under 40,000 tons, the rate on a VLCC stayed at around world- scale 70, just about enough to cover operating expenses.

An expenslve waiting game Toward the end of May, a temporary firming in the Persian Gulf market brought hope in Bergen that lSates THE GAME OF THE GREEKS: were again on the way up. The action in the chartering room was close enough to a real poke13 game that it seemed appropriate when visitors were presented with Greelc shipow~~ersseem to relish their popular im- decks of cards bearing the Reksten flag. Reksten played n age as daring gamblers, but they don't really live up steel-nerved waiting game by transatlantic telephone. to it-at least not compared to the Scandinavians. He was offered a voyage at worldscale 85, which he ,410ng the l)ar~.encoasts of the Aegean, endurance turned down in the hope that a little patience would bring has a special value. As Basil P. C;oulanclris puts it, the bid to over 100. That fifteen points would have been "the prime motivation of shipowners is not to mnke worth $340,000 on the 230,000-ton Falkefjell, one of money, but to survive." The Greeks have generally three VLCC's that Reksten has "chartered in" from other owners. (Time charters between owners are not unusual, followed a policy of chartering their supertankers but only Reksten has chartered in supertankers to run long term to earn an assured income. When they on the spot market.) Perhaps more important. than the play the risky spot market, they do so j~rimarilywith additional money was that a higher rate would have estab- smaller ships that have been paid offFf. lished a better climate for Reksten's Kong Hnakon VII, Goulantlris (like Aristotle Onassis and Stavros which in two weeks was due "off Dubai-load-ready any Niarchos) has amassed a huge fleet of supertankeis. Persian Gulf port." Rut most Greek ships are under 100,000 tons, half of The waiting game turned out to be a costly play. Oil what it now takes to be called a supertanker. Costas companies flooded the spot market with "relets"--ships Lemos, one of the largest Creek shipowners-and, that they had chartered long term but had no cargo for- some say, the ~ichest-has only four supertankers. and knocked the rates way down. After a week, the Falkefjell accepted worldscale 70 from British Petroleum. Twenty-five of his tankers are under 100,000 tons; Adding the $340,000 loss from the slippage in rates and the $25,000 a day he was paying to charter the ship, Rek- sten had maneuvered himself out of a half million dollars. The Falkefjell, moreover, was only one of five super- tankers Reksten deliberately left idle for periods of up to Goulandris 1 -1 six months in the vain hope that the tide would turn in " : the tanker market. For all his philosophic nature, Rek- . sten is uncomfortable reflecting on that decision. "It was ,,. a mistake," he readily concedes. He attributes his action in part to a miscalculation ("I thought the Arabs would at least maintain production"). He also says he made a deliberate sacrifice, similar to the sacrifice that the leader I of an underwriting syndicate is supposed to make in a bear market ("I am watched very closely and did not want to add to the panic"). Whatever the reason, the gesture cost him $5.5 million of those "unsound" profits he had earned the year before, continued page 220

148 FORTUNE Augusl 1979 .. 2 . . -. Karageorgis iURVlVAL COMES FIRST

several of them are more than fifteen years old. owns no ships larger than 150,000 tons, ordered two Greeks run smaller ships than the Scandinavians, 375,000-tonners. Michail Karageorgis, on the other it1 part tterause the Greeks pay their crews less. Since hand, stood by that old Greek preference for small small ships are relatively more labor intensive than ships. He has twice as much tanker tonnage on order large ones. the (:reeks have an advantage in that as is in his existing tanker fleet, but none of the segment of the hi~siness.Over the years, the Nor- orders are for supertankers. "We anticipated that wegi;~r~shave tl'atlecl up. selling their older ships, the would reopen," he says, "and then freqilently to the Greeks. Last year the prices paid smaller ships would have an advantage." for the shills halloonecl: the cost of a 25,000-tonner Most if not all Greek shipping companies are fam- shot up from 52 million to $5 million. Now that ily firms. Sometimes, indeed, it seems as if all Greek freight rates have collapsed. it. seems obvious that shipowners are related. When people said during the some buyers paid too much. Says Manual Kulukun- buying spree that everybody and his brother were tlis, the elder statesman of Greek shipping: "The ordering ships, it might have been tcue. John M. most vulnerable are small owners who bought ex- Carras, whose daughter is married to a competitor, ~'ensivesecond hantl ships at the top of the market." thinks private family companies have an advantage. 'I'he Creeks have aiso ordered some 20 million tons "If you make a mistake," he says, "you don't have of new shil)s. Sevc?ml have bought supertankers for to go before your stockholders and explain." Maybe the first time. Minos Colocotrol~is,who currently only your father-in-law. The Tanker Game continued from page ircr orated. Slow steaming to the Persian Gulf (partly to save on fuel, partly to delay the inevitable), the Radny had to The massive losses Reksten had to swallow periodically wait three weeks before picking up a spot cargo on which reinforced the views of other owners that his type of she barely broke even. A sister ship, to be delivered this spot-market g?me was far too risky-at least as a full- month, will soon be competing for cargo with the Raclny time occupation for their supertankers. Other owners in a spot market that has since grown even worse. have dabbled in the spot market in hopes of winning big, Even when a shipowner can sign up a time charter, but at the same time they have taken precautions that he is playing a riskier game than he has in the past. In minimize their risks. Playing the spot market with older the Sixties, many VLCC's were chartered out for periods ships that are fully paid for is one way to limit exposure. of up to twenty years at rates as low as 88 cents per ton Another, used for ships under construction, is to contract per month--or $2,640,000 a year for a 250,000-ton vessel. a time charter that will take effect several months after The owners expected those charters to yield moderate the new vessel comes out of the yard. In the unchartered but predictable profits. The deals assured them a steady months, the owner may try his luck on the spot market, flow of income and the risks seemed low. comfortable in the knowledge that he won't be subject to To the owners' surprise, their "quiet game" turned its whims forever. hazardous in an era of inflation and currency chaos. Charters had been written with the expectation that crew Never in a bad market costs would go up about 5 percent a year ;actual costs rose Some owners play the spot market with "combination several times that fast. The costs of repair and mainte- ships" that can carry oil or dry cargo. Although combina- nance, expensive items for large ships that can be handled tion ships generally cost 15 percent more than straight by only a few drydocks, have gone up even faster. Insur- tankers, they enable the owner to switch out of the oil ance costs have doubled. And the devaluations of sterling business entirely if the rates become unremunerative. and the dollar, the currencies in which most charters were They can also pick up ore or coal on at least part of the written, have hurt the owners badly. Independent oper- "ballast leg," where a straight tanker would be traveling ators are now running heavy losses on long-term charters. empty. Halfdan Ditlev-Simonsen Jr., a Norwegian, plays The losses for 1974 are estimated to total $375 million. the spot market with six oil-bulic-ore carriers. He and other Oslo shipowners share in some contracts to carry They need permission to hush a cat coal from the U.S. and iron ore from Brazil. Last year, During recent years, as the risks in long-term charters when tanker rates reached record highs, Ditlev-Simonsen became evident, many shipowners felt forced to play, if and other owners of oil-bulk-ore carriers "chartered in" not Reksten's game, something approaching it. Says dry cargo ships to meet their commitments to carry coal Greek shipowner Basil P. Goulandris, who had chartered and ore. They wanted to speed their own vessels back to out long term: "Reksten took too many risks, but he the Persian Gulf to capitalize on the lucrative oil business. foresaw the situation better than we did." Like most Shipowners who prefer time charters may occasional- other owners, Goulandris has had reservations in recent ly put their supertankers into the spot market and wait years about signing a time charter of more than five for time-charter rates to go up. While time charters years. This short-charter policy has some characteristics fluctuate less violently than single-voyage rates, they similar to playing the spot market. With ships coming off can vary by several dollars per ton per month between charter more frequently, the probability increases that an peaks and troughs. Hagbart Waage, seventy-five, who owner will be stuck with a vessel nobody wants to charter. owns one of Oslo's largest tanker concerns, follows the On the other hand, of course, having a ship come on the maxim :"Never fix a time charter in a bad market." When market at the right time can be very rewarding. the 225,000-ton Sysla was delivered during a slump in Last fall, in the rising market, Swedish shipowner the spring of 1972, Waage sent her to the Persian Gulf Sven Salen fixed three-year charters on two VLCC's for on spot rather than take a low time-charter rate. Her first $80 million, enough to pay the full purchase price of the cargo was at worldscale 15, the lowest rate any tanker ships, after all expenses. Manager of a fleet founded by his has ever accepted. The ship grossed only $300,000-little father in 1915, Salen is well aware of the ups and downs more than enough to cover the fuel bill. After a few barely of shipping. "We have tended to order in bad markets profitable voyages in the fall and winter, she finally hit it with the idea that the ships would be delivered when the big in the booming market in the spring of 1973, earning market is good," he says. Compared with last year's per- $20 million on six trips. But Waage found it easy to avoid feit timing, he fears that circumstances might be different the temptation to let his winnings ride in the spot market. next year, when he has to find charters for three new When Shell offered to charter the Sysla for two years at 350,000-ton tankers and four older VLCC's that are com- $30 million, he snapped up the deal. ing off charter. "But that's the way the business is," he By the time Waage took delivery of the 280,000-ton says. "We have always had great swings in the past, and Radny in November, however, the bull market had evap- the last two years have been very good." continued page 995

220 FORTUNE August 1974 The Tanker Game continued shipping or related activities. Thus the big profits of 1973 led almost automatically to big investments. The largest of all the Norwegian shipowners, Sigval Some new considerations also encouraged the owners -' Bergesen, stands out as an extraordinary case of a tanker to order more and bigger ships last year. The supertanker . man who still charters long term. By reputation, Bergesen had been developed to bring crude from the Middle East is the most conservative of the Norwegians. He owns 5.5 to Europe and Japan, But when U.S. oil production ., million tons and he commands respect, in the most literal peaked out in 1970, Venezuela, the main foreign supplier sense. As he puts it : "I run a one-man show. Nobody here to the U.S., was not capable of filling the higher demand. says hush to a cat without consulting me first." Son of a Oil exports from the Middle East to the U.S. doubled in shipowner, Bergesen struck out on his own during the 1971 and went up an additional 26 percent in 1972. When Great Depression when his father, seventy-two, showed the U.S. eliminated its quotas on oil imports in May, 1973, no signs of retiring. He himself is now eighty-one and the owners believed that more and more of the U.S. needs enjoys piloting an Italian speedboat across a Norwegian for oil would be filled from the Persian Gulf. fjord at forty miles an hour. Rergesen concedes Ibat in- To tanker owners, a barrel of oil from the Middle East flation has greatly increased the risk of long-term char- is the equivalent of several barrels from anywhere else. ters, but he says: "It is better to take a long time and a The trip around the Cape of Good Hope to the East Coast not-so-good charter than to have no charter at all." of the U.S. takes more than a month, compared with the week or so it takes to bring oil from Venezuela. While only Keeping enough millions at hand a little more than two million tons of tanker capacity are To focus on Re~.gesen'schartering tactics, or to accept, required to transport one million barrels a day from Mari- uncritically his reputat.ion for conservatism, would be to caibo, more than ten million tons are needed to carry the miss the real game he is p1:~ying.Bergesen makes his big same amount from the port of Ras Tanura in Saudi money not in chartering but in the buying and selling of Arabia. Shipowners believed the bulk of the increased ships. Last year, he sold six supertankers-includj17g four trade would go to the supertankers because they were the 400,000-tonners on which construction had not even begun most economical. Never mind that the U.S. had no ports .. . -for a net profit of more than $200 million. Pl;iying this that could handle the big ships-the Americans would . game takes a lot of cash. "I always make it a point to have build them. a sufficient number of millions at hand," Rergesen says. It also takes a fantastic credit rating. "Three years ago," Like buying a diamond Bergesen says, "during a two-week period, I ordered five Optimistic shipowners found plenty of people who were ships, 400,000 tons each. It was done casually, like we are eager to encourage their buying. After a tanker boom in sitting here, talking. To finance the ships, T had to get a 1970, shipyards invested heavily in new facilities geared loan of one and one-half billion Norwegian kroners [about specifically to the construction of VLCC's. When the $300 million]. I picked up the phone and called Den tanker market hit one of its periodic lulls in 1971, new Norske Creditbank in Oslo and Hambro's bank in London. orders were slow in coming. When the new boom came Whcn I put the receiver back on, I had made oral deals for along, shipbuilders saw it as a time to recoup-and to the sum-half from each bank." ensure employment of their facilities far into the future. Of course it was not really all thnl casual. As Bergesen Numerous U.S. banks, looking for action on the Euro- puts it : "I always prepare my project over a long period dollar market in the early Seventies, discovered the ship- of time-then decisive action only takes seconds. Fantasy ping industry's huge appetite for capital. The correspond- and thoroughness are key words for me." Indeed, Berge- ingly huge profits made the shipowners appear to be good sen seems to have displaycd a genius for timing. Last year risks. Merchant banks in London put together syndicates he was noticeably absent from the great "ordering orgy" that made it easy for the newcomer banks to invest in that now threatens to bring on an overabundance of su- what looked like a sure thing. Shipping experts at the pertankers. "I joined the ordering boom at the beginning established international banks say the easy terms offered but backed out and sold six VLCC's. My company will by the syndicates encouraged some owners to get in over probably not order any more supertankers for some their heads. Predicts a London-based officer of a major time." A lot of other shipowners now wish they had been Manhattan bank : "We might see some midwestern banks gifted with that sense of timing. in the business of operating supertankers." The big surge of orders resulted in part from that The easy money also sucked in some shipowners who natural instinct that makes eager gamblers return to were new to the supertanker game. Says a Norwegian the tables after a big win. But there were also other influ- operator who does not relish the additional competition: ences at work on the shipowners, including the tax laws. "The trouble with a boom like last year's is that the Norwegians are subject to some of the world's steepest banks find out how much money we make and then finance income taxes, but their profits are almost completely someone who doesn't know what it is dl about," Fully sheltered to the extent that they reinvest the money in half of the owners who have supertankers on order now continued page 286 pi? own none at all. Some owners have ordered several times Vessels of 80,000 tons or less, capable of moving throug~ , . more tonnage than they now own. To order a million tons the canal fully loaded, can cut twenty-five days off a takes a minimum of $175 million, but somehow more than round trip to Europe. Some tankers up to 200,000 tons , thirty independents have come up with enough money can make the ballast leg back to the Persian Gulf through for at least the down payment. the canal, saving twelve days or so. These savings would .I The boom helped send ship prices climbing by as much eliminate the need for 200 supertankers. Unless the : as 60 percent in Japan over the course of the year. But Egyptians undertake the expensive task of dredging for I. 3 that didn't slow down the buying. The tanker menthought deeperdraft vessels, the canal will tend to put small ships the price of ships would rise even higher in the future, and back on an even footing with the supertankers trading I. they considered ships a safe haven for their capital. "They between the Persian Gulf and Europe. And if the Arabs 1.- bought ships the way you'd buy a diamond," says Con- build the huge new refineries they are talking about, they :- stantine Gratsos, who heads U.S. operations for Aristotle will further depress demand for supertankers. The Onassis. "But with a diamond you can just put it in a VLCC's cannot be used for carrying refined products, safe and wait. A ship costs thousands of dollars a day which require smaller, more complex vessels. to maintain and it's a little difficult to visualize that as Chastened by developments over the past eight months, '. protection. We shipowners are full of excuses for the even Hilman Reksten now worries that what the Arabs IF , mistakes we commit." are doing to the oil industry may permanently alter the ianker game. "The war in the Micldle East was something Intimidating arithmetic T didn't anticipate at all," he says, "and I admit that I 1. Watching from the sidelines, oil-company executives face an international economic and political situ;~t,ionI were startled by the surge of new shipbuilding contracts don't fully understand. So, for the first time in my career, , being placed by the independents. In the days when the in- I think I will just have to sit here in the corner of my . dependents fixed a long-term charter before they ordered garden and watch and not do anything." a new ship, the ordering spree probably would not have occurred. The oil companies wouldn't charter what they "You have to be an optimist" , didn't need, and without the charters, the ships woultln't Considering their exposure, it is difficult to see how . be built. The movement away from the charter-first policy independenl tanker operators can sit comfortably, in the Seventies cut the independents off from oil-com- whether in a garden in Norway or on :L yacht in the $ pany planning. They no longer had a way of equating Aegeah. They are used to periodic recessions, but if the ' future supply with future demand, and an important dire forecasts are anywhere near the mark this time, even constraint was removed from their gambling instincts. the strongest owners will be in trouble. I-1au11tedfor years Christopher J. Chrven, manager of Exxon's transporta- by the specter of an unemployed superta~lkerdraining tion operations, predicts that by 1978 one-quarter of the their cash reserves, many owners fear they will have no tanker fleet-more than 100 million tons-will be surplus. option but to have their big ships join the Reksten fleet Most operators ridicule such dire predictions. Some dark- shopping for scarce cargo. ly suspect an oil-industry slrategy to frighten them into Halfdan nitlev-Simonsen expresses sentiment to signing charters at low rates. But even the most optimistic which mosl shipowners appear to su1)scribe: "You have lo owners can't help but be intimidated by the arithmetic. be an optimist or life woulcl be intolcrJ~l(-i."Thc owners The industry as a whole will have 600 supertankers leaven their collcern for tho future with a rcc.il.ation ol coming on the market in four years. Eleven independeni. factors that might frustrate the forec.asLs. First of all, owners of VLCC's will each have to find employment for they think profligacy ill oil consumption is a habit that more than two million tons in that period. To employ all will not be blunted merely by increased prices. They the ships will require an increase in oil consumption of expect that alter a period of adjustment,, dc~n:inclfor oil more than 13 percent a year, with most of the additional will begin rising as fast as ever. They also h:wte~l Lo ob- supply coming from the Persian Gulf. Even in the Sixties, serve that, paradoxically, higher oil prices can increase world oil demand increased by only 7.5 percent a year. the demand for tankers in one way. The higher cost of And now that the Arabs have run a successful embargo, fuel encourages owners and charterers Lo reduce speeds. consuming nations will try to hold down their purchases Slowing down by two knots can save as much as 25 per- from the Persian Gulf for strategic reasons. Grand ges- cent on the fuel bill-about $150,000 on the round trip tures such as "Project Independence" may not fully pan between Europe and the Persian Gulf. If the entire tanker out, but consuming countries will almost certainly have fleet engaged in the practice of slow steaming, it would some success in turning away from the Arabs. The North increase the effective demand by about 20 million tons. Sea, for instance, is thought to be capable of supplying a It seems absurd that nothing can be done to forestall quarter of Europe's energy requirements. an outpouring of supertankers for which the keels have The reopening of the Suez Canal, expected next year, not yet been laid. Owners have reason to hope that circum- will deal another blow to the owners of supertankers. stances will keep at least some new supertankers from eontinzed page 228

228 FORTUNE Auausl !1974 ;**I. v-a ships are laid up or scrapped. In the current climate the# - The Tanker Game continued is considerable uncertainty about which ships will get coming into the market on schedule. They expect more pushed out of the market first. Normally they have been ' than the usual amount of slippage in the delivery sched- the older, smaller, less efficient ships. But there are so ' ' ules. Steel supplies are tight and shipyard unions are many VLCC's coming along, and so few ports to handle notoriously strike-prone. Many supertanker orders may them, that many experts think supertankers will soon be converted into orders for smaller tankers and carriers join the lay-up fleet. of refined petroleum products. Past recessions bave brought outright cancellations. But under some current Well, maybe there will be a war k . contracts, shipowners would have to forfeit a down pay- In the past, the tanker industry has often been bailed ment of as much as $20 million to cancel construction of a out by political disturbances that increase the demand very large ship. for ships. The instinctive feeling of shipowners is that While many owners will have a tough time making a history will repeat itself. One veteran shipowner, speak- profit on ships ordered in 1973, many shipyards face a ing with extreme candor, puts the proposition baldly: loss on almost every ship ordered before then-inflation "War is the rule of existence, and war is good for busi- hit the shipyards, too, particularly in Japan. This situa- nes.s--especially the shipping business. Between 1945 tion would seem a natural for a "walkaway deal," in and 1974 we've had four wars. The odds are for some

' which owners and shipyards agree to cancel a number of kind of conflagration. The way humanity is led today $ . .old and new orders. But it does not really seem probable you never know what is going to happen." The man does - that many such deals will come about. Shipyards and the not go home at night and pray for war. He simply sees . . governments that subsidize them would rather build himself as a realist. L . , money-losing ships L;han let facilities stand idle. Shipowners are also fatalists. They face with equa- Eventually, almost everyone concedes, hard choices nimity levels of risk and uncertainty that woulcl paralyze -I.." ' will have to be faced. (Such is the optimism of shipown- others. In the words of C:onst,antine Gmtsos, the Onassis ers that most expect the hard choices will have to be man : "The cards have already been dealt ; all you can do w.' faced by others.) In every recession a certain number of is pick up your hand." END t'lI

' .*.. from Bolivia will riot be sufficient for 20 ern Cross award. Gibson now has pal- Gas Man from Idaho I-- million people. Barring the discovery of pable evidence of his accomplishments : continued from page 173 Jd some other source of natural gas, Com- a hantlsome gold meclal and a sheepskin cajoling from the sidelines paid off. In gLis will continue to rely heavily on man- certificate. But in an official decree ac- ' ;. ;. April, 1973, Flavio Guimariies was sum- ufactured gas; it has immecliate plans companying the award, the Brazilian . , I; moned to a meeting in Hrasilia with the to build four more naphtha plants. The Foreign Ministry omitted any mention Brazilian Minister of Mines and Energy, company will also have to import lique- of the pipeline. Instead, it spoke in the the president of the country's National fied natural gas from Algeria, , most general terms of Gibson's "out- Petroleum Council, the president of and elsewhere. Moreover, it will take st:intlinx service to Iirazil in connection Petrobrks, and the president of the mu- many years, and cost billions of tlollars, with his 1.E.S.C:. projects here." When a nicipally owned gas company in Rio clc to install the necessary gas mains in the reporter pressed the point, a Foreign Janeiro. Brazil and Bolivia, it was an- expandetl Cjorngits territory. Ministry spokesman denied that the nounced, had agreed that a pipeline award hat1 anything to do with the pipe- should be built, and that negotiations The highest honor line. IIe explitined that it was simply a would begin the following month. To Ralph Gibson, the Brazilian-Ro- tribute to Gibson's "disinterestetl, decli- Three years after Ralph Gibson first livian pipeline represents, as he puts it, cated services to Corngb." set foot in Slo Paulo, Comgks is prepar- "the greatest achievement of my busi- It should be pointed out, however, that ing for an incredible metamorphosis. ness carecr." Those are strong words for Brazil does not bestow the Southern Once a local joke, and a bad one at that, someone who servecl twelve years as Cross lightly. The medal is the nation's the company is now in a position to be- president of an important U.S. company. highest honor, normally reserved for for- come one of the largest gas utilities in Rut Gibson insisk he isn't exaggerating. eign heads of state and for the elite of the world. In the wake of the pipeline "The pipeline," he says, "will affect more Brazil's own government. Over the agreement, Comgb has negotiated ex- people, and do more for the people, than yerrrs, more than three hundred I.E.S.C. clusive rights to pipe gas to around 20 anything I've done before." consultants have offered their help to million people-more than a fifth of the Gibson's pride of accomplishment was Brazilian businesses, and most of them nation's population. heightened considerably last June when have provided "disinterested, dedicated" The metamorphosis will have to be a the Brazilian government gave him its service. Only Ralph Gibson has received gradual one, however. The supply of gas treasured Cruzeiro do SuI-the South- the Southern Cross. END