Global Marine Partners

CASE STUDY
ADVANCED ACCCOUNTING

SUBMITTED TO:
LOUIE ARTH REYES

SUBMITTED BY:
Aquino, Mary Claire C.
Cabaya, Eula C.
Crisostomo, Meryl
Enriquez, Pauline C.
Magno, Franz Catherine S.
Magparok, Catherine
Orate, Rhealy B.
I. BACKGROUND OF THE CASE

Of the many different areas in which Global Marine operated, the primary
ones were Exploring and Producing, Chemicals, and Marketing and Refining.
A separate division called Marine served all crude-oil transportation needs for
the company. A recent review of world oil markets had prompted a discussion
about the firm’s need for new tankers. The general belief was that declining
U.S. domestic production would increase reliance on Middle Eastern oil. If
this scenario came true, the demand for VLCCs would increase dramatically
over the next 10 years, because these vessels were used for transporting crude
oil over the long distances from Saudi Arabia or Kuwait to the United States.
At present, Global Marine operated a fleet of 10 VLCCs, all constructed
between 1978 and 1983. Because the useful life of these vessels was
approximately 20 years, all or most of them would probably be retired by the
early 2000s. In fact, most of the existing world fleet of VLCCs were 13 to 19
years old. Some analysts had estimated that more than 300 new VLCCs would
be required over the next 10 years.
The ability of the shipbuilding industry to meet the expected increased
demand was suspect. Worldwide, in 1982, 32 shipyards were capable of
building this type of vessel, but by 1998, only an estimated 10 remained, all of
which were in Japan or South Korea. (Exhibit 1 summarizes trends in the
shipbuilding industry.) Not only had the number of shipyards declined, but
also—and more to the point—the number of available building berths. The
production capacity of 110 ships per year in 1982 had fallen to 20.1 given the
capital and the long lead times necessary to bring new production facilities on
line, supply seemed unlikely to catch up with demand in the next 5 to 10
years. Some estimates indicated that growth in capacity would allow
production to increase to only 30 to 40 a year, even under the best of
circumstances, by 2002. This delay, coupled with the fact that two to three
years separated initial contract from delivery, painted a grim picture of VLCC
availability. The conclusion was that prices for this type of vessel would
increase in the near future. Global Marine had done some preliminary analysis
of how to meet its expected needs for VLCCs. The option of leasing had been
explored, but it raised a basic question about availability. In a few years, ships
might not be available to lease. An additional consideration was safety.
Overall, the general level of maintenance of ships available for charter was
not expected to be up to the company’s standards. A certain level of quality
and safety was no small concern to Global Marine. Therefore, the decision
was made to look into the building of two VLCCs.
II. STATEMENT OF THE PROBLEMS

1. Should Global Marine lease or buy VLCCs

2. What hedging instrument is more effective for the company?

III. PRESENTATION OF DATA

1. Yes, in the next 10 years it is estimated that more than 300 VLCCs would
be required. Despite the declining of number of shipyards and number of
available building berths, Global Marine can cope up with the demand of
VLCCs if it continue its good relationship with Japan Shipyards, LTD.,
(JSL). At present, Global Marine operated a fleet of 10 VLCCs, all
constructed between 1978 and 1983.
Global Marine had done some preliminary analysis of how to meet its
expected needs for VLCCs. The option of leasing had been explored, but it
raised a basic question about availability. In a few years, ships might not
be available to lease. An additional consideration was safety. Overall, the
general level of maintenance of ships available for charter was not
expected to be up to the company’s standards. A certain level of quality
and safety was no small concern to Global Marine. Therefore, the decision
was made to look into the building of two VLCCs.
2. Yes, Global Marine will commit the second ship because in future the
demand of VLCC is expected to increase also today only few shipyards
were capable of building this type of vessel. In addition, leasing of ship
might not be available in future and an additional consideration was
safety. The ability of the shipbuilding industry to meet the expected
increased demand would suspect. Not only had the numbers of shipyards
declined, but also- and more to the point- the number of available building
berths.
In few years, ship might not be able to lease. The general level of
maintenance of ships available for charter was not expected to be up to the
company’s standard. The decision was made to look into the buildimg of
two VLCCs.

IV. CONCLUSION
Therefore, we conclude that the Global Marine Partners should use forward
contract a forward contract is beneficial for several key sectors of a national
economy because it is simply an agreement to buy an asset on a specific date
for a specified price. It is the simplest form of derivatives, which is a contract
with a value that depends on the spot price of the underlying asset. It is
important to note that forward contracts also present a risk of price
manipulation, because a small transaction completed at an above- or below-
market price could affect the value of a much larger forward contract. Japan
Shipyards, Ltd., (JSL) established a fixed price, in yen, at which JSI would
deliver the ships; guaranteed the availability of the building berths, which was
important from the point of view of Global Marine; and also set the delivery
dates. An important feature of the contract was that Global Marine did not
have to commit to any purchase until February 15, 1999, at which time it
would pay in full for the first ship. Global Marine would not have to commit
to the second ship until February 15, 2000, but if it chose not to take the
second ship at that time, it would be required to pay JPY875 million to JSI. If
Global Marine took the second ship, it would be required to pay the full
amount on February 15, 2000. Certain other expenses were specified in the
contract. The consensus within Global Marine was that the arrangement was,
overall, very attractive. The parties to a forward contract also tend to bear
more credit risk than the parties to futures contracts because there is no
clearinghouse involved that guarantees performance. Thus, there is always a
chance that a party to a forward contract will default, and the harmed party's
only recourse may be to sue. As a result, forward contract prices often include
premiums for the added credit risk.