Energy Syst (2011) 2: 67–82

DOI 10.1007/s12667-011-0026-9
O R I G I N A L PA P E R

Risk management of oil maritime transportation

Brahim Idelhakkar · F. Hamza

Received: 12 August 2010 / Accepted: 27 January 2011 / Published online: 9 February 2011
© Springer-Verlag 2011

Abstract The largest oil deposits discovered in the world are located in places far
from developed countries that are major consumers of energy. This situation is the
reason why, for two decades, huge quantities of hydrocarbons are transported every-
where in the world either by sea or by road. The oil trade and the market are subject
to an inexorable competitive pricing. In reality, the age of the tanker intervenes in
the decision-making process; it is often the cheapest available tonnage offered by the
oldest ships that controls prices. It is therefore difficult to ensure that quality pays for;
this phenomenon probably involves some risk for the maritime security as a whole:
human (accidents, shipwrecks) and environmental (vegetation pollution e.g. fauna
and flora), and on health).

Keywords Risk failure · Performance · Tanker · Moral hazard · Externality · Oil

pollution

Acronyms
IMO: international maritime Organisation
OPA: Oil Pollution Act
MARPOL: MARINE POLLUTION
IOPC funds: The International Oil Pollution Compensation Funds
FIIPOL: International fund for compensation for pollution
OECD: Organisation for Economic Co-operation and Development
ISM Code: International Safety Management Code
ISPS Code: International Ship & Port Facility Security
AIS: Automatic Identification System
VLCC: Very Large Crude Carrier
LNG: Liquefied Natural Gas

B. Idelhakkar () · F. Hamza

FSJES, Université Abdelmalek Essâadi, Tanger, Morocco
e-mail: b.idelhakkar@yahoo.fr
68 B. Idelhakkar

1 Introduction

The maritime oil risk can, in case of realisation, cause oil pollution damage of which
costs have had an increasingly big importance. Thus, the recent oil disasters ranging
from that of the EXXON VALDEZ to those of the Erika and Prestige have still struck
minds. These accidents can issue a malfunction of the navigation parameters which
is connected to the notion of the organisation concept, which refers to the concept
of performance. By performance (shipping companies), we mean, limiting ourselves
to only one dimension of the operating company (i.e., excluding non-current finan-
cial operations), a rival advantage for businesses, measured by current indicators of
profitability, competitiveness and productivity. This definition leads to a study of the
performance concept in conjunction with the oil risk. We believe that by positively in-
fluencing the outcome of maritime oil transport companies, the performance should,
at this level, result from strict enforcement of regulations; standards of oil tankers.
We start from the assumption that the maritime oil transport system is made up of
all maritime oil companies and all other agents involved in this type of transportation
(shippers, insurers, classification companies, port State . . . ). The more an oil trans-
port company is able to strictly enforce regulations on the operating parameters, the
more it will be able to reduce the frequency of the oil risk.

2 The maritime oil transport risks

We will discuss the risks affecting the maritime oil shipping (cargo and oil tankers).
We here deduce four major types of accidents/risks which an expedition may be sub-
mitted to: the Boating risk (collision or grounding), the risk of fire or explosion,
the shell cracks or deformations of tanks, and the risk of pollution while loading or
unloading. Based on statistics, we noted that among 85 tanker accidents cause oil
pollution of coast. The following ranking of calamities in a frequent order is pos-
sible: grounding represents 50.6% while 30.6% indicates collision. These tankers,
even newly constructed, can be subject, during their sailing, to risk. These various
risks involve aggravating factors such as age, size and Flag.
For the ship’s age, we find that 40% of wrecks are caused by ships older than
15 years old. The size of the tanker is another component of aggravating risks as-
sociated with this type of tankers. Small units have generally more problems than
large-tonnage oil tankers. Regarding the Flag, it is customary to castigate conve-
nient flags, considered as dangerous, because they employ an unskilled workforce
and lower costs. The realisation of these risks may raise oil tanker’s responsibility.

2.1 The economic approach of risk

The term risk has an unsteady meaning in terms of economic and mathematical liter-
atures. In the full economic significance of the word, risk refers to the variability of
future results—it can also mean profit. And this acceptation exceeds the frame of in-
surance, where risk is a potential loss, which would be partially or totally covered by
the insurance. According to the two economists Knight (f.), and Arrow (k.), we talk
Risk management of oil maritime transportation 69

about risk when the consequences of an action or a phenomenon can be embodied in

a number of probabilities.
The orientation of Arrow joins the risk theory thesis which recognises that human
individuals have a natural aversion to risk, and that the need of security concerns
goods as well as people. In Arrow’s view, some individuals may have a preference
for risk, or even induce to its realisation (moral risk insurance). And some people are,
more than others, inclined to accept risk and fraud.
In some markets, these risks can be transferred to the most able ones to cover
them, till the margin. The cost for those who assume these risks becomes equal to the
expected benefit by the one who transfers them.

2.1.1 Formalisation of the oil shipment risk management

Our study is focused on multi-risks (a situation in which risk has several sources);
particularly the transportation of energy products by sea, where risks are dependent.
This approach is based on the aggregation of risks as the reality of some disasters
provides a serious justification of the orientation of our thought.
In the context of maritime oil transport, the tanker Erika presents a case of two
risks at least: The risk of the vessel body (tearing of the hull and breaking of the oil
tanker into two parts) preceded and created the risk of oil pollution in the French
Atlantic coast. Thus, it is necessary here to emphasise the dependence of risk. It
is therefore justified to consider the dependency of risks, by raising the concept of
treating dependent multi-risks: the “Stronger risk aversion” Ross (1981).

2.1.2 The scope of “Stronger risk aversion”

The anti-selection is the issue of insurance which consists of, in exchange of a per-
ception of quote-part or premium, providing a predefined financial service to an in-
dividual, an association or a company during a risk period. Thus, the main part—the
insurer—will propose a maritime contract. For his contract he fixes a unique price p,
because he cannot know the quality of his customers (good or bad carriers). In other
words, let’s simplify it as the cost of the median oil ship accidents.
From the point of view of a potential customer, this contract is even more interest-
ing than is a bad carrier (the cost of the accidents becomes higher than the price of
insurance).
Among all customers, the insurer will ensure all failing carriers; those whose ac-
cidents cost more than p, and only part of the goods which can bear the cost of their
infrequent accidents instead of paying insurance). So the contract selects customers
whom the insurer would not want to (they make him lose money), and does not like
those who make him lose. Therefore this asymmetry of information is the origin of
the marine insurance’s higher costs and it results in hazardous moral problem which
is an “unwanted effect” i.e. a non desired result and a tiresome regulatory system or
a contract with a major legal flaw which opens wide possibilities of abuse, or even
fraud, to those who want to take advantage of the regulation/the contract by diverting
its spirit. The hazardous moral is the voluntary ability for someone to strategically
take advantage of an unpredictable situation ignored by the system designers.
70 B. Idelhakkar

To resolve this issue, we believe that the insurer can check and improve his infor-
mation about the agent, for example by including in the contract his former accidents
that can inform about his quality as a carrier. It’s the base of the bonus/overcharge sys-
tem; and this may be possible only by requiring a technical control from the experts
of the port States and classification companies who have the right to issue certificates
of security for any type of vessels, that is why transport of petroleum products should
be subject of strong inspection. However when it comes to pavilions of complacency,
standards are not much respected which, in parallel, will lead the insurer to write
down a two parts contract, inducing agents (here carriers) to be auto-selected, and
thus to reveal upon their job titles.
Typically, such contracts include a bonus and a franchise. Under such conditions,
it is possible to firstly suggest a strong premium and a low franchise contract which
is chosen by the failing carriers, and a low premium and strong franchise contract,
chosen by good carriers. We would call the first contract: participatory constraint and
the second one incentive constraint.

2.1.3 Mathematical formulation

Following the usual convention, we note P as principal and A as agent: where P is

the maritime insurer and A is the carrier. Each agent is characterised by a parameter
λ ∈ [0, 1] unobserved by the principal.
Supposing that the principal offers a single contract price p, with no exemption,
agent A takes a utility U (λ, p) from the contract, and the principal P gets a profit
(which may be negative):
 = p − c(λ) (1)
where c is the probable cost of ensuring the agent (the cost of an accident multi-
plied by the probability for this agent to have an accident). It is clear that the agent
subscribes the contract only if:
U (λ, p) ≥ 0 (2)
We call (1) a participation constraint.
For a reordering of agents, we can assume that U (λ, p) is increasing in λ and de-
creasing in p. Similarly we can assume that c(λ) is going up in λ. λ can be understood
as the probability of a maritime accident, for instance.
All subscribers are then of the form. [λ0 , 1]
The principal then makes a profit:
 1
(p) = [p − c(λ)]dλ (3)
λ0

with the participation constraint:

U (λ0 , p) = 0 (4)

If the principal knew λ he could pay a price to each agent as p the same as p ∗ (λ)

U [p ∗ (λ), λ] = 0 (5)
Risk management of oil maritime transportation 71

Thus, he would make a profit

 1
∗ (p) = [p ∗ (λ) − c(λ)]dλ (6)
0

If agents dislike risk (i.e. they do not like to take risk). ∀λ, p ∗ > c(λ)dλ. It is then
clear that ∗ is the maximum value that the insurer can make.
The difference (p) − ∗ (p) corresponds to the cost for the insurer of moral
hazard.
Thus, the asymmetry of information endows the agent by the possibility to use—
to his advantage—his abused private information without being felt neither by the
principal nor by a third party. He benefits of an informational allocation
We have just exposed the economic theory of risk under the aspect of the depen-
dent coverage plan. In the latter case, the application of economic risk may concern
insurance. However, in the case of marine oil transportation, we have stressed that it
is a question of the coverage plan with two dependent risk sources. And the imple-
mentation of the oil vessel body risk may result in the risk of oil pollution of the seas
and coasts. If the first risk is fully covered by regular insurance, the second is not.
Civil liability insurance exists for that. Yet, international law limits the liability of
the oil ship-owner (carrier) to a ceiling of 920 million Euros. This limited financial
capability may create inadequate compensation to victims of extensive oil pollution
damage. However marine risks, especially oil pollution are considered as new risks,
which are not covered by conventional insurance, Godart [4].
The solution lies in a partnership between governmental and private initiatives,
like the IOPC Fund (The International Fund for Compensation for damages due to
oil pollution). Therefore, we consider that it is not inappropriate to say that the ap-
plication of the economic theory of risk to oil shipping has limitations. But, facing
the marine risks, what is the outline of the law then? We will confer to this study,
a judicial risk in the oil transport.

2.1.4 The preliminary risk analysis (PRA)

Developed in the early 1960s in the United States, the PRA has been taken over
by the aviation industry. Dedicated to the identification of the risks represented by a
system and the definition of the means (prevention, protection, procedures,) to control
dangerous identified situations, the PRA includes not only the security aspect but also
the aspect of “exploitation” of systems.
The PRA method should allow many targets: first to rationally understand all the
safety aspects by identifying risks and then to require immediate corrective actions
in the best of efficiency conditions of speed and cost and to identify risks, justifying
a further study, and finally to obtain, from earlier phases of research of development
and conception, a sort of security analysis translated by operating instructions and
safety, devices of control and regulation, means of protection, rules of equipment
construction that may be an oil tanker.
72 B. Idelhakkar

3 Risk evaluation of oil transport

Compared to other energies, the success of the petroleum energy is particularly re-
lated to the ease of transportation. We can distinguish four main risks: the risk of
maritime security: the risk of total or partial loss of ships, sailors and cargo, the pol-
lution risk, the risk of supply disruption, the financial risk taken by traders: A ship
carrying 2 million barrels, or 280,000 tons, in new construction, costs $ 100 million,
with 130 to 140 million dollars on the actual board. We will more precisely examine
the risk of oil pollution and its impact on costs.

3.1 Oil pollution and marine environmental law

How is the environment integrated in our market economy? The traditional approach,
consisting of regulating the most possible, has shown its inability to solve environ-
mental problems. A new approach, which is more flexible and more efficient in com-
bining regulatory and economic instruments, should lead to improve both economic
and ecological results to fight against pollution.
In the early 1970s, governments began to intervene in the field of environmental
protection by using a regulatory arsenal and direct controls. Parallel to this legislative
process, a new—economic—approach appeared. It came out from the theory of ex-
ternalities, by which the phenomena of pollution and environmental degradation are
due to the lack of an adequate pricing of environmental resources: if we give a full
price for these assets, their users (especially polluters) will take the necessary mea-
sures to limit their consumption and deterioration, rather than wasting them when
they are “free”.
Therefore, it is convenient to first examine the theory of externalities, which is the
basis for the economic approach to the fight against pollution. Then we’ll see how
this theory gives rise to economic instruments for environmental protection.

3.2 The contribution of the theory of externalities

We can define the externalities (or external effects) as follows: “an external effect
occurs when a person’s activities affect the functions of production or the welfare of
others who have no direct control over that activity” [10]. “An external effect is an
external economy or an external diseconomy whether it is favourable or not to the
person who undergoes it.” In the environmental economy, the negative externalities
occur most often.
The externality characterises a situation where the economic action of an agent
provides advantages (positive externalities) or disadvantages (negative externalities)
to one or many other agents, such interdependence finds no adjustment on the market.
A company that pollutes a river creates negative externalities to all residents and
businesses located downstream of the pollutant firm. When a tanker empties its tanks
in the international waters or when toxic smokes degrade the air quality, officials
embarrass fishermen and inhabitants without spontaneously setting any price for such
nuisances.
Risk management of oil maritime transportation 73

In case of externalities the price system ceases to carry on its function of informa-
tion and incitement, it does not guide the agents towards more socially optimal deci-
sions which may lead to various forms of inefficiency in the organisation\activities
of production and consumption.

3.3 The internalisation of external costs and the principle of the polluter-payer

“An external effect is internalised when its origin becomes a decision and a concern
of the same person, i.e., the same agent” [10]. In other words, agents must take into
account the external effects in their decisions. The polluter-pays principle (PPP) in-
troduced by the OECD in 1972, fulfils this objective. This principle requires that the
costs of the fight against pollution are neither covered by grants nor supported by the
community but are borne by the polluters who, generally, could pass them on to con-
sumers. In fact, we should speak about the polluter-first-payer). Since it is generally
accepted that the “polluter” is the “other”, this principle was immediately met with
great popular success. However, its application is more delicate than it seems. Indeed,
the “polluters”, often well-organised in pressure groups, may be reluctant to the idea
of having to pay a free environmental good. In addition, we are faced here with a fun-
damental problem of environmental economy: how are the external costs quantified?
Economic instruments for pollution control try to answer this crucial question.

3.4 Economic instruments to fight against pollution

We shall introduce here the concept of Pigouvian taxes, named after the British
economist Arthur C. Pigou (1877–1959) who first, proposed to tax externalities in
the environmental field. It aims to internalise the external costs or damages that the
firm imposes on society and—the environment. With this tax, beard in mind, is not
a tax but a price, the producer takes into account not only its individual costs of pro-
duction but also its social costs (externalities) caused by its operations. The problem
of course is to quantify the damage in monetary units. This estimate is very difficult
in practice and the Pigouvian tax, optimal theoretical tool, can not be applied in this
form. The concept, however, provided a theoretical basis for economic instruments
increasingly used in OECD countries, such as taxes, fees, deposit systems, the fi-
nancial markets or the creation of a “permit to issue” (“rights to pollute”). All these
instruments have the advantage of giving a price to the pollution and thus lead to a
better allocation of resources.
However there are two opposite views here, on the one hand, economists in favour
of active intervention of the state (tax or regulatory approaches) and on the other hand,
economists advocating free negotiation between polluters and the polluted (Contrac-
tual approach, and mechanism of pollution rights).

3.5 Fees and charges

Some confusion may be noted from the outset between the concept of “tax” and
that of “royalty”. In theory, the tax, also called “environmental tax”, is the original
Pigouvian concept outlined above. It has an incentive effect and internalisation of
74 B. Idelhakkar

external costs. Although it does not recognise the price of pollution, the authority
tries to give it one; which it can then adapt according to the reaction of agents.
As for the fee, it forces polluters to pay for environmental services they use, such
as waste disposal service. The charge is primarily a financial function, because the
funds collected are most often used to finance operations against pollution. This dis-
tinction is entirely theoretical, though. The OECD collects all taxes and charges under
the term “royalties”. It notably distinguishes:
– Tipping fees (payments on environmental emissions: calculated based on the quan-
tity and/or quality of pollutants)
– Fees for rendered services (for the costs of collective or public treatment of dis-
missals) or
– Royalties on (pollutants) products [33].
The OECD notes that the fees and taxes are certainly more widely applied today,
but their amount is usually too weak to exert a good incentive.

3.6 Financial aid

Grants are intended to encourage polluters to undertake antipollution investments.

We can distinguish the following forms: shares by fiscal policy, grants for pollution
control (negative taxes), support for operating purification devices, accelerated de-
preciation of the anti-pollution or credit facilities; by loans at lower interest rates.
Consider especially the former case.
Fiscal policy can change the relative prices of products in heavily beating those
that are harmful to the environment or, conversely, by reducing the tax on products
that maintain it. We must take into account certain rather difficult aspects (Schwarz,
1991).

3.6.1 The environmental problem is primarily a problem of externalities

Therefore, the term “inciting tax” (“Lenkungsabgabe”) is a bit lenient and we should
speak of “internalisation tax”, though. A green tax would violate the principle of
fiscal neutrality because it influences, through fees, the agents’ behaviour.

3.6.2 Environmental taxes must respect the neutrality of the state’s share

It is desirable to completely separate the ecological tax from the considerations of

the State, and then redistribute the product to the agents according to the principle
of eco-bonus. In the opposite case, where the state needs money, the agent may be
tempted to increase taxes without asking whether this is ecologically justified or not.
The State, however, would have an interest in promoting miss-behaviour of agents.

3.6.3 Green taxes shouldn’t be dealt with as instruments of redistribution

Economic instruments should lead to a change in relative prices. Certainly in the short
term at least, this will inevitably lead to a general rise in prices, since free services
must be paid. These remarks show how much we should be cautious with such an
instrument, which has the merit of being truly revolutionary.
Risk management of oil maritime transportation 75

3.7 The rights to pollute

Like the introduction of a tax, a system of negotiable emissions permits also to

achieve a certain level of pollution, which is more effective than direct controls.
An environmental authority, as the “Environmental Protection Agency” (EPA) in the
United States, can put for sale the property rights for a certain amount of polluting
emissions. These rights are sold and redeemed at a price reflecting supply and de-
mand which will tend to stabilise at a cost rate [in marginal terms] antipollution to all
polluters.
Indeed, each polluter will purchase rights until the price of these rights will be
equal to the (marginal) cost of pollution reduction, and beyond this, it would become
more expensive to buy rights than to pollute.
The overall cost to the community will be minimal, while the effectiveness, at least
in theory, would be maximal. This system worked, albeit with some success in the
United States in the field of air pollution.
In conclusion, we note three advantages of economic instruments to fight against
pollution in relation to direct controls.

3.7.1 An incentive to the economy

The mechanism of prices will encourage the owners of tanker fleets to find the cheap-
est way to reduce pollution. Thus, the less they pollute, the less they will pay for
licences or taxes.

3.7.2 Consistent and automatic application

The efficiency of direct controls depends too much, in its application, on the mo-
mentary popularity of anti-pollution and economic interests at stake. It should not,
however, ignore all regulations. These are essential in some areas, such as hazardous
waste control. Economic instruments that seek to integrate environmental factors in
our economic system are useful additional direct controls, with which they can be
combined to achieve better results in the fight against pollution.
International law establishes the principle of freedom of navigation on the inter-
national seas and the right of innocent passage through territorial waters of States.
International law is framed by international conventions which are binding on States
that have ratified them and therefore the ships under their jurisdiction. Chatterers
shall ensure in their charter contracts that the ship-owner with whom they contract
complies with these conventions. Beyond the law, it is also the right of the port State
and the right of the flag State.
In terms of risk prevention, including the risk of maritime safety, the most impor-
tant international conventions is that of the Safety of Life at Sea, known as SOLAS,
adopted in 1960 and 1974. Its objective is to establish minimum standards for con-
struction, equipment and operation of ships. States flag vessels have the responsibility
to ensure that vessels flying their flag comply with the provisions of the Convention.
The Contracting Government may inspect vessels of other Contracting States if there
is a reason to believe that the ship does not comply with the provisions of the Con-
vention.
76 B. Idelhakkar

The 1978 International Convention on Standards of seafarers Training, of Certifi-

cation and Watch keeping came into effect in April 1984. This includes the captain,
the bridge and the machine (including the officers and crew).
The risk of pollution is taken into account by several conventions. The Torrey
Canyon accident in 1967 and its media have been critical. It was the first major oil
accident, after which the International Maritime Organisation, affiliated to the UN,
has been initiated by the adoption of several international conventions.
The first is the MARPOL Convention of 1973/1978, which establishes rules de-
signed to prevent and minimise pollution caused by ships, whether accidental or due
to routine operations. Beyond these agreements, we must also recognise the voluntary
efforts of industry, either the ship-owners or oil companies.
Despite these devices, incidents are always possible; that’s why there is insurance.
This area is actually quite similar to other industrial sectors. Regarding the coverage
of risks of pollution, there is a convention adopted in 1969 and came into effect in
1975, called CLC 1969. International Convention on Civil Liability for Oil Pollution
Damage. It establishes the liability of the ship owner, without any need to prove this
responsibility.
The objective of the Convention is to ensure fair compensation for people who
suffer from any damage due to the oil pollution. The equivalent of that convention
was the limitation of liability of the ship owner: and, since it may limit its liability,
the owner can and must also be insured. In 1979, this liability had been established
and limited to a maximum of 14 million SDR (special drawing rights) (19 million
dollars today); since then, these amounts have been revised and greatly increased.
A second agreement, known as FUND of 1971 Fund for Compensation for Oil
Pollution Damage (1971 Fund Convention), allowed the creation of an International
Fund for additional damage due to oil pollution. It came into effect in 1978. The Con-
vention complements the 1969 Convention on Civil Liability and provides additional
compensation for damages related to pollution in so far as protection under the 1969
Convention was inadequate.
However, the bond funds have been limited to an amount not to exceed 30 million
SDR 45 million (and including the previous $ 19 million). Contributions to the fund
are paid by anyone who receives oil transported by sea in a Contracting State.
All of these amounts appeared very insufficient. In the light of the Exxon Valdez
accident (1989 Alaska), United States—which had always refused to ratify these
conventions—have changed their position. Unilaterally, in 1990 they adopted the Oil
Pollution Act, which established the liability of the ship owner for the international
convention with extremely high ceilings and the potential for unlimited damages for
negligence.
Noting the difference between the adoption and the enforcement of the various
conventions, ship-owners and oil companies have introduced voluntary measures TO-
VALOP (Tanker Owners Voluntary Agreement Concerning Liability for Oil Pollu-
tion) and CRISTAL for oil companies ship owners. These voluntary plans weren’t
applied until the years 1975/1978 and continued until 1997, i.e. until the required
funds have been substantially increased.
Today, we are under the Protocol of 1992, applied for both conventions. The com-
pensation limits are approximately 300 million dollars.
Risk management of oil maritime transportation 77

The accidents of the Erika and Prestige have shown that these limits could be
insufficient and outdated (the calculations leads to certain pro rata levels of compen-
sation). Led by the European Union, a third additional fund was created, adopted in
2003, and put into force on the 3rd December, 2004 (actually March 2005), follow-
ing ratification by eight States carrying at least 450 million tons a year before the
entry into force (Germany, Denmark, Finland, France, Iceland, Norway, Portugal and
Japan—the Netherlands are part of the fund since 16th September 2005). The com-
pensation fund was increased to 750 million SDRs, or just over one billion dollars,
which seems at the height of the current claims.
In conclusion, shipping is considered by the oil companies neither as a profit core
nor as a cost core but as a risk core. It is, therefore, continuously seeking for the most
efficient way possible to be insured.

3.8 IMO responsibility

We recall here the criminal trial of the tanker Erika that sank on 12th December 1999
on the French coasts and caused serious pollution after the spill of 200,000 tons of
fuel oil. It is the irresponsible practices of the maritime world and the race for the
benefit of multinationals that are charged against; two main components are included
here:
– The dilution framework of responsibilities and the lack of transparency that char-
acterise the financial rules of the sea under the International Maritime Organisation
(IMO)
– The players of the global economy as Total Oil Company, in order to maximise
profitability, are always basing their activities towards the lower social and envi-
ronmental responsibility.
We particularly believe that the absence of an unlimited, coherent and preventive
responsibility of a national regime to be applied to oil transport by the sea, both at
national and international levels, allows the maritime actors and their shippers to bear
an inconsistent risk with the preservation of the environment which remains viable in
case of disaster.
Unlike the UN agencies, the IMO does not work on the principle of “one state—
one vote” but according to the relative weight of States in respect of maritime trans-
port. Consequently, flags of convenience such as Liberia, Panama, Malta and the
Bahamas, which represent 40% of maritime traffic, make out a law of it. The rules
of the IMO Maritime suffer from this backing of the lobby of private operators, ship
owners, chatterers and major petroleum owners. Flags of convenience are countries
that offer tax advantages, a social right and a discount on almost total laxity in regu-
lation (inspection of ships, etc. . . . ). Rather than fight against their existence, the EU
relations with this system are troublesome.
The Greenpeace that chairs as an advisory title in the IMO where it works on
the development and implementation of regulations which are more protective to the
environment, particularly on the following themes:
– The exclusion zones for the protection of biodiversity;
– The prevention of marine pollution;
– The ship breaking.
78 B. Idelhakkar

In 2002, the same lobbies that endangered the environment have tried unsuccessfully
to exclude Greenpeace IMO for non-compliance with safety rules (compared to the
actions at the sea). The support of many states and public opinion has prevented this
attempt of exclusion. Isn’t it time to demand a complete reform of the IMO’s mandate
entrusted to a body reinstated in the UN rules?

4 The total quality approach

This development addresses the impact of oil risk on the performance of maritime
oil transport. Here the quality management is the prospect of internal adjustment of
organisations. It is located in a management model, to absorb some shortcomings.
This approach which is participative is applied, for the purposes of our analysis, to
all economic agents involved in oil transport. We will follow this three-ways study:
a theoretical orientation of the performance, a performance study by the total quality
and its consequences on oil transport.

4.1 The performance of indirect actors

We would detail the contribution of ship classification companies, insurers and gov-
ernments to manage the total quality of oil transport.

4.2 The quality management in the classification companies

Classification companies are subject of caustic criticism from many professionals in

the oil transport industry, in the sense that they are accused of issuing certificates of
convenience to oil ship owners so as to satisfy insurance requirements.
These criticisms relate to the performed inspections. For the current methods of
inspection and classification, we can rely on two ideas: the multiplicity of audits that
do not produce reliable results and the lax of classification companies that classify
ships under norms/standards. In response to these criticisms, the classification com-
panies have begun moving responses to the management of quality of service they
have been providing.

4.3 The quality management of maritime insurers

Insurers are accused of lacking rigour to insure ships under standards.

It is justified to advocate the participation of insurers in the management of the
oil transport quality. The marine hull insurers and public liability are the only ones
affected, in terms of oil carrier, taking into account the hull risk and public liability
risk for marine pollution. The insurance policy towards under substandard ships is to
get rid of them by leaving the serious risks. How?
By becoming more coercive on the imposed insurance clauses, insurers have in-
troduced, in conjunction with the brokers, a clause that provides for the exclusion
of vessels over 20 years, and the access to the classification registry. Tankers’ hull
insurers benefit from the support of London Joint Hull Committee, who introduced
the policy.
Risk management of oil maritime transportation 79

Condition Warranty, used by the marine hull insurers when insurers have doubts
about the structural integrity of a ship. If faced with the will to manage the quality
of maritime oil transport, insurers choose to eliminate understandard ships; they also
have the will to tax others. These insurers intend to give priority to oil quality tonnage.
For civil liability insurance: the P & I Club. Insurers take into account the partici-
pation of classification companies with which they have developed ties to strengthen
inspections of oil tankers. This draconian policy is partly conducted by the tankers’
hull insurance and by the insurers of risk of pollution, on the other hand.

4.4 Port State contribution to manage the quality of oil transport

For the ISM Code (International Safety Management) of the IMO (International Mar-
itime Organisation), port State intervenes in the management of quality in shipping.
The ISM Code imposes the implementation of procedures for quality management
and it tends to globalise their organisation on the ground.
The code provides a number of provisions relating to the security and protection
of the environment, the development of manuals procedures, the definition of the
rules for better communicating between the ships and shore staff, the development of
emergency procedures’ reports system and other regular audits.

4.4.1 The performance of direct oil transport actors

We focus here on the participation of shippers and traders (dealers) and Tanker Own-
ers in managing the total quality of oil transport in Europe.

4.4.2 The quality management of chatterers and traders

The quality management, viewed by the chatterer, is done with the participation of
oil traders. These are often integrated oil companies, which are major chatterers, in
the marine tanker market. Traders are dealing within their business, owners and chat-
terers.
The risks are particularly crucial for integrated traders, given the involvement of
their oil group, in case of accident. In addition to the concern inspired by the poli-
tics of environmental protection, oil companies take into account the impact on their
image and financial risks arising from potential oil spills. All of these considerations
call for the imperativeness of quality management which is applied to multiple areas
with sufficient funding. In the choice of vessels, integrated traders apply a policy of
selectivity which is primarily applied to the chartered vessels, and then the vessels
enter the oil terminals operated by oil companies.
For British Petroleum (BP) the acceptability of a tanker is granted for a maximum
period of two years, reduced to one year for tankers over 20 years old. This takes into
account the elements contained in the database SIRE (Ship Inspection and Report
Exchange program) relative to petroleum tankers in doubt.
80 B. Idelhakkar

4.4.3 The contribution of the carrier to the quality of oil transport management

The owner manages the quality of oil transport taking into account three parame-
ters: insurance, branding and qualification and training of personnel performing the
operations of the tanker. The need for such insurance to the oil carrier is crucial.
This refers to the study of policies relating to new challenges imposed by environ-
mental problems, the oil shipping industry—both from the point of view of the ship
owner and that of the oil chatterer—concerning any risk of ecological disaster.

4.5 Consequences of maritime oil transport

The total quality management, within the meaning of our analysis, requires the par-
ticipation of all economic agents involved in this type of transport. And it is clear that
the implementation of quality management in the oil transport generates increased
costs for the carrier (including officers). These costs will be further aggravated by
increases in operating costs. For example, the maintenance of a double hull oil tanker
is twice more expensive than a single hull tanker.
But this increased cost must be offset by higher oil freight rates sufficiently re-
munerative to the oil amateur. These minimum requirements are the foundation of
the beginning of investment programs to acquire new ships. This requires a reduction
in the supply of oil transport, enabled by the elimination of the tanker fleet, the old
understandard tankers.
But can we settle for market mechanisms to achieve this increase in highly prof-
itable oil freight rates? We will found our reply on the earlier developments in the
market. During the year 1991, which saw soaring oil freight rates, there was a rush for
the acquisition of newly built vessels, while the demolition was postponed. Some pro-
fessionals in the freight shipping tanker, approximately 125 new VLCC (very large
crude carrier) have been, by then, delivered since 1988, while fewer than 60 have
been scrapped.
The result was the following observation: when demand had remained more or
less stable between 1991 and 1993, the available capacity (in terms of supply) in-
creased by 16% (18 million dwt), with deliveries of newly constructed vessels. This
oversupply has pushed down oil freight rates. As a result, profits increased from the
range of 12,000–16,000 USD per day in 1992 to $ 1994, and 8,000–12,000 USD per
day.
This finding can be repeated in the future, regard to the cycles of maritime trans-
port. We understand that, given these data and those mechanisms, the difficulty of
relying solely on market forces to restore tanker freight rates, highly remunerative to
the oil carrier, by eliminating oil tankers understandard.
Expecting oil carriers, to decide on demolishing understandard ships, then, proves
here to be ineffective: the market goes up and stops the demolition because tanker
freight rates become higher than the price of demolitions.
It is becoming less profitable to send oil to the case. Stopping demolitions re-
sulting from increased oil freight rates involves the exploitation of oil tankers, even
under standard, if the implementation of laws and total quality management becomes
ineffective.
Risk management of oil maritime transportation 81

5 Conclusion

In this study, we have shown the impact of oil maritime risk on the performance of oil
shipping in general. This study was made on the basis of an analysis of the concepts
of risk and performance. And the risks of maritime oil transport are considered as
new risks that, globally, we do not know how to cover them by the classical methods
of prevention, insurance (or investment). The difficulty of covering oil risk insurance
concerns the component: “risk of oil pollution”. We highlighted the problem raised by
the compensation ceiling that does not seem to promote effective prevention. A cur-
rent solution, in the coverage of marine oil pollution risk, resides in a partnership that
refers to a mixed coverage, through the IOPC Fund.
The final outlet has resided in the direction of our reflection on a statutory and
legal basis, which has restrained performance by total quality management. Given
the imperativeness of quality management to increase performance, the policies of
the various partners involved in the oil shipping have been analysed.
The renewal of the tanker fleet, starting from good quality oil tankers to double
hull, is possible only if freight rates are highly profitable and allow a full coverage of
the costs of the maritime oil transporter so as to enable him to invest in the acquisition
of new single or double hull tankers.
We have shown that market mechanisms cannot—standing on their own—allow
the collection of these remunerative rates more adequately. The second consequence
is that, to take over a market which is in a relatively decayed mechanism, the im-
plementation of regulations and laws on the regional and international levels could
help in securing the tanker owner to obtain tanker freight cost by eliminating under
standard tankers.
We were able to show the impact of oil maritime risk on the performance of mar-
itime oil transport in general and on Europe in particular. And the merit of the law is
to achieve the objectives of this performance, based on total quality management.

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