Jose Luis Rice Jr.

: President, One-on-One SatCom in a New Rice Propulsion With Thad Allen and Different Light
November/December 2010

Chairman, President & CEO

Volume 14, Edition 6

Co ntents

NoVEMbER/DECEMbER 2010

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THE MARITIME EXECUTIVE

8 | Executive Achievement

Jose Luis Rice Jr.

46

President, Rice Propulsion
by nichole williamson

Report from Down Under: The World Leader in High-Speed Watercraft
by roberT c. spicer

12 | Washington Insider
by larry Kiern

Congress Passes Maritime Legislation Despite Gridlock
16 | MarEx oP-ED

52

34 40

Case Study:

Wiring the oceans: SatCom Comes of Age
by arT garcia

Hornbeck offshore Services

oPEC at 50

by michael J. economides

60

The Shipbroker’s Art
by barry parKer

In just 13 years the company has become a leader in the deepwater Gulf of Mexico with an enterprise value in excess of $1 billion.
by Tony munoz

20 | MarEx Exclusive
by Tony munoz

A Conversation With Thad Allen
24 | Upgrades & Downgrades
by JacK o’connell

66

Advances in Clean Marine Propulsion
by richard carranza

Executive Interview:

The outlook for Workboat Stocks
28

72

Todd Hornbeck

SatCom Directory

Swimming Upstream: The Struggle to Expand America’s Marine Highway
by barbara saunders

the dynamic young leader discusses his vision for the future and staying “one step ahead.”
by Tony munoz

Half Page Vert

10/26/10

8:50 AM

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Tony Munoz :: tonymunoz@maritime-executive.com Jack O’Connell :: harvardjo@maritime-executive.com Nichole Williamson :: nwilliamson@maritime-executive.com Evan Naylor :: enaylor@maritime-executive.com Daniel Bastien :: dbastien@maritime-executive.com Brett Keil :: bkeil@maritime-executive.com Philipho Yuan :: fyuan@maritime-executive.com Carlos Dominicis :: cdominicis@maritime-executive.com Steven Gonzalez :: sgonzalez@maritime-executive.com Cliff Kai :: ckai@maritime-executive.com
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editorial

a Year of Fallen expectations, Challenges and rebuilding, and Maritime excellence
the deepwater Horizon disaster challenged america’s ecologic and economic fortitude. While the nation was enraged over the ecological destruction, Gulf communities slid into economic crisis. Yet as the disaster unfolded, the offshore industry responded immediately with a flotilla of specialized vessels manned by legions of marine professionals. In the face of the worst environmental catastrophe in U.S. history, the ability of the Gulf Coast maritime community to respond immediately and decisively with manpower and equipment constituted an impressive achievement. Additionally, the performance of MSRC, NRC and O’Brien’s Response Management and their contractors places them among the most professional organizations in the world. MarEx is pleased to feature Hornbeck Offshore and its Chairman, President and CEO, Todd Hornbeck, in this edition. Hornbeck and MarEx first met on a bayou in 1998 to photo-shoot the company’s inaugural offshore support vessel. It was the rebirth of Hornbeck Offshore, a company started by Todd’s father Larry in 1981 and merged into Tidewater in 1996. Todd Hornbeck’s vision was to build vessels to meet the requirements of the deepwater Gulf of Mexico. Over the years the company built or acquired 85 vessels, which made it one of the fastest growing companies in the industry over the past decade. The Case Study and Interview with Todd Hornbeck offer valuable insights into an organization that foresaw the deepwater not as a frontier but as a sound business investment. Meanwhile, U.S. Coast Guard Commandant Thad Allen, who was scheduled to retire this year, was asked to stay on by President Obama to be the government’s point man on the BP oil spill. In the process he became a national hero to many throughout the world. We were fortunate to catch up with Allen, who is now a Senior Fellow at the Rand Corporation, as he sheds light on his brilliant Coast Guard career and talks about the road ahead. We are extremely proud to have this American icon in our pages, so enjoy. BTW, did you realize that OPEC turned 50 this year? Well, it did and without much fanfare or notice by the mainstream media. But columnist Michael J. Economides didn’t allow it to pass without stating his point of view on one of the most influential organizations in the world. From its modest beginnings in September 1960 through its golden age and subsequent fall from grace, OPEC has challenged the prevailing “twilight in the desert” scenario to maintain its geopolitical importance. The “professor of oil” brings home another gem and must-read. Columnists Larry Kiern and Jack O’Connell crafted their contributions for our mantra of “intellectual capital for executives” with their handy brands of precision and excellence. Kiern explores the key priorities and workings of the Coast Guard Authorization Act of 2010, which marks the first time since 2006 that the Coast Guard has had a clearly defined agenda, while O’Connell shares some tough love about workboat stocks which, not surprisingly, have had a bleak year. But the U.S. market is not the only place taking a hit; it’s really been a global downturn of huge proportions. And the markets will turn because the world is emerging from the Great Recession and expanding economies still need oil. MarEx contributors Bob Spicer, Richard Carranza, Art Garcia, Barry Parker, Nichole Williamson and Barbara Saunders have crafted their magic as well with some great articles. Spicer takes us “Down Under” to see how the Australians are building some of the finest high-speed aluminum watercraft in the world. Richard Carranza reviews propulsion and the potential of LNG-fueled vessels to save the planet from pollution. Art Garcia’s first contribution to the magazine reaches out to some of the big hitters in the world of satellite communications to see how affordable and widespread these systems have become. Long-time contributor Barry Parker provides insight into the world of ship brokering, while Barbara Saunders writes about the battle to upgrade America’s Marine Highway. For our Executive Achievement feature, Assistant Editor Nichole Williamson checks in with the fourth generation of Rice Propulsion in Mexico to see how that company has grown into a global player. All in all, it’s a content-packed edition and a great way to end the year. So sit back and enjoy! Mar Ex

NoVEMbER/DECEMbER 2010

Tony Munoz
Editor-in-Chief

6

THE MARITIME EXECUTIVE

tony Munoz can be contacted at tonymunoz@maritime-executive.com with comments, input and
questions on this editorial or any other piece in this magazine. The Maritime Executive welcomes your participation in our editorial content.

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New Construction – Repair – Conversion – Industrial Fabrication

Four generations of family leadership have made Rice Propulsion a global force.

NoVEMbER/DECEMbER 2010

By Nichole Williamson

ExecutiveAchievement

President, Rice Propulsion

8

THE MARITIME EXECUTIVE

The porT Town of MazaTlan siTs on Mexico’s west coast across from the southernmost point of california’s Baja peninsula. it is here in Mexico’s largest port that four generations of the rice family have guided rice propulsion to a position of leadership among propeller manufacturers worldwide. This century-old family business continues to get better by using the accumulated wisdom of previous generations to build an even brighter future.

Jose Luis Rice Jr.
following in his father’s footsteps, third-generation head Jose luis rice designed and developed the manufacturing process for all the propeller and bronze piece production departments. he expanded the company throughout north america. During his tenure and with the help of an efficient team, exports dramatically increased, reaching 80 percent of total production. it was also during this period that the capacity for casting larger propellers was installed and nozzle manufacturing began, eventually leading to the establishment of rice nozzles in 1978. after receiving a bachelor’s degree in mechanical engineering and a master’s degree in business administration, twenty-six year old Jose luis rice Jr. joined the family business. with his help the company added yet another U.s. patent to its list when in 1998 father and son acquired the U.s. patent for the rice speed nozzle, designed to give 10 percent more power to a vessel without any other modifications. This revolutionary nozzle truly set the company apart because it not only increased vessel speed but improved fuel efficiency and bollard pull as well. it remains to this day the company’s most popular propeller.

Today the business is led by the fourth generation of the family, Jose luis rice Jr., the great-grandson of Maximino rice, the company’s founder. from an early age Maximino worked in mines, workshops and foundries, perfecting his mechanical skills. More than a century ago, with a forge, anvil, hand tools and the help of his wife, luisa, Maximino established himself in Mazatlan as a blacksmith, founding Maximino rice e hijos in 1909. in 1919 he patented a system for the production of cast iron rings for internal combustion engines, using small furnaces of his own invention. That same year the blacksmith shop began manufacturing propellers. inheriting their father’s technical skills and leadership, Maximino’s sons luis and andres rice formed rice Brothers in 1935 and focused on developing and consolidating several companies in the marine industry. recognizing the future potential of the propeller business, especially with the busy port nearby, the two brothers formed rice propulsion in 1959. in this second generation luis rice, known for his great charisma, took on the challenges of the family business and is credited with the rapid growth that followed. contributing to that growth was a device to draw and machine the pitch for propeller patterns that luis designed and developed. The new design, which is still used today, revolutionized the way propellers were manufactured, and luis received a U.s. patent for it in 1961. he also developed, by trial and error, nickel-aluminum alloys that combined high resistance with great elongation and are today the standard for international certification agencies.

Building a Company

recognizing the importance of proving that the company abided by the high standards of production and manufacturing that it claimed to follow, young Jose Jr. worked hard to help his father obtain the international standards organization’s (iso) 9001 certification for rice propulsion. This certification instilled confidence in new and potential customers and naturally led to even more business. with the ingenious engineering and manufacturing of its propellers and nozzles and a commitment to the highest standards of business integrity, it was only a matter of time before rice propulsion became the largest propeller manufacturing company in Mexico and, later, a leading manufacturer in the americas and canada. Under his father’s leadership, Jose Jr. learned the business inside and out, at one point or another overseeing human re-

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EXECUTIVE ACHIEVEMENT
sources, quality control, production, sales and finances for all the companies under the Rice Industries umbrella. Since 2002 he’s run the show. Like his great-grandfather, grandfather and father before him, he has stayed true to the values that have made Rice Propulsion the leading propeller manufacturer it is today while continuing to adapt to the ever-changing needs of its customers. Recognizing the growing demand for larger pieces, Jose Jr. expanded the foundry and machining facilities to allow the manufacture of propellers more than 13 feet in diameter. He also made sure his staff had the latest technology to meet increasing international standards and the ability to provide specialized solutions to clients. Through its proprietary in-house knowledge, Rice has developed a full line of propellers to meet the specific needs of every vessel on the water, from propellers that offer greater thrust for tugs to propellers that eliminate hull-damaging vibrations for pleasure craft, and what it doesn’t have it will create to meet customer requirements. To continue its commitment to providing the latest technology, Jose Jr. has formed cooperative programs with naval research development centers and leading testing facilities worldwide. The latest research is important in providing Rice with the best and least corrosive alloys to offer its clients. To continue to meet the rigorous ISO standards, Jose Jr. has implemented continual training programs for engineers and other staff involved in the production process. And to better serve clients, he has added a 24/7 year-round support team, available to immediately assist any client anywhere in the world. pletely to the repair of propellers has allowed for the latest in technology and equipment, giving Rice the ability to maneuver, weld, balance, and modify propellers of any design and weight up to 20 tons. Marine Propulsion Repairs offers regeneration and straightening of damaged areas, balancing and dye checks, on site, afloat or in-house. Just as he did for Rice Propulsion, Jose Jr. obtained ISO 9001 certification for Marine Propulsion Repairs, ensuring its customers the high standards they had grown accustomed to and helping maintain the trust of major clients like the U.S. Coast Guard and Petroleos Mexicanos (PEMEX). Despite his responsibilities as President, Jose Jr. is still involved in all aspects of the business including administration, finance, sales, production and repair. He also seeks out new business and maintains strong relationships with clients. In addition he oversees the entire foundry business, which makes pieces for not only the marine industry but also for mining, steel, energy, sugar cane, concrete and metallurgical companies.

NoVEMbER/DECEMbER 2010

10

Once again adapting to the changing times and the rise in metal prices, the company enhanced its propeller repair services and in 2007 the U.S. Coast Guard awarded Rice the first repair contract for patrol boat propellers. With the repair side of the business growing rapidly, Jose Jr. found it in the company’s best interests to consolidate the repair division and in 2009 he established Marine Propulsion Repairs. The formation of Marine Propulsion Repairs allowed Rice to cater to new and more complex markets demanding specialized services. Repair service quality is controlled by ISO 484 Class S, I, II and operates with methods endorsed by all the major classification societies. All of the repair staff are certified by at least one of the major classification societies, a qualification Jose Jr. believed was essential to foster client confidence in his business and the services it provides. Eleven thousand square feet in new facilities devoted com-

Marine Propulsion Repairs

At a young 42 years of age and with three generations of leadership in his DNA, Jose Luis Rice Jr. knows what it takes to be successful. When it comes to developing new business and expanding the company, he holds firm to his great-grandfather’s motto: “Better to be a big fish in a small pond than a small fish in a big pond.” While expansion is important, sticking to what one does best and holding tight to that niche is even more important and will keep the company at the top. And when it comes to manufacturing and production his father knew how important it was “to get things right the first time around.” While holding true to the insights of his forebears, Jose Jr. has his own ideas about the most important fundamentals of business. Number one on his list would be customers, with employees a close second. Keeping employees happy and motivated is, after all, the secret to customer satisfaction. Jose Jr. hopes to see Rice Propulsion become a worldwide leader in the manufacture and repair of marine propulsion equipment. To get there he says it will have to maintain a clear focus on the updating of its designs and the integration of new technologies while continuing to offer a competitive price. With Jose Luis Rice Jr. at the helm, Rice Propulsion will likely exceed the expectations Maximino Rice had for the company 100 years ago. Stay tuned! Mar Ex

Putting It All Together

THE MARITIME EXECUTIVE

Nichole Williamson is Assistant Editor of The Maritime Executive.

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washington insider

Congress Passes Maritime Legislation Despite gridlock
NotwithstaNdiNg the partisan gridlock that gripped washington policymakers on most subjects in advance of the midterm elections, Congress enacted into law a number of maritime provisions that had been in the works for much of the 111th Congress. the principal legislative vehicle for this accomplishment was the Coast guard authorization act of 2010 (Cgaa). Congress completed its protracted deliberations on the measure on september 28 and sent it to President obama just before recessing. the President signed the legislation into law on october 15. the measure marks the first Coast guard authorization bill enacted into law since 2006, and its passage flowed from recognition of the Coast guard’s successful performance responding to the deepwater horizon incident.
NoVEMbER/DECEMbER 2010

washingtoninsider

Written by Larry Kiern, Winston & strawn LLP

12

the Cgaa enacts into law reorganization provisions referred to as “modernization” that had been the service’s top legislative priority for most of the previous four years. it authorizes up to four positions of Vice admiral, elevates the Vice Commandant to the rank of admiral (it previously was a three-star, Vice admiral position), and allows the service to replace existing Pacific and atlantic area Commanders with Vice admirals who will have different functional responsibilities. according to previous agency statements, modernization would allow it to more closely mirror the other military services, facilitating coordination. Retired Commandant thad allen sought to reorganize the atlantic and Pacific area Commands into a single operations Command at Portsmouth, Va. and a Readiness Command in alameda, Calif., where the atlantic and Pacific Commands are now located. he also sought to establish two deputy Commandant positions -- one for operations and one for support -- to integrate acquisition, logistics and maintenance functions. in proposing the reorganization, admiral allen argued that the Coast guard “must have command-and-control and mission support structures that optimize mission execution.”

Coast guard authorization addresses Key agency Priorities

however, no sooner had the legislation been signed into law than the new Commandant, admiral Bob Papp, announced that he was retaining the separate operational atlantic and Pacific area Commanders which allen had proposed eliminating. Citing the need to “steady the service,” admiral Papp pledged to finish the service’s organizational realignment process already underway by putting his own imprint on the final product. he issued a statement to the service in which he said that “solidifying the post-modernization chain of command will enhance your ability to get your job done and keep your focus on safely and effectively executing Coast guard missions.” admiral Papp has made no secret of his concerns about the service being overextended and underfunded in recent years. No doubt as the process of seeking approval for the service’s FY 2012 budget request proceeds through Congress, admiral Papp must be very sensitive to the approaching period of austerity about to confront federal discretionary spending. the enactment into law of the reorganization authority should allow the service to complete a process that had been in doubt and should help it weather the approaching budgetary storm better than it otherwise would. the harsh reality is that the Coast guard, and other domestic discretionary programs, likely face budget constraints akin to the 1990s when it was cut 12 percent and lost 4,000 personnel. although the Cgaa authorizes $10.2 billion for FY 2011 for the Coast guard and increases the authorized end-strength of military personnel by 1,500 members to 47,000, the appropriations bills currently pending before Congress provide less funding. senate appropriators approved only $9 billion for the Coast guard in July. and if Congress fails to enact into law a department of homeland security appropriations bill during the lame duck session, then the service will have to operate under a continuing resolution that will reduce its spending to last year’s level. as history teaches, this will mean cuts in the number of Coast guard personnel, station closures, decommissioning of cutters and aircraft, and cuts in the acquisition of new vessels, aircraft and equipment. in the face of such fiscal challenges, it is good to have reorganization finally resolved.

THE MARITIME EXECUTIVE

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Coast Guard Authorization Act of 2010 shows that progress is possible although budgetary issues remain.
new Maritime Provisions
The new law features over 150 sections, many of which contain provisions of interest to the maritime industry. These include diverse provisions about piracy; the marine safety program; pollution prevention; and fishing, commercial vessel and port safety and security. The provisions are far too numerous and complex to be addressed in detail here, but the following overview highlights key elements of interest. » Exoneration From Liability for Self-Defense From Piracy The CGAA includes an important exoneration from liability to protect shipowners, operators and seafarers from lawsuits arising from actions taken to combat piracy. This provision does not resolve all the issues surrounding this subject that arose in the wake of the April 2009 attack by Somali pirates on the U.S.-flag vessels Maersk Alabama and Liberty Sun. However, it bolsters the right of self-defense enjoyed by American seafarers by clarifying that shipowners cannot be sued by pirates or their survivors in the U.S. if they act in accordance with standards prescribed by the Secretary of Homeland Security. » Marine Safety Program Reform A major area of congressional attention during the 111th Congress was concern about the performance of the Coast Guard’s marine safety program and problems with maritime industry relations, which House Transportation Committee Chairman Jim Oberstar (D-MN) argued had suffered badly, especially after the service prioritized port security post-9/11. Key aspects of his proposal were enacted into law. For example, for the first time in the service’s history the Commandant must appoint an “ombudsman” in each Coast Guard district to serve as “liaison between ports, terminal operators, shipowners, labor representatives, and the Coast Guard.” The ombudsman is responsible for improving communications, resolving disputes and investigating complaints. This provision provides the maritime industry a formal institutionalized mechanism to address its complaints. It remains to be seen if it will amount to much in practice, however, as the regulated community will surely remain reluctant to anger its regulator directly. The reform measures institutionalize provisions to improve marine safety expertise. The law mandates career tracks, minimum qualifications for marine safety personnel, development of a long-term strategy for improving vessel safety, reports to Congress on efforts to recruit and retain civilian marine inspectors and investigators, and establishment of centers of expertise for marine safety. » Pollution Prevention Reform Senator Maria Cantwell (D-WA), who serves as the Chair of the Senate subcommittee of the Commerce Committee with authorizing jurisdiction over the Coast Guard, pursued oil pollution prevention legislation for years, and the CGAA realizes some of her goals and adopts others. It provides a mandate for double-hull-equivalent protection for vessel bunker tanks to avoid oil spills like the Cosco Busan incident in San Francisco. It mandates that the Coast Guard pursue efforts to reduce oil spills during oil transfers involving tank vessels and address the reasons for human error as the leading cause of oil spills. The CGAA also includes audit and reporting provisions about how the funds from the Oil Spill Liability Trust Fund are being spent and which responsible parties are not paying for oil discharges. The law further includes an amendment to the liability provisions of the Oil Pollution Act of 1990 (OPA 90) that for the first time extends OPA 90 liability to cargo owners. The provision amends the OPA 90 definition of the term “responsible party” to include “in the case of a vessel . . . the owner of oil being transported in a tank vessel with a single hull after December 31, 2010.” The provision excepts until 2015 certain vessels unloading oil in bulk at a deepwater port or offloading in lightering activities within an established lightering zone more than 60 miles offshore. As a practical matter, the use of single-hull tank vessels in the U.S. is unusual. However, this provision represents a significant change in the political compromise that was struck in OPA 90, which did not include cargo owner liability. The law also amended OPA 90’s financial responsibility provision by expanding its reach to

washington insider
MANAGING RISK

Learn about our knowledge and experience using LNG as a fuel for green shipping

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NoVEMbER/DECEMbER 2010 THE MARITIME EXECUTIVE

Photo Courtesy of RollsRoyce

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washington insider
include “any tank vessel over 100 gross tons using any place subject to the jurisdiction of the United States.” Previously this provision had only applied to vessels over 300 gross tons. The CGAA provides the U.S. enabling legislation for the international convention on anti-fouling systems for ships. This includes establishing penalties for violations to be enforced by the Coast Guard and the EPA. It also requires the Coast Guard and the EPA to study and report to Congress on new technologies for reducing air emissions from cruise and cargo vessels. This sets the stage for future greenhouse gas regulation in U.S. ports. Fishing and Commercial Vessel Safety and Security Following up on the 2009 National Transportation Safety Board (NTSB) report on the sinking of the Alaska Ranger, the CGAA enacts real fishing vessel safety reform. It provides safety equipment and construction standards for uninspected commercial fishing vessels operating beyond three nautical miles of the coast of the U.S. It requires fishing vessels of certain sizes and those that undergo substantial changes to comply with load line regulations, and it mandates periodic vessel examinations by the Coast Guard. While progress in this area has been painfully slow, these measures should save lives. Other commercial safety provisions include a study to ensure safe and secure shipping in the Arctic; a requirement that inspected vessels maintain official logbooks and log the service hours of seamen, their injuries, and their illnesses; and a requirement that regulations governing “safety management systems” on certain passenger vessels, including ferries, consider their particular operations. The CGAA institutionalizes the America’s Waterway Watch Program to promote voluntary reporting of activities that may indicate a threat or an act of terrorism and requires the Secretary of Homeland Security to establish Coast Guard-deployable response teams to protect vessels, port facilities, and cargo.

the Road ahead

NoVEMbER/DECEMbER 2010

»

After working for two years on this legislation, Congress demonstrated that it is possible to legislate modest and uncontroversial measures for the maritime industry. The CGAA enacts many new provisions that will require the Coast Guard to study, report, and promulgate new regulations. How it will accomplish these new tasks while sustaining significant budget cuts remains to be seen. Mar Ex

14

Larry Kiern is a partner at Winston & Strawn LLP, an international law firm of 900 lawyers. His practice concentrates on maritime issues, including legislative, regulatory, and litigation matters. Before joining Winston & Strawn, he was a Captain and law specialist in the U.S. Coast Guard who served as the Legislative Counsel and Deputy Chief of the Coast Guard’s Congressional Affairs Office.

THE MARITIME EXECUTIVE

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NoVEMbER/DECEMbER 2010

MarEx OP-ED:

16

OPEC at 50
By Michael J. Economides
OPEC turnEd 50 this yEar, an event that went virtually unnoticed by the mainstream media. an oil cartel formed in september 1960 by iran, iraq, Kuwait, saudi arabia and Venezuela was supposed, as its mission still states today, “to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.” Lofty pronouncements, which at

While not the force it once was, OPEC still wields considerable clout in a world that remains dependent on the steady flow of oil.
times worked but often did not, and certainly not equally for all members of a disparate and often ragtag group of countries with a huge spectrum of needs and an even bigger void of management skills and economic development. But one thing has worked: With the exception of small inconsequential disruptions, oil has kept flowing – providing a steady stream of the most vital and irreplaceable element of the world economy. seven other countries are now members: algeria, angola, Ecuador, Libya, nigeria, Qatar and the united arab Emirates. there

THE MARITIME EXECUTIVE

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is a huge difference between the five founding members and the rest, some of whom went in and out of membership. Others are relatively new while Indonesia, formerly a member, no longer is since it is now a net importer of oil. OPEC can never be ignored for the simple reason that it houses 1,064 billion barrels of proven oil reserves, about 80 percent of the world total of just over 1,300 billion barrels, and produces 27 million barrels per day, almost 32 percent of the world total. price hawks at a time when presumably their governments were friendly to the West. Of course they became even more militant when their governments became unfriendly. Militant members were the ones pushing for production quotas and a lid on production levels, which led to frequent and often transparent cheating among members. The non-absorber countries, on the other hand, included Saudi Arabia with its enormous oil resources and other smaller Mideast nations, who wanted a far milder stance, especially since they were closely aligned with the oil-consuming countries and mainly the U.S.
NoVEMbER/DECEMbER 2010

One cannot think of OPEC apart from the emancipation of former colonies and the emergence of assertive new national governments. Commodities and especially oil were the reason European powers became colonists in the first place. OPEC, once it was established, provided one of the most powerful vestiges of independence for these emerging countries. The need for oil by the developed world brought not only money but also a sense that finally former colonists and “imperialists” were getting their just comeuppance. OPEC’s assertion of power reached a crescendo with the Arab Oil Embargo of October 1973 following the second ArabIsraeli war (the Yom Kippur War). The Arab members of OPEC threatened to withhold oil shipments to the West if it continued its lopsided support of Israel against its Arab neighbors. It was the first time in history that a cartel used oil as a weapon to effect a political aim. The embargo never reached its threatened level but it brought panic in the West, which had come to rely on cheap oil from far away. Dirty oil was not to spoil the pristine beaches of California or Florida, and it would not be enough anyway. The embargo made “energy crisis” part of the Western lexicon and introduced for the first time the rhetoric of “alternative” energy sources and the even more potent (but still silly) notion of “energy independence.” But more to the point, it shot oil prices up, and the price shocks continued for a decade that included the fallout from the Iran-Iraq war. During that decade the world witnessed the largest ever redistribution of wealth in its history – from the oilconsuming countries to the oil-producing countries. That was OPEC’s golden era and that’s when stories of ostentatious wealth, solid silver cars, gold toilet fixtures and all sorts of outrageous playthings became the stuff of legend. Those were not just for the rulers. Even the middle classes could take weekend trips to Paris for shopping. The trouble was, and still is, that many of the OPEC countries suffer from endemic corruption and are grossly mismanaged. With the notable exception of a couple of tiny members, virtually none of them have capitalized on their oil revenues to diversify their economies and wealth-producing capabilities. One is mystified at the persistent resistance to progress and modernity that still permeates Iran, Venezuela and Libya, along with the longevity of notorious and buffoonish leaders who could never have come and stayed in power had it not been for oil. OPEC might have been a cartel but it was far from monolithic. Member countries were divided into “absorbers” and “nonabsorbers.” Absorbers were countries with large populations which could readily use all the revenues from oil. These included Nigeria, Indonesia, Iran, Iraq and Venezuela. Absorbers had an obvious interest in maintaining prices as high as possible and were also the most militant when it came to protecting prices. Interestingly, Iran and Venezuela were the most militant oil

The Golden Age

It was in 1984 that OPEC frayed at the hem. Then-President Ronald Reagan “encouraged” Saudi Arabia to over-produce unilaterally, and that sent the oil price on a tailspin. From November 1985 to February 1986 oil prices collapsed from $32 per barrel to less than $10. Caracas, Jakarta and Lagos never really recovered, remaining the abject, poverty-ridden eyesores that were created during the boom years, an era that would never return. There was an ancillary benefit for the U.S. The collapse of oil prices at the height of the Cold War laid bare the internal fractures of the Soviet Union, which depended on oil for almost all its “hard currency.” The fractures became gaping holes, and the rest is history. I have recounted all of these events in my book, The Color of Oil. OPEC today is not what it used to be. It does not have the power it once had to manipulate the market. Others have muddied the scene: Mexico and Brazil with their massive offshore developments; Canada with its tar sands; and especially Russia with ambitious Communists-turned-capitalists such as Mikhail Khodorkofsky, the ex- Chairman of Yukos, who got afoul of Vladimir Putin exactly for his desire to become powerful enough that he could challenge OPEC. He is now rotting in a Siberian prison. Russia did not want overproduction to collapse oil prices and thereby shoot itself in the foot. But Russian oilmen showed there was life beyond OPEC. OPEC also does not have the excess capacity it once had. A demonstrable excess of over 10 million barrels per day in 1995, outside of Saudi Arabia, has been reduced to near zero today. This is not what OPEC’s potential production capacity could be but what it is now “behind the valve,” meaning oil it can turn off and on at will. The reason for the decline is simple: It takes huge reinvestment to maintain production capacity. Nigeria, Venezuela

Fall From Grace

17

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oped EconomidEs
and Libya are suffering from gross and chronic mismanagement and Iran is gasping under the sanctions, no matter what the bravado of the leaders of these countries might claim. As for Iraq, it is hard to produce oil when people are shooting at you and, when the U.S. military gets out, I am not at all optimistic about future production. All of these countries are producing only about one-third of their geological potential. OPEC had, moreover, little to do with the run-up in oil prices from 2004 to 2008, when they almost topped $150 per barrel. Geopolitical headlines ruled those days. Consumption gone berserk in China and sustained growth in the U.S. dominated the market. I am surprised that oil has yet to surpass $100, a testament to how much weaker the U.S. economy really is, even compared to some of the most pessimistic forecasts a couple of years ago.

NoVEMbER/DECEMbER 2010

not dead Yet

18

One should not write OPEC off by any means, for at least two reasons. First, “green” energy rhetoric notwithstanding, the world will continue to be dominated by oil (and gas and coal, i.e., fossil fuels) for at least another century. Second, “peak oil,” which will happen eventually, is not nearly close; and with all due respect to my recently departed friend Matt Simmons, we will not see any

time soon a “twilight” in the Saudi Arabian “desert.” With proper management and investment, that country can at least double its current production capacity and, along with its fellow cartel members, remain a potent geopolitical force for years to come. mar Ex

Dr. Michael J. Economides is a Professor at
the Cullen College of Engineering, University of Houston, and Editor-in-Chief of the Energy Tribune.

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THE MARITIME EXECUTIVE

A Conversation With

Thad Allen
tion, 500 miles north of Bangkok in Lampang, Thailand, right at the end of the war in Southeast Asia. In fact, when I retired I think I was the last person on active duty that served there. I was actually there when Saigon fell, and we dismantled the LORAN chain and brought it home. It was rather bittersweet when we started closing the LORAN chain, but it probably needed to be done because they were using the same technology in 2010 that they were using in 1974 and 1975.

Tony Muñoz: Tell our readers about yourself and your background. Who is Thad Allen? Thad Allen: I’m the son of a retired Chief Damage Controlman,

TM: What was your first command? Allen: I was Commanding Officer of LORAN transmitting sta-

ties and had appointments to both the Naval Academy and Coast Guard Academy. In the end I chose the Coast Guard Academy because I thought I was too small to play Division I football, and I thought in a Division III school I’d have a better chance to play. And it worked. I walked on to the varsity as a freshman and was captain my senior year.

TM: You mentioned your father was career Coast Guard. Is that what drew you to the service? Allen: This is a pretty funny story. I applied to several universi-

Clyde Allen, who lied about his age and joined the U.S. Coast Guard (USCG) when he was 16 during World War II. I grew up in the USCG. He and my mom got transferred around quite a bit. I went to a number of schools mostly up and down the West Coast. Actually, I started grade school in Ketchikan, Alaska but graduated where my father retired in Tucson, Arizona, so I’m a native son of the Golden West. In my 39 years in the USCG, I spent most of them on the East Coast, so I’ve seen quite a lot of this country. I’ve also been around the world and it’s been a great and glorious career.

physical at our clinic in Portsmouth, VA, and they were drawing blood. I looked across the way in the break room and saw on television when the plane hit the tower. Of course, I went right back to work. While 9/11 was generally regarded as an aviation event, it was very significant for the USCG. First of all, we closed New York Harbor and Boston Harbor because some of the planes took off from Logan Airport. We also closed the Potomac River just north of the Woodrow Wilson Bridge. The attacks occurred on a Tuesday morning and by Thursday there was so much pressure to reopen the Port of New York that we had to do it because so

TM: What was your role during 9/11? Allen: I was Atlantic Area Commander. In fact, I was having a

thad allen

Editor-in-Chief tony Munoz caught up with the former U.S. Coast Guard Commandant and National Incident Commander for deepwater horizon after his keynote address in early November at the Excellence in Government Conference in Washington, d.C.
much petroleum is shipped up the Hudson River to places around Albany and New England. There are no pipeline systems that go up there. We really saw the impact of what it was like to close New York Harbor and the impact on redistribution of oil and energy around New England. We also had the extraordinary and challenging task of coordinating the evacuation of people off Lower Manhattan. I’m not sure we’ll ever know how many. The estimates range from 400,000 to a million. As you know, the local cruise ships, tugboats, everybody was called in to help that day. Beyond that, we did a lot of resupply and logistical support because the easiest way to get in and out of Ground Zero was by boat. We actually tied a buoy tender up about a block away and used the boom on the tender to bring water, food and support supplies for the folks at Ground Zero. Probably a little-known fact: We sent all our USCG chaplains that we could muster to help administer to the responders and escorted some of the families in so they could see what was happening.

TM: You were appointed the 23rd Commandant of the USCG in 2006. What do you consider your most impor-

TM: As National Incident Commander for the Deepwater Horizon oil spill in the Gulf, you quickly distinguished yourself as a no-nonsense leader and became a familiar face to

issued the “Commander’s Intent” action orders. Most of the time when there’s a change of command, the new commander issues a Commander’s Intent so everyone knows what they’re going to do. I wanted to create a more flexible, more agile Coast Guard that could respond more nimbly to changes in demand from our stakeholders. I issued ten orders and those orders laid out where I thought the USCG needed to go. I’d say probably the most important of those was the transformation and the re-creation of a logistics and maintenance system that could be used for aircraft, small boats and cutters. We’ll see what history has to say a few years from now, but I think when people look back they’ll probably say the most fundamental change was how we are organized in the USCG to support ourselves and that an integrated logistics system was created for the first time.

tant achievements? Allen: When I became Commandant in 2006, the next day I

21

NoVEMbER/DECEMbER 2010 THE MARITIME EXECUTIVE

thad allen
millions around the world. What lessons did you learn from that experience? Allen: One of the significant challenges in the oil spill was
equipment we were going to need. I took control of that and set up a flow rate technical group. As far as the fate of the oil, I’m not sure if we really know for certain what the capability of the Gulf of Mexico is to absorb oil and how fast it biodegrades. We do know how much we skimmed and how much was burned. We have models for how much evaporates. One of the last things I did before turning over the national coordination response to Admiral Paul Zukunft was to issue an order that called for comprehensive testing of the water column in the Gulf for hydrocarbons to make sure there was no oil that we didn’t know about and to address the concerns of the American public that there were plumes of oil below the water. At this point they haven’t been found.

22

that, under U.S. law, when there’s an oil spill of this scope the government oversees the response. That’s much different than the law under hurricanes or natural disasters, whereby pursuant to an emergency declaration local governments are given resources from the federal government and other places to run the response. I don’t think that was well understood by state and local governments. I’m not sure it was well understood by even our national political leaders. The challenge I had was to make everyone understand the preeminent federal role was to oversee BP’s actions as the responsible party. It was a pretty tough communications challenge, but in the long run we succeeded and we also contained the well. It was a huge engineering challenge, but BP put a lot of effort into it with oversight from the federal government. In the long run the response that was mounted was significant – the largest response in the history of this country. I believe the doctrine served us well. In the future, what we need to understand is there’s a way to do it out there. We spent a lot of time arguing about what BP’s role should have been when we should have been focusing more on how to clean the oil up.

NoVEMbER/DECEMbER 2010

TM: You’re a member of The Maritime Executive’s LinkedIn group. What other social media do you use and do you find them helpful? Allen: When I was Commandant I was pretty fully immersed
in it. I had an official Facebook page. I had a blog. We had RSS feeds that linked all that together, and we were using Twitter. I wasn’t sure that blogging during the oil spill would have been the appropriate way to comment given the amount of scrutiny and the fact I was doing press briefs every day. Now that I’m retired, I have a Twitter account that I haven’t done much with and a personal Facebook account for the folks I deal with individually. I’m on LinkedIn and I continue to monitor blogs and I subscribe to a lot of different media widgets. I would call myself a pretty

TM: Any idea where all the oil went? Allen: There’s been a lot of talk about oil blooms and the flow

rate. I was more concerned about getting the flow rate right because it really impacted on how much response and skimming

THE MARITIME EXECUTIVE

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thad allen
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most, he’s somewhat controversial, is Alexander Hamilton. He’s generally regarded as the founder of the USCG, the first Treasury Secretary and, arguably, the father of public administration in the country. He had some ups and downs, some public problems with a lot of different people, but generally a very forwardthinking guy who set the terms and conditions on how to run the country and move it ahead. More recently, there’s a host of folks to be astounded at due to the type of work they do. It’s mostly the day-to-day people in the USCG who pull people out of the water and give them back their lives. They’re the public servants who go to work every day who aren’t really celebrated much. A lot of people work very hard in this country and it’s not often visible to the American public, but the people I’ve worked around in the USCG for the last 39 years are my inspiration.

TM: You’re a hero to many people, but who are some of your own heroes? Allen: Mine go back pretty far. One of the people I admire

A Message to Workboat Companies
I have walked in your shoes.
NoVEMbER/DECEMbER 2010

knew this oil spill would occur. I wasn’t anxious to jump right into government consulting and defense contracting roles. I wanted time to think and contemplate, do some speaking and writing. I’m a big believer in lifelong learning, and Rand has an extraordinary reputation for academic research in a nonpartisan way. I thought if I could come up with the right relationship with Rand it would be a way to take a year to write, read and, more importantly, continue to learn from the extensive research that’s going on here. The position I have right now is termed a Senior Fellow. It’s not full-time, but I have a place where I’ve got computer connectivity and I can do internal consulting about the issues I’m concerned with, mostly in the areas of maritime security, intelligence issues related to border security, and things related to emergency response. So far it’s been a very interesting process.

TM: Tell us about your new role at the Rand Corporation. Allen: We had some discussions at the first of the year before we

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THE MARITIME EXECUTIVE

ten by James Bradley. He also wrote Flags of Our Fathers and Flyboys. He was curious about the antecedents of World War II and why we fought the war. He went back and did some research and his premise was that a lot of things that set the conditions for World War II occurred when Theodore Roosevelt was President and a lot of it centered around a cruise that William Howard Taft took as Secretary of War from San Francisco to the Pacific Rim, where he visited all the countries that would ultimately be involved in that conflict. It is an absolutely fascinating book.

TM: What books are you reading? Allen: The last one I read is called The Imperial Cruise, writ-

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spring I’m going to teach a graduate-level course at my alma mater, GWU, called “Leadership in Large Complex Organizations.” For relaxation I usually hike or bike, and my wife and I walk a lot on weekends. We both really enjoy music, but the main center of activity are our seven and nine-year-old grandsons here in Fairfax County, Virginia. That’s the main reason we’re remaining in the D.C. area, but also because my wife is the Assistant Dean for the School of Management at George Mason University in Fairfax. TM: Thanks for your time, Admiral. Mar Ex

TM: Now that you’re retired, what are you going to do with all your spare time? Allen: I haven’t found any yet. I’m still transitioning to Rand. Next

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The outlook for Workboat Stocks
If you’re wonderIng about the state of the workboat market, look no further than trico’s Chapter 11 filing in august. burdened with excessive debt and faced with the prospect of interest payments coming due that it couldn’t make, the company succumbed to the realities of the marketplace and submitted a “pre-pack” plan of reorganization for the second time in its roughly 15-year existence. It expects to emerge with a cleaned-up balance sheet sometime after the first of the year. need more evidence? How about tidewater, the biggest player of them all, “preannouncing” in late october that its earnings in the third quarter would fall well below analysts’ estimates and would be off by more than two-thirds compared to a year ago? If this can happen to one of the best-run and best-financed companies in the industry, what does that mean for everybody else? It’s been a tough year, all right, the worst in recent memory. despite relatively stable crude prices in the $75 - $85 range, the combination of a struggling world economy, anemic energy demand, large crude oil stockpiles, and the deepwater Horizon disaster and subsequent moratorium made life miserable for the operators of offshore support vessels. earnings on average are down by almost half compared to a year ago with sharp drops in revenue as well. Particularly hard hit were the gulf of Mexico and north Sea. other regions – brazil, west africa and the far east – fared better, giving promise for the future. Likewise, those companies with large global fleets tended to do better than small, regionally based operators. and-butter activity is its offshore division, which claims the third biggest fleet in the world. SeaCor was not the only bright spot as, ironically, the largest oil spill in history –an event that proved disastrous for most – meant profits for some. edison Chouest, with its large fleet of monster, state-ofthe-art offshore vessels, was another beneficiary, as was almost every company with deepwater capability in the gulf. It was a temporary boost, to be sure, as Seacor warned in its earnings statement, “response activities are now winding down and equipment, people, vessels and helicopters are being released from spill support activities.” but it was sure fun while it lasted with uncle Sam and bP footing the bill and preventing a bad year from becoming even worse. gulfmark said it too had a “better than expected” third quarter. “the decrease in drilling activity in the gulf of Mexico was offset by prolonged spill response work,” stated President and Ceo bruce Streeter. earnings of $19 million were a welcome change from the massive loss of the previous quarter, although Streeter cautioned that the fourth quarter would likely be “soft” due to the de facto moratorium in the gulf and seasonality in the north Sea.

24

THE MARITIME EXECUTIVE

but wait. there were a few bright spots. one company that defied all the odds and reported record third quarter results was Seacor Holdings. the company’s large and diversified environmental Services business (featured on the cover of this magazine’s September 2007 edition) led the way, accounting for more than half of total operating income. “oil spill response activities following the sinking of the deepwater Horizon in april defined this period’s results,” Seacor explained in a release, “as they reflect the combined effort of Seacor’s environmental Services, offshore Marine Services, aviation Services, and Harbor & towing business units.” Safety and environmental preparedness can pay off after all, and in more ways than one, although they are too often taken for granted. one might argue that Seacor is not really a workboat company because of its hodgepodge of businesses and a strategy known only to its founder and executive Chairman, Charles fabrikant, whose hero is apparently warren buffett. and while it does operate in businesses as diverse as commodities trading and ethanol refineries, its bread-

Profiting from Adversity

A Counter-intuitive strAtegy

faced with declining demand for their services, stagnant day rates and a gloomy short-term outlook, workboat companies are doing the only logical thing: they’re building more vessels. that’s right. building more boats. at the same time that older vessels are being cold-stacked or sold, new ones are being ordered and delivered. bourbon, the second biggest player behind tidewater by number of vessels, is “taking delivery of one new supply vessel every 12 days,” boasted its Chairman and Ceo,

It’s been a tough year, one of the worst ever. Is there light at the end of the tunnel?
woRkboAT sToCks
Company (Symbol) Year-Ago Price seacor Holdings (CkH) $81 bourbon sA (Gbb:FP) €28 Tidewater (TDw) 44 Gulfmark offshore (GLF) 28 Hornbeck offshore (Hos) 24 Trico Marine (TRMA) 6
Sources: Barron’s, Bloomberg. *Ranked

JACKO’CONNELL
disposing of 517 vessels in the process, of which 420 were sold for proceeds of $665 million and the rest scrapped. It currently has a fleet of 396. To pay for all this, the company has taken on debt for the first time in recent memory. But not to worry. It is sitting on more than $500 million in cash and its debt ratio stands at a healthy 22 percent. It remains the only company in the workboat space to pay a dividend, a sign of its financial strength and confidence in the future. “Our day will eventually come,” stated its Chairman, President and CEO, Dean Taylor, during a third quarter conference call, “and when it does, we’ll be ready with the largest and newest fleet in the world.” In the meantime, “We’re growing our business and doing so at an attractive cost of capital,” he added. As for the immediate outlook, “We remain in the trough of the earnings cycle,” Taylor lamented, with CFO Quinn Fanning adding, “Day rates will bounce along the bottom for at least the next two quarters.” The company cold-stacked 17 additional

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Jacques de Chateauvieux. Bourbon’s recently announced 2015 Leadership Strategy envisions a fleet of 600 vessels in the next five years (up from about 400 today), financed in part by the sale of its bulk carrier fleet. Total cost: a whopping $2 billion. Bourbon operates in more than 30 countries and is particularly strong in West Africa. Not to be outdone, Tidewater continues to take new deliveries at an impressive

rate. Tidewater, it seems, has been on a newbuilding spree for the last ten years, ever since the downturn of the late 1990s, when it realized it had to do something about an old and increasingly uncompetitive fleet. Tidewater has added 230 new vessels in the last 10 years at a cost of some $3.4 billion. It currently has 30 more on order totaling nearly $700 million. Tidewater, to its credit, has essentially replaced its entire fleet since 1990,

25

THE MARITIME EXECUTIVE

JACKO’CONNELL
vessels in the quarter. What’s the logic behind this flurry of newbuildings? “Operators will need newer vessels in order to be competitive when the market finally does rebound,” stated Dave Wilson, an oilfield services analyst with Howard Weil in New Orleans. Gulfmark’s Streeter put it more succinctly, “There will be a flight to quality” with the “great unwashed” of inexperienced crews and vessels being left by the wayside. The general consensus is that customers, once the downturn is over, will demand only the best in terms of offshore equipment and, unless you can offer the latest and greatest in workboat technology, you’re likely to be left out in the cold. pre-Deepwater Horizon levels. Gulfmark’s Streeter is more optimistic: “The Gulf of Mexico will come back and be an area of great potential.” He’s just not sure when. It all depends on the pace of new permitting, of course, and the newly minted Bureau of Ocean Energy Management seems in no hurry to proceed. Hornbeck Offshore’s CEO Todd Hornbeck, profiled elsewhere in these pages, strikes a positive note, believing it will happen sooner rather than later. Hornbeck, of course, has a lot at stake, since its high-spec fleet is deepwater-oriented and accounts for about 15 percent of the market (privately held Edison Chouest is first with an approximate 37 percent share). Hornbeck reported better-than-expected third quarter results, attributing nearly half its revenue in the period to the oil spill cleanup effort. But that work is quickly drying up, and the next two quarters are expected to be especially challenging given the de facto moratorium, the end of the cleanup process, and seasonal factors in both the Gulf of Mexico and North Sea. Hornbeck has already announced it will be stacking four additional vessels in the fourth quarter while Tidewater will stack 17 to 20. Not an encouraging sign. So what to expect? Brazil, West Africa and other international hotspots beckon, yet surprisingly few vessels – and fewer rigs – have migrated out of the Gulf. The general feeling is that we’ve been through this kind of downturn before and we’ll get through this one too and be better for the experience. The light at the end of the tunnel is visible, the “new normal” as Todd Hornbeck calls it, and it will grow increasingly bright with each passing day. We’ll see. In the meantime, see you in MarEx New Orleans!

NoVEMbER/DECEMbER 2010

Whither the DeepWAter?

26

The big question facing the industry today is when will the deepwater Gulf return? Opinions vary, but nobody is expecting anything to happen for the remainder of 2010. Tidewater’s Taylor predicts “a long slow recovery for deepwater drilling in the Gulf” – up to a year before it returns to

Jack O’Connell, the senior editor of this

magazine and a former maritime executive, is a private investor who may own shares in some of the companies mentioned in his columns. The views expressed in this column are his and his alone and are not in any way to be construed as investment advice.

THE MARITIME EXECUTIVE

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28

swimming Upstream:
The Struggle to Expand America’s Marine Highway
Plans are Proceeding to exPand U.s. inland waterways into an interconnected system of environmentally friendly supercargo passages – if with vastly less funding than is needed. the white House remains a major sticking point when it comes to providing the necessary support for waterway improvements. Funding for america’s Marine Highway initiative and general infrastructure enhancements would need to rise considerably for these programs to meet their full potential for relieving congestion and reducing pollution from america’s highways and railways. there’s also a crucial need to develop more cargo capacity as the nation’s population rises in years to come. “the President wants to double exports, but our highways and railways would have a tough time handling it,” stated cornel Martin, President and ceo of waterways council, inc., a trade group that focuses primarily on waterway infrastructure issues. looking down the road, he added, “By 2050, for example, we’ll need triple the amount of food we produce today due to population growth alone.” inland waterway improvements would help smooth the way for the 73 percent increase in cargo traffic that’s expected over the next 25 years. a 2005 study by the U.s. department of transportation’s (dot) Maritime administration (Marad) reported that the nation’s highways will feel the strain of some 58,000 tractor-trailers by 2020, nearly double the 32,000 operating in 2004. yet inland waterway expansion was conspicuously absent from President obama’s labor day announcement to spend $50 billion on much-needed infrastructure improvements.

THE MARITIME EXECUTIVE

Major funding remains logjammed despite ambitious plans to relieve congestion on the nation’s highways and rails.

why the omission when the arguments supporting the expansion of america’s Marine Highway are so compelling? For instance, barges can move one ton of cargo 576 miles on a single gallon of fuel versus only 413 miles by rail and 155 miles by tractor-trailer.

Compelling Case

SWIMMING UPSTREAM
One 15-barge tow has the same capacity as 216 rail cars or 1,050 tractor-trailers. Put another way, a barge moving four tons of cargo 2,300 miles uses 9,000 gallons of fuel versus 53,000 gallons if moved by tractor-trailer. In addition to the fuel savings, expanding the nation’s waterways effectively lowers emissions of NOx, carbon monoxide and hydrocarbons while relieving highway congestion and reducing the nation’s reliance on imported oil. Safety is another compelling argument. For every one injury sustained on a barge, there are 125 on the rails and 2,171 on tractor-trailers. Meanwhile, waterway expansion would help create and sustain jobs in the maritime industry. More than 60 shipyards have closed over the last 50 years, and job losses have been severe with more than 40,000 merchant mariners, 38,000 longshoremen and 200,000 shipyard workers idled. “Those of us who advocate for water resources will need to increase our efforts to educate Congress and the public on the economic and environmental benefits of improving the waterway infrastructure,” stated Amy Larson, President of the National Waterways Conference (NWC), a broad-based umbrella group representing multiple users. “We’re very concerned that the President’s FY 2011 budget contained no additional funding. When Congress reconvenes after the November elections, we’re hoping to work with committees in the House and Senate to get funding for FY 2012.”

NoVEMbER/DECEMbER 2010

PRoGRESS IN WAShINGToN

Despite the absence of needed funding, several noteworthy developments occurred during 2010. In April a consensus group representing some 150 stakeholders – the Inland Waterways Users Board – adopted its final report addressing how to fund infrastructure improvements and prioritizing them for the first time ever. Known as the Inland Waterways Capital Development Plan, the proposal retains the present 50/50, industry-federal government cost-sharing formula for projects over $100 million but also advocates a hike in the federal tax on diesel fuel to fund the effort. Upkeep to the system is provided by the Inland Waterway Trust Fund, which is supported by a tax of 20 cents per gallon on diesel

fuel. The report advocated raising the tax between 30 and 45 percent, or up to 29 cents per gallon. For its part, Congress has in the past provided only $170 million per year in appropriations for waterway infrastructure improvements whereas a total of $380 million per year is needed, according to the Waterways Council. So the government clearly needs to do more as well. On the brighter side, MARAD issued a final rule calling for an expanded Marine Highway Program in April 2010. In August it announced its selections for the 11 specific corridors, connectors and crossings that will be the program’s initial focus and that would extend marine transportation routes near land corridors with especially heavy traffic congestion (see map). Connectors are the shorter byways that act as feeders to corridors, the large multistate routes. In September MARAD awarded $7 million in grants for three pilot demonstration projects. While that’s a proverbial drop in the bucket compared to what is needed, it nevertheless provides momentum for the program. “MARAD has done a very good job in designating grants and selecting the appropriate projects and corridors,” said NWC’s Larson.

29

THE MARITIME EXECUTIVE

MARINE hIGhWAy FocUS

The $7 million in grant funding will be used to expand waterways between Texas and Florida in the Gulf Coast region and on the East Coast between Richmond and Hampton Roads, Virginia. This will jumpstart the program and demonstrate how expanded

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waterways can relieve highway and railway overload. The grants will also fund a new start-up water-service corridor between Itawamba, Mississippi and Mobile, Alabama. Another $800,000 was provided to study other marine highway initiatives showing promise. These include a West Coast Hub Feeder and Golden State Marine Highway serving 13 ports between Crescent City, Washington and San Diego, California. Another initiative would improve Midwest connections between Peoria, Illinois and the Gulf Coast. Finally, an East Coast initiative would expand service between Florida and Massachusetts at specific locations to improve overall shipping capacity. In addition to the grant projects, MARAD targeted eight projects with longterm public benefit and sustainability that would need no further federal support after initial funding. It also identified six projects that offer promise for the future. “These projects demonstrate how water transportation can help solve some of our toughest transportation challenges,” commented U.S. Transportation Secretary Ray LaHood. “Transporting goods by water will let us reduce congestion and greenhouse gas emissions. These grants will help a long-overlooked means of transportation finally grow.” Yet, according to Waterways Council’s Martin, “It can’t succeed long-term if we don’t fund the infrastructure.” identified as a major truck bottleneck, would save up to 500,000 hours of vehicle delays per year – along with related fuel, water and emission reductions. It would provide additional benefits by utilizing low-emissions engines and ultra-low-sulfur fuel.

30

REINvENTING ThE “FERRy WhEEl” FoR A PollUTIoN SolUTIoN
THE MARITIME EXECUTIVE

Some of the pilot projects selected for preference in future funding would thriftily reinvent the ferry wheel, so to speak, to get noteworthy environmental and economic results. A case in point is the proposed Cross Sound Project between New London, Connecticut and Orient Point, New York, which would increase ferry capacity across Long Island Sound. The service currently makes 12,000 one-way ferry trips per year along a 16-mile route, eliminating a 166-mile highway drive through congested portions of Long Island, New York City and Connecticut. The project would expand capacity 3,000 trucks per year, saving nearly 500,000 highway miles driven. In addition to emission reductions and energy savings, it would improve the livability of the surrounding areas. A second example is the proposed James River project between Hampton Roads and Richmond, Virginia along the very congested I-64 highway corridor, which entails doing more of what’s already working well. It would expand upon existing container-on-barge service between four terminals in the Hampton Roads area, shifting more freight from urban roads to water. I-64, which has been

While not all initiatives can benefit from what’s already there with quite such simplicity, they can potentially produce even greater results. A grander scheme is envisioned in the Tennessee-Tombigbee (Tenn-Tom) Project, which would create a new container-onbarge service between Itawamba, Mississippi on the Tenn-Tom Waterway and Mobile, Alabama and help the congested I-65 corridor accept more freight traffic. I-65 currently handles about 3,150 truck trips per day, a number that is expected to increase to 25,000 by 2035, according to DOT. Right now significant traffic comes to Tennessee by rail and then is trucked to Mississippi. The new initiative would create a nearly all-water route for freight from the Panama Canal to the Tenn-Tom Waterway. Another grand scheme is envisioned by the Port Authorities of Galveston, Texas and the State of South Carolina for a Gulf-toAtlantic Coast series of public- and private-funded improvements that would make a major dent in traffic congestion and related pollution problems. The initiative would distribute both international and domestic containers between the Gulf Coast and the Mid- and South Atlantic Coasts on a new fleet of U.S.-flag vessels with cutting-edge technologies. Adding to the economic boost, the vessels would be built in U.S. shipyards and crewed by U.S. mariners. The project would provide “measurable relief,” its developers say, to 400 miles of congestion on I-10 and more than a dozen major freight bottlenecks along I-95. The route also includes the movement of large volumes of hazardous materials that would be transported much more safely by water than by land. Sponsors say the plan could conceivably be completed by the time the Panama Canal expansion is finished in 2014, providing additional import-export capacity for the region.

GRANdER SchEMES

NoVEMbER/DECEMbER 2010

PolITIcAl PITFAllS ANd PoTENTIAl

With all the obvious environmental and economic benefits, why is the idea of enhancing inland waterways and, more importantly, obtaining the needed funding such a hard sell in Washington? A major reason, says NWC’s Larson, is that lock-and-dam projects are usually viewed as “pork barrel” undertakings. In other words, Congress is accustomed to thinking project-by-project and not on a national scale. “We need a systems approach to explaining

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32

the importance of waterway projects, not the piecemeal one used traditionally,” notes Larson. “We also need to include the multiple uses of waterways, such as flood control and hydropower, in addition to navigation and traffic flow. And we need to do a better job of selling the economic benefits of these projects as a whole, demonstrating how they all work together.” Larson cited an example of what she termed a “frightening wake-up call” – the possibility of the lower Mississippi River

resorting to one-way traffic due to the lack of vital infrastructure projects. “If there isn’t additional funding, it will be disastrous for the whole country. There will be a ripple effect on all the ports sending agricultural and other goods down the Mississippi,” she warned, adding, “There just isn’t sufficient appreciation for the benefits of waterborne transportation.” MarEx

barbara Saunders is a writer and editor based in Houston.

THE MARITIME EXECUTIVE

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Flight deck on the HOS Achiever.

NOVEMBER/DECEMBER 2010

34

THE MARITIME EXECUTIVE

Hornbeck Offshore Services
In just 13 years Todd Hornbeck has built a company with a leadership position in the deepwater Gulf of Mexico and an enterprise value in excess of $1 billion. On a bright sunny day in the summer of 1998 Jeff Mudgett and I, who had cofounded this magazine two years earlier, drove south from New Orleans for a few hours to do a photo shoot on the first new vessel of Hornbeck Offshore. We knew that Tidewater Marine and the original Hornbeck Offshore had merged in 1996 and the new company was the undertaking of Todd Hornbeck, the son of the previous company’s owner. Driving around a small bend with a crusty old bait store nestled on an unimposing knoll, we came upon a new platform support vessel towering over the bayous flowing to the ocean. The vessel was tethered to a small docking area barely the length of the ship. As we exited our vehicle the waters suddenly boiled on the surface with fish being herded by dolphins, and it was evident that this was a very unique place to see a ship.
by Tony Munoz

HORNBECKOFFSHORESERVICES

35

NOVEMBER/DECEMBER 2010 Spread: The HOS Iron Horse, one of Hornbeck’s two 430-ft DP3 Merwede T-22 class multi-purpose support vessels, providing ultradeepwater subsea construction, inspection, repair and maintenance services worldwide. Upper Right: The bridge of the HOS Achiever, featuring a highly qualified U.S. crew and state-of-the-art vessel technology. Lower Right: One of the nearly 48,000 cumulative personnel transfers between Shell’s Perdido spar and the HOS Achiever, which served as a “floating hotel” for Perdido’s offshore workforce for nearly eight months in 2009. THE MARITIME EXECUTIVE

ALL PHOTOS COURTESY HORNBECK OFFSHORE SERVICES

Within a few minutes a young man in his early thirties arrived and introduced himself as Todd Hornbeck. As we started to talk, it became apparent the young owner was extremely proud of the new vessel with the HOS insignia painted on the house. He gave us a tour and displayed his intimate knowledge of the offshore industry and the new technologies employed throughout the boat. He made it clear this vessel was the first in a progressive building program he was embarking upon over the next several years. Now, more than a decade later, we are honored to update our readers on the journey of Hornbeck Offshore and its Chairman, President and CEO, Todd Hornbeck, toward becoming one of the most influential maritime companies in the world.

Lots of people dream of building a company with worldwide aspirations, but few dare to chase down the vision because the chances – and consequences – of failure are too great. The vicissitudes of the oil and gas markets are a highway of broken dreams, men and companies who planned and did their best, but discovered the timing was not right.

BUILDING ON A DREAM

In 1997 Todd Hornbeck, along with a partner, co-founded Hornbeck-Leevac Marine Services with $1 million in seed money, a tugboat and a few barges. They ventured into the mature U.S. Gulf of Mexico offshore marine services industry not to test their mettle but with a vision of a next-generation vessel. Larry Hornbeck, Todd’s father, started his offshore support company in 1981, and it became successful and was eventually sold to Tidewater in 1996. But let’s be clear: Todd Hornbeck was not born on third base, and venturing into the oil and gas market takes more than just money. It takes an extraordinary amount of fortitude, timing and vision. In the late 1980s the U.S. GOM was known as the “Dead Sea” because oil prices made exploration and production economically unattractive. By 1996, after more than a decade of depressed activity, the industry began to rebound, lifted by incentives such as royalty relief from the federal and state governments. Crude was now trading on world markets between $16 and $23 per barrel and GOM production was rising, so companies began unstacking boats and hiring mariners. In 1997 Anadarko positioned its Neptune platform in 1,930 feet of GOM

HORNBECKOFFSHORESERVICES
water, and deepwater drilling’s future seemed assured. When HornbeckLeevac Marine opened its doors that same year, its modern 220-foot proprietary in-house OSV design was ready to be built. The question of whether the oil industry was willing to pay for a new technologically advanced boat when plenty of traditional 180-foot boats were available was the gamble Todd Hornbeck took. Unfortunately, in late 1997 oil prices collapsed again and by April 1999 only 488 drilling units were working in the GOM. However, deepwater exploration kept going as ExxonMobil worked its Hoover-Diana development; BP’s Atlantis, Thunder Horse (largest field ever discovered in the Gulf), Holstein, King, King’s Peak and Marlin fields were ramping up; and Shell’s Crosby and Nakika and BHP Billiton’s Mad Dog discoveries were getting ready to come online. Meanwhile, Hornbeck continued to build and acquire vessels because the company was convinced the U.S. GOM deepwater was the future and the deepwater required a new breed of vessel.

NOVEMBER/DECEMBER 2010

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Hornbeck’s 66-acre shore base facility (“HOS Port”) located in Port Fourchon. In addition to serving as the base of operation for the company’s U. S. Gulf of Mexico fleet, HOS Port provides logistics support for drilling, production and construction projects in both deepwater and shelf Gulf of Mexico locations.

By the time Hornbeck Offshore went public in April 2004, the company owned 23 OSVs (17 constructed by the company and six purchased from the Candy Fleet Corporation), 12 tugboats and 16 barges. The financial markets understood that the next dimension of oil and gas production was the deepwater and Hornbeck had the newest fleet of boats in the industry. As the company’s Initial Public Offering moved forward, reports circulated about weak demand for boats and falling rates. But investors knew that, while this might apply to the traditional GOM fleet that had been built in the 1970s, the deepwater market was booming.

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Meanwhile, for Todd Hornbeck the IPO represented the rebirth of the company his father had started and sold to Tidewater. At the time of the sale Hornbeck Offshore was the second largest supply boat operator in the world and Tidewater was the largest. The symbolic rebirth may have been a dream come true for the younger Hornbeck, but his business savvy drove the building of a next-generation fleet of boats to meet the demand of the emerging deepwater. Wall Street, the oil companies and Todd Hornbeck knew the deepwater was the future. The IPO provided $80 million in gross proceeds, which allowed the firm to fund its future growth. While many thought at the time that Hornbeck was exclusively an offshore OSV operator, its tug-and-barge unit was simultaneously investing in double-hull tank barges and a modern fleet of tugboats. In the volatile offshore markets of 2003 and 2004, the “downstream” segment of the company provided a stable base of cash flow and covered 100 percent of all company-wide fixed charges, including debt service and maintenance capital expenditures. By 2005 the company was also operating two coastwise tankers, a fast supply vessel and two foreign-flagged anchor-handling vessels as well as a new shore-based facility in Port Fourchon. It was running 25 next-generation OSVs, 14 oceangoing tugs and 18 oceangoing barges for petroleum transport in the northeastern U.S. and Puerto Rico. It had also developed a new market application for the double-hulled tank barges by using them to perform well stimulation services in the deepwater, which was an innovative way to use the same equipment in the both the upstream and downstream segments of the company’s business. Ultimately, what Hornbeck had done was build a company with the youngest OSV fleet in the industry and a modernized tug-and-barge division. He developed an entrepreneurial culture with his management team and an ownership mentality among employees. By reminding them that they were in the service business, he instilled a sense of pride and belonging that didn’t exist in the “cowboy” mentality days of the old offshore industry.

The growing deepwater had the industry moving again and the future was filled with anticipation as companies invested in all types of vessels. By 2007 there were a record 15 rigs in water depths of 5,000 feet or more, and drillers announced another 15 new mobile offshore drilling units would be delivered between 2009 and 2011 with the capability of drilling in depths of 7,000 to 12,000 feet. When President Obama announced on March 30 of this year that he was opening the vast expanses along the Atlantic coastline, the eastern Gulf of Mexico and the north coast of Alaska to oil and gas drilling and exploration, the industry rejoiced because it had waited a very long time for this and would finally have additional offshore opportunities in the U.S. Mishaps on oil rigs are rare, but on April 20 the Deepwater Horizon exploded, killing 11 workers and injuring 17 others while another 98 survived without serious physical injury. The news stunned the nation, and as the world watched the spectacular fire consume the rig on television Hornbeck Offshore – along

THE CHALLENGE OF DEEPWATER HORIZON

37

NOVEMBER/DECEMBER 2010

HORNBECKOFFSHORESERVICES

38

NOVEMBER/DECEMBER 2010

The HOS Mystique, one of Hornbeck’s new 250EDF class new generation offshore supply vessels now working in ROV / construction support. THE MARITIME EXECUTIVE

with many other offshore support companies – sent boats to fight and extinguish the fire. But after 36 hours of intense burning the melting rig sank into the ocean, and once again the world was reminded that offshore drilling is a very dangerous business. Hornbeck Offshore employed its ROVs to assist in the numerous attempts to cap the well-head. The company put at least 25 vessels to work assisting in the emergency response and cleanup. Hornbeck had envisioned his company with the right equipment for every job required by his customers, but he had never expected, like most of us, that his company would be called upon to meet the equipment needs of the greatest environmental disaster in U.S. history. The company had met the greatest challenge ever posed in the Gulf of Mexico ultra-deepwater. On April 27 the government issued a temporary ban on offshore drilling in the GOM in depths deeper than 500 feet. Then a six-month ban was issued on May 27 by Ken Salazar, Secretary of the Department of Interior. Hornbeck Offshore was immediately impacted by the closing of the 33 rigs impacted by the moratorium. In June it filed a lawsuit against the DOI (Hornbeck Offshore Services LLC v. Salazar, 2:10-cv-01663) in U.S. District Court in New Orleans. The company had watched its stock drop 37 percent since the explosion, and the ban had idled its vessels and personnel. On June 22 Judge Martin Feldman of the U.S. District Court in New Orleans lifted the ban and prohibited the government from enforcing it. On July 17 Salazar issued a second ban based not on water depth but on drilling configuration and technology. The judge ruled the second ban wasn’t any different than the first and the courts threw it out, but the government pursued the

issue from a technical point of view and prevailed. Ultimately, the Administration lifted the moratorium on October 12 but with technical restrictions.

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Since 1997 Hornbeck has been funding numerous newbuild programs and has augmented its fleet through acquisitions. Today the company has a fleet of 80 vessels including 54 OSVs ranging from 200-feet to 430-feet and a fleet of oceangoing tugs and barges, most of which are double-hulled. It is a unique combination of upstream and downstream operations. In 2009 it posted revenue of $386 million and operating income of $102 million. Its enterprise value is more than $1 billion. Not bad for a company that began 13 years ago with $1 million in seed money! According to Todd Hornbeck, this has been the building stage of the business plan, and now he is moving it into the mergers and acquisition phase. The company also operates overseas and plans to review opportunities around the world. Todd Hornbeck may have rung the opening bell at the New York Stock Exchange in 2004, but he put a shot across the bow of the offshore industry many years before that on the bayou when he took this magazine’s founders on a tour of his first OSV. From the beginning he knew what the industry needed and designed those advanced technologies in-house. He was clear about building on the emerging opportunities in deepwater exploration and drilling, and he kept that focus and stayed the course. Today, the company has worldwide recognition, a modMarEx ern fleet and a visionary leader. What’s next, Todd?

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Hornbeck Offshore Services
MarEx: HOS began in 1997 with one boat. Tell us about the extraordinary growth from that point forward. TMH: As I reflect back over the past 13 years, I am very pleased with the exceptional growth that our company has achieved. By any measure, we have exceeded the goals we originally established in 1997. Today, our diverse fleet of 85 vessels is comprised of a total of 51 new generation offshore supply vessels, or OSVs, four multi-purpose support vessels, or MPSVs, nine doublehull tank barges, nine ocean-going tugs

Todd Hornbeck, Chairman, President & CEO

40

and 12 other vessels. Within each of these major categories, our vessels are comprised of a wide variety of different vessel designs ranging in size and specifications capable of servicing our customers’ needs from “cradle to grave” anywhere in the world. For example, we have 10 distinct classes of OSVs, two distinct classes of MPSVs and four distinct classes of doublehulled barges. The primary catalyst that has fueled our investment decisions has been the exponential

THE MARITIME EXECUTIVE

The dynamic young leader and founder of Hornbeck Offshore talks about his vision for the future and keeping the company “one step ahead.”
By Tony Munoz

TODDHORNBECK
growth in technology that our customers experienced in the deepwater, which led to their success in finding ever larger oil and gas deposits there. In the late 1990s, our customers and Wall Street were keenly focused on reserve replacement. This caused them to fund research and development of enhanced drilling and production technologies to drill and commercially produce hydrocarbons in water depths of up to 10,000 feet and well depths of up to 35,000 feet. This ultimately drove the need and opportunity for us to develop innovative new marine solutions to keep pace with the dynamic offshore technology curve. Early on we recognized that the existing fleet of conventional OSVs operating in the Gulf of Mexico was not capable of meeting the complex demands of deepwater, deep well and other logistically demanding projects. So we began a program to construct technologically advanced new generation OSVs using the proprietary designs of our inhouse engineering team. Consequently, our company has had a rich history of offering unique marine solutions to the offshore sector. MarEx: Today the company is more than just an offshore energy support company. Please explain the diversity of your operations. TMH: Our market strategy has always been to diversify our revenue mix by expanding our operational footprint in two core markets (the U.S. GOM and Latin America), extending our geographic reach into new foreign markets (the Middle East) and adding as many oilfield and non-oilfield specialty niche ser-

Our market strategy has always been to diversify our revenue mix by expanding our operational footprint in two core markets (the U.S. GOM and Latin America), extending our geographic reach into new foreign markets (the Middle East) and adding as many oilfield and non-oilfield specialty niche services as possible.
vices as possible. We have also designed our vessels to take full advantage of their versatile platform and to participate in every phase of oilfield marine support services -- from the spudding of an exploratory well, through the completion process, including flotel and well-testing services, to the installation, repair and maintenance of the production infrastructure through the life of the field, to providing environmental response capabilities and hurricane relief efforts to protect the oilfield, to assisting with the decommissioning of the field when it is ultimately plugged and abandoned. In the oilfield, our vessels have been adapted to operate in a host of specialty configurations, such as seismic, deepwater well stimulation, high-pressure pumping, deep-well mooring, and ROV subsea construction. We have also ventured into such diverse non-oilfield specialty services as military applications, fiber-optic cable-lay, and oceanographic research. MarEx: HOS has recently invested more than $1.5 billion in next-generation vessels and equipment. While a father loves
NOVEMBER/DECEMBER 2010

41

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TODDHORNBECK
all his children, what are the that the GOM is worth Our $215 million follow-on public equity offering fighting for. At the end of most innovative vessels in and $75 million privately placed “tack-on” to the day, the GOM represents the fleet? our existing 6.125% senior notes were very well TMH: You’re right. I do think one of the most promisreceived, resulting in excellent pricing of both of our vessels in a paternal ing deepwater regions in sense, but unlike if you’d ask the world and, given the securities. In September 2006 we refinanced our me to “play favorites” from technological advances that revolving credit facility to increase its borrowing among my three children, this have been achieved in the base, extend its maturity and lower our interest is an easy one. We recently ability to identify, drill for designed in-house and conand produce hydrocarbons rate. In November 2006 we completed a $250 structed the two largest and in the ultra deepwater lower million convertible bond offering on very attracmost flexible DP-2 classed tertiary and Miocene geotive terms that allowed us to monetize our high multi-purpose supply vessels logic trends, the long-term operating in the world today. prospects for growth are stock volatility and strong credit profile. The proprietary HOS 370 enormous. Some estimates class HOS Centerline and show up to 50 billion barrels HOS Strongline are the only vessels in the world to have received of oil equivalents (BOE) in these subsalt geologic regions. To put certifications by the U.S. Coast Guard under Subchapters “L,” that in perspective, there have been approximately 50 billion BOE “I,” “D” and “O,” which allows them to operate as a supply discovered in the traditional geologic regions in the GOM and vessel, industrial/construction vessel, and as a petroleum and about half of that has been produced. The lower tertiary and Miochemical tanker. These two world-class vessels are fully SOLAScene trends might, in essence, represent a second GOM waiting to and Jones Act-compliant and, with their 30,000 barrels of liquid be produced. We think that’s very exciting for the long term. mud carrying capacity and highly unique regulatory pedigree, MarEx: Officially, the moratorium is over. Is there a possibility represent a major step forward in our efforts to support our that the Bureau of Ocean Energy Management (BOEM) will customers’ ability to service a diversity of projects with a single keep it going by slowing permitting activity? vessel. TMH: I don’t think there’s any doubt that the pace of permitting activity in the GOM is going to be a lot slower for the foreseeable MarEx: How were you able to finance this latest OSV newbuild future. But because of its enormous potential, activity will evenprogram in the midst of a worldwide recession? TMH: We have always had the philosophy that it is better to raise tually resume and, over the course of several years, it will resume money when you can on good terms, not when you need to. As to a level that may even exceed pre-Macondo levels. in life, timing was everything as we took advantage of robust MarEx: The government repeatedly said the moratorium had market conditions in late September 2005 to recapitalize our little impact on the Gulf Coast economy. Do you agree? balance sheet by accessing the capital markets in the immediate TMH: No, I do not agree. We haven’t yet fully seen the impact of aftermath of Hurricane Rita. Our $215 million follow-on public the drilling moratorium on the local economy. While some layoffs equity offering and $75 million privately placed “tack-on” to our have been deferred, it is only a question of time because drilling existing 6.125% senior notes were very well received, resultrigs and all of the assets that support them, like our vessels, will ing in excellent pricing of both securities. In September 2006 not be able to remain idle for long. The fact that oil companies we refinanced our revolving credit facility to increase its borand drilling contractors have been willing to pay the price of sitrowing base, extend its maturity and lower our interest rate. In ting on the sidelines, and thereby save some jobs, is not sustainNovember 2006 we completed a $250 million convertible bond able. If the pace of permitting does not pick up, rigs will leave and offering on very attractive terms that allowed us to monetize our significant job losses and economic harm will occur. high stock volatility and strong credit profile. As a result of these MarEx: The Jones Act is constantly under attack for stifling financings we were able to achieve, according to one investment job growth, impeding commerce, and recently from preventbank, one of the lowest weighted-average costs of capital in the ing foreign vessels from assisting in the GOM oil spill cleanup. oilfield service industry. With over $500 million in excess cash Should there be waivers on certain work that requires speand up to $250 million in undrawn revolver borrowing capaccialty vessels? TMH: The Jones Act traces its roots back to the third act of ity, combined with the substantial free cash flow that we were projected to generate during the construction period, we were Congress in 1789. It is bedrock legislation and has been part well-positioned heading into the downturn of late 2008 with of this country’s economic fabric from the very beginning. This nation has been one of the most prosperous to have ever existed, ample “dry powder” to execute our aggressive growth strategy. MarEx: HOS states that about 35 percent of its revenue so I don’t see how a law that has been with us since the birth of our nation can be attacked for stifling job growth or impeding comes from upstream vessels, which is an obvious reason to commerce. The Jones Act has promoted the investment of billions file a lawsuit against the Department of Interior’s moratorium and billions of dollars by vessel owners to build vessels in U.S. on drilling in the OCS. Was HOS more exposed than other shipyards employing many thousands of workers. It enables the operators? TMH: There are several other vessel operators in the Gulf of employment of U.S. mariners and all of the shoreside support Mexico (GOM) that joined in the lawsuit with us who also believe that is needed in order to operate ships in a safe and environmen-

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THE MARITIME EXECUTIVE

NOVEMBER/DECEMBER 2010

TODDHORNBECK
tally sound manner. I don’t think that stifles job growth either. The real question that you need to ask is whether vessel day rates in the GOM are higher than in other international markets as a result of the Jones Act. I think you would be surprised to find that day rates in the GOM are actually lower than in many other markets around the world. This is a highly efficient and competitive market that supports one of the great U.S. industries and is crucial not only to our national security but to our energy security as well. We have no argument with the issuance of waivers when Jones Act-qualified vessels are not available. In fact, we have publicly supported an appropriate waiver system. The problem has been that, instead of waivers, foreign vessels have operated on the OCS in violation of the law and that is another matter entirely. We have a responsibility to our investors and to our employees to ensure that vessels that are not legally qualified to conduct operations on the OCS do not do so. MarEx: HOS has expanded throughout the U.S. and is now in a few strategic markets overseas. Are there plans for further overseas expansion? TMH: Yes. Over the years many of our customers have expressed an interest in chartering our vessels for international operations. With roughly thirty percent of our supply vessel fleet chartered for use in foreign markets as well as a significant level of inhouse experience managing vessels worldwide, we will continue to evaluate additional international opportunities. We currently have eight vessels in Brazil on long-term charters with Petrobras, five vessels in Mexico, one in Trinidad, two in Qatar and are actively bidding additional vessels abroad. MarEx: When do you see the global offshore market improving? TMH: With oil prices still above $80 per barrel, we believe the worldwide supply-demand equation for new generation OSVs will remain healthy for the foreseeable future and will be driven by demand for higher-spec vessels, which is our core business. With more deepwater and ultra-deepwater drilling and production units scheduled to come online globally over the next 12 to 24 months, we expect that the market for our type of equipment will continue to gradually improve. Clearly, certain emerging markets, such as Brazil, will be more robust than others, but we expect to see a fairly broad-based and evenly distributed global demand profile. Plus, as I mentioned earlier, we are very optimistic about an eventual full recovery of the post-Macondo Gulf of Mexico over that same time period, as well as a pick-up in activity in other traditional Latin American markets, such as Mexico. MarEx: As HOS plans its strategy over the next five years, will the company continue to invest in new opportunities or is its current profile adequate? TMH: We expect to continue having follow-on investment opportunities as we believe that the offshore energy industry’s technological innovation cycle will continue to develop and will drive the need for new and different equipment as technologies advance. At Hornbeck Offshore we never forget that this is a service business, so we must stay focused on satisfying our customers’ current needs while preparing to meet their future needs. If we don’t, someone else will. We are engaged in a very volatile

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NOVEMBER/DECEMBER 2010

TODDHORNBECK
and cyclical industry that is constantly affected by a myriad of market forces. Disciplined decision-making based on objective criteria is imperative. The ability to anticipate the future, stay flexible and “turn on a dime” is critical to our long-term success. That is why we focus on staying on the leading edge of new vessel construction in each of our marine segments while searching for acquisition opportunities of new generation equipment at a reasonable price. These attributes have allowed us to profitably grow in ever-changing market cycles, while remaining true to the core values embodied in our mission statement. Everything we do, from developing innovative technologies for our fleets to hiring the best people in the business, is driven by our goal of being the company of choice in our industry. MarEx: Any final thoughts for our readers, Todd? TMH: Looking back on our various achievements and the significant growth we’ve experienced over the past decade or so, it’s easy to lose sight of the fundamental beliefs that have driven our success. The overarching macro thesis for our business model is deceptively simple. Following is a summary of what we continue to believe to be the underlying truths of our industry: Oil and natural gas are the predominant fuel sources of our energy-driven economy. World oil consumption will continue to increase, especially driven by China and India. Alternate fuels are not likely to displace oil and natural gas for the foreseeable future. The oil and natural gas production decline curve is real. The only viable way to replace existing reserves is through the drill bit. Oil companies are increasingly searching for large deposits of hydrocarbons offshore. The steady trend in offshore drilling is toward deeper waters and deeper well depths. Exploratory success drives a commensurate increase in subsea production infrastructure. Deeper waters tend to be farther removed from the shore-based logistics chain. Deeper wells require more drill pipe and exponentially greater liquid volumes. Subsea infrastructure needs to be inspected, repaired and maintained at least annually. New generation OSVs and MPSVs are ideally suited to meet all of these demand drivers. With our large and growing multi-class fleet of increasingly larger, more versatile vessels, Hornbeck Offshore is extremely well-positioned to take advantage of these macro-trends. I am confident that we can repeat the success of the past and stay one step ahead of whatever future challenges we may face if we remain true to our business model and execute our proven strategies in the years to come. This past decade has proven to be a fast-paced and encouraging start to what we believe will become a launching pad for yet another period of sustained profitability and growth. MarEx: Thanks, Todd, and our readers thank you too. MarEx

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NOVEMBER/DECEMBER 2010

OFFSHORE

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11 20

RepoRt FRom Down UnDeR:

The World Leader in High-Speed Watercraft
By Robert C. Spicer, CPT

the Austal-designed and built US navy Littoral Combat Ship (LCS) “USS Independence” is the first military platform to feature the company’s innovative trimaran hullform - delivering superior efficiency, seakeeping and maneuverability.

With companies like Austal, HYPAC and Sea Transport leading the way, Australia is top dog when it comes to the design and production of high-speed, aluminum passenger and patrol vessels.
AustrAliA, thAt mAgicAl continent 9,700 nautical miles from new York, 11,600 from rotterdam and 4,500 from shanghai, rests in the center of the world’s imaginings: an enchanted land of mystical beginnings. starting with the arrival of the Aborigines (some say as early as 68,000 Bc), the steady stream of the adventurous continue to arrive daily. in the year ended August 2010, 5.8 million tourists visited Australia, an increase of six percent over the previous 12-month period. this unique land continues to draw the inquisitive traveler to a warm tropical climate in the north and a temperate zone in the south. And with a coastline that stretches 25,760 kilometers and ranks as the world’s seventh longest, is it any wonder that some of the finest high-speed watercraft on the planet are designed and built in Australia? navy and coast guard ships, knows the Australian marketplace well: “Australia has been at the forefront of high-speed craft since their inception and remains at the forefront today. the designers and shipyards continue to improve their designs and bring out new concepts.” Kaminsky noted that “compared to other countries and Australia’s huge coastline, we have relatively limited usage of high-speed vessels at the moment. most of the ones that do operate inside Australia are passenger ferries to the Barrier reef and rottnest island, although there is an increasing number of crewboats and FsVs being delivered as our offshore oil and gas fields continue to expand. the use of high-speed patrol boats to protect Australia’s borders and apprehend human smugglers and drug runners is also expanding.” hYPAc is expanding its offerings to include steel winches and additional products for conventional vessels, With its recent acquisition by Precision technology, a u.s.-based company in roanoke, VA, hYPAc has been able to manufacture its products inside the u.s. and supply them directly to customers like northrop grumman in newport news. Australian design technology has been exported for many

NoVEMbER/DECEMbER 2010

HYPAC

Paul Kaminsky, Director of hYPAc, the Adelaide, south Australia-based manufacturer of lightweight deck machinery for high-speed ships such as passenger ferries, roPAX vessels (ferries that carry both passengers and vehicles), crewboats, FsVs,

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THE MARITIME EXECUTIVE

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The TIDALWAVE HMX TYPE II Sewage Treatment Plant provides state of the art processing of onboard sewage. Designed for quick starts and stops with the push of a button, the TIDALWAVE HMX system uses enhanced floculation, chemical oxidation, hydro-maceration and patented cross flow separation techniques to thoroughly destroy influent biomass. The optional electrocatalytic system generates sodium hypochlorite onboard from seawater thus eliminating consumables during operation. The four-stage treatment system provides trouble free treatment of black and gray water with a sterile, dechlorinated effluent for disposal. The PLC automated operation permits the treatment technique to be customized after installation to treat varying hydraulic or organic loading conditions, and to meet future performance standards in different areas. These systems are provided from the global leader in marine sanitation in marine grade aluminum or steel construction with a tough epoxy coating for corrosion protection.

HigH-Speed Watercraft

years. For example, the vast majority of the U.S. fast ferry fleet is made up of Australian designs built at U.S. shipyards. “As the Australian market is relatively small, it is expedient to design vessels for construction in other countries,” noted HYPAC’s Kaminsky.

AuStAl
NoVEMbER/DECEMbER 2010

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In the design and manufacture of high-speed craft, Austal is a world leader. With its head office in Henderson, Western Australia, Austal began in 1988 with a vision to build high-quality commercial vessels for the international market. It is now a global company with operations in Australia and Mobile, Alabama. Austal entered the military market in 1998 with an order for eight Bay Class Patrol Boats for the Australian Customs Service. Sizeable orders soon followed from various navies and coast guards including the Royal Australian Navy. Its proven record of excellence has placed Austal at the top of the world’s elite patrol vessel builders. In 2001 it became the first company to supply the U.S. military with high-speed Theatre Support Vessels. Austal is now the world’s largest builder of fast ferries and aluminum patrol boats and was recently successful in winning the contract to design and build the U.S. Department of Defense’s next generation, multi-use platform, the Joint High-Speed Vessel (JHSV). Austal continues to drive superior performance in the industry. Its ability to control in-house design and quality along with

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HigH-Speed Watercraft

a skilled workforce ensures its on-time and on-budget deliveries. Austal’s financial strength and sound management team will keep it at the forefront of the industry for a long time to come.

Austal’s landmark 127-meter high-speed vehicle ferry “benchijigua Express” – designed and built in Australia – was the first Austal vessel to feature the company’s innovative trimaran hullform. Since delivery to Spain’s Canary Islands in 2005, the vessel has demonstrated significant advantages over traditional high-speed craft in terms of superior passenger comfort and reduced seasickness along the notoriously rough route.

Project1

12/11/04

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Another leader in the fast-boat market is Queensland-based Sea Transport Corporation, a naval architecture and design consultancy founded by Stuart Ballantyne in 1976. One of the secrets behind Sea Transport’s success is its investment in people. Its strategy is built, in part, upon a commitment to developing a staff that has spent between nine and twelve months working on vessels at sea, thereby adding a vital depth of experience to their qualifications. This factor, combined with ongoing training and technology updating by way of seminars and conferences, produces a highly efficient and professional team able to analyze and quantify all facets of ship design, construction and operation. “Sea Transport Corporation prides itself as designers with ‘real experience’ and has gained an impressive record for designing innovative and commercially unbeatable shallow-draft vessels with designs now in 45 countries,” said Ballantyne. In September of 2010, Dennise Trajano, Chairman of Archipelago Philippine Ferry Corporation, announced that financing was approved for 10 medium-speed ROPAX catamarans. The design was created by Sea Transport Corporation. “This heralded the arrival of the country’s first brand new ROPAX ferries and a

Sea TranSporT

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NoVEMbER/DECEMbER 2010 THE MARITIME EXECUTIVE

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HigH-Speed Watercraft

new safety standard in local ferries,” stated Ballantyne. The new design is a 50m x 17m x 1.8m draft, quadruple screw, 16-knot ROPAX catamaran for trucks, buses, cars and up to 500 passengers that complies with the latest standards of damaged stability criteria, lifesaving and firefighting equipment. The vessels are expected to commence construction shortly, and the first will be in service by the middle of 2011 with the following vessels arriving at two-month intervals.
NoVEMbER/DECEMbER 2010

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While much has been written about the technological marvels of modern high-speed watercraft, too little attention is paid to actually operating these complex vessels. The most important part of the operation is undoubtedly the proper selection of the key people who will be at the controls. The Captain, Port Engineer, Control Systems Engineer and Chief Engineer are just some of the people that are essential to making the operation work well. “You cannot run these sophisticated and complex vessels like a bus,” said Clark Dodge, President of CED Consulting LLC, who has a lifetime of experience with fast-craft operation. And he is right. The men and women who operate these vessels have a significant responsibility with regard to operations, rules of the road, and passenger and crew safety – to name but a few of the more important issues. “We really need to pay more attention to the selection and training qualification process,” said Dodge.

Finding tHe RigHt people

Leadership in the construction of high-speed aluminum vessels could bode well for Australian boatbuilders during the next decade. The recently published Australian Defense Capability Plan details significant strategic growth for the Royal Australian Navy through 2030. This includes the addition of 43 different vessels including submarines, Air Warfare Destroyers, Multi-Role Vessels and Future Frigates. But it does pose questions for the existing industry because naval shipbuilders in Australia do not have sufficient infrastructure to support the steel construction initiatives. The Australian shipbuilding industry has for many years been competitively priced for aluminum vessels but not for the construction of steel hulls. Steel hull shipbuilding continues to flow to less expensive countries like China, where labor is cheap and the technical construction is simple. The industry challenge now may be how to incorporate the learning from the high-speed aluminum craft business into an opportunity to take part (or all) of the steel shipbuilding needs for Australia’s future. That would be a real coup. In the mystical land Down Under, anything is possible, but one thing is certain: If you’re in the market for a high-speed alumimarEx num boat, you’ve come to the right place.

Competing WitH Steel SHipS

Robert Spicer, who holds a Chief Engineer’s license, is studying
for his Doctor of Education degree in organizational learning.

THE MARITIME EXECUTIVE

A R E

Y O U

S A T I S F I E D ?

Luis Manuel Ocejo Rodriguez Director, Maritime Transportation Grupo TMM, S.A.B.

We are happy with the performance of the vessels and with the reliability of Horizon’s staff. The project requirements were very well understood.

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“R YO U

Okechukwu Nwakwesi Executive Director, Fymak Marine and Oil Services Nigeria Limited

A quality vessel is realized when the shipbuilder is able to evolve their design methodology and build process to exceed vessel owner expectations and then follow up with superb support throughout its operating life. This is my experience with Horizon Shipbuilding . . .

Dennis A. Pasentine Owner and Chairman of the Board Florida Marine Transporters

I am very pleased with the performance, coupled with the quality of workmanship on our vessels that we have received from Horizon Shipbuilding. All of the FMT vessels that have been delivered from Horizon are performing better than we originally expected. Horizon has been and continues to be committed to helping Florida Marine succeed in supplying the most efficient vessels for transporting America’s resources.

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NoVEMbER/DECEMbER 2010

THE MARITIME EXECUTIVE

The demand for broadband services aboard ships is booming as the cost comes down.
Unlike most sectors of the shipping indUstry, orders for satellite communications (satcom) equipment and services are on the rise. major contracts awarded in the past several months further wired the oceans to meet the growing demand for broadband. What happened in full-service land-based offices 15 years ago is happening with maritime satcom on ships today. only a satellite system can bring broadband on-the-move access to most ships, and there are many options for companies looking for satellite solutions.

the cruise market was the first to adapt VsAt (Very small Aperture terminal) to serve passengers with services that are now being adopted by merchant vessels for economy and efficiency and also for crew welfare. low-cost broadband calls – 10 to 20 cents a minute using Voip (Voice over internet protocol) versus previous phone charges of $2 to $3 a minute – can be made to family and friends back home. inbound telephone numbers posted on the ship company’s Web site via a toll-free 800 number ring onto the ship. “that has changed crew welfare tremendously,” said eric sung, ceo of intellian technologies UsA in irvine, calif. and ceo of its parent, intellian technologies inc., headquartered in south korea.

Cruising With BroadBand

Wiring the Oceans

Wiring the Oceans:
Many passenger ships have automated teller machines (ATMs) while vendor and casino transactions move across the VSAT link for credit card authorization and verification. In the past five years there’s been an evolution of cell towers on cruise ships so passengers and crew can use their own cell phones at sea, a seamless system that allows callers to receive their phone charges directly from their cell-phone provider. “A number of vessels are putting in Internet kiosks as work stations for crew members to catch up on their e-mail or send messages home or make their own planning arrangements,” Sung said. “That makes it a lot easier to keep the crew happy and connected to the family. Some ships operate with two VSAT systems, one for vessel operations or mission-critical functions, the other for crew welfare and morale.” In the face of a worldwide recession, Intel-

SatCom Comes of Age
lian, founded six years ago, has seen its revenues in 2010 grow by over 80 percent from the prior year. The company does not reveal dollar figures. The outlook for the maker of marine antennas is “very strong,” said Sung, who predicted revenue growth of 70 percent to 100 percent in 2011. The satcom market “definitely” is moving towards broadband technology, affirmed Susan Agemy, Vice President for Product Engineering at Miramar, Fla.-based MTN Satellite Communications. The decision facing fleet owners is which technology to adopt – the Iridium OpenPort solution, FleetBroadband or one of the flavors of VSAT available. Then comes the choice of minior standard VSAT product. “The larger shipping companies are making that decision now,” she said, with some having chosen to go with pay-bythe-minute services such as Iridium OpenPort or Inmarsat FleetBroadband where they can commit
NoVEMbER/DECEMbER 2010

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to a specific capacity level. “Other companies that are more IT savvy are going more towards the VSAT always-on connection, where there are no pay-by-use fees,” she added. “There is a fixed monthly fee for a circuit size, and they pump as much voice and data as they see fit.”

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In the past, communications to ships were expensive and reserved for essential business operations and safety. “But today, because it’s less expensive and we’re also able to offer more capacity – and that’s the key, greater bandwidth – it means all of a sudden there are more applications that can be offered to, not just the operator or the ship’s officers, but also the crew, one-way and two-way,” said Andy Frost, Vice President of Marketing and Business Development for GE Satcom, a wholly owned subsidiary of General Electric based in Stuttgart, Germany. GE Satcom offers telephony, Internet access, e-mail and video conferencing “all at a fraction of the cost compared with the past,” Frost added. “We can do all that and deliver daily TV content so the crew keeps in touch with current affairs and sports developments as they happen, rather than waiting for the next time they reach port.” An important new element built into broadband technology for crew welfare is medical support. An injured crewman or passenger can receive access to a high level of medical personnel or medical technology by sending photos or images and receiving medical advice through video or audio transmission.

Becoming AffordABle

NoVEMbER/DECEMbER 2010

“Satcom has really become a must-have item on a commercial vessel,” contended Paul Comyns, Intellian’s Vice President of Global Marketing. “It’s nearly a required element for operating a

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Wiring the Oceans
ship at sea so having that level of communications with voice and data or e-mail connectivity has really made it so much easier for vessels to operate with special tracking, vessel monitoring, engine and spare parts management.” As electronic links tighten between ships and shore, commercial vessels and cruise lines are able to maintain constant contact with their home office operations to receive instructions, report weather changes and exchange real-time information on everything from fuel optimization and weather routing to ship position and available cargo. Satcom is not at a breakthrough point with a flood of new technologies, but it is at a level where broadband is “becoming affordable,” noted Tore Morten Olsen, CEO of Marlink, an Oslo-based global provider of voice and data solutions, who has seen prices drop as much as 20 to 30 percent over the past two years. In September Marlink announced a renewed agreement that significantly expands its contract with A.P. Moller-Maersk, one of the world’s largest shipping lines. In partnership with Vizada, an independent provider of global satellite communications services, Marlink will provide FleetBroadband airtime services to an additional 200 vessels. The deal brings to 370 the number of A.P. Moller-Maersk vessels sailing with the service. In October, Marlink debuted a new Access Controller system that enables seamless and cost-effective management of a ship’s onboard satcom network. Compact and lightweight, the system can be installed on any vessel to make switching between VSAT, OpenPort or FleetBroadband systems quick and easy, helping

NoVEMbER/DECEMbER 2010

56

users efficiently manage costs. “The whole satcom market is at a very pivotal point,” observed Peter Broadhurst, Sales and Marketing Director at Sea Tel, which is owned by Cobham PLC, headquartered in Dorset, England. Sea Tel is a TV and VSAT antenna manufacturer that figures it has about 35,000 marine antennas in the field and claims 85 percent of the antenna market for the cruise industry. Four to six cruise ships are launched yearly “and we generally get all the systems on those ships,” he said. “There’s a lot of change happening. There are new service offerings to end users and new antenna manufacturer entrants,” he continued. “Ka-band is the big talk, and a number of Ka-band satellite operators will be launching satellites over the next few years. We can see a trend, definitely, towards smaller, low-cost antennas, and we can see a trend towards more bandwidth requirements by the end user.”

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Bottom-Line impact
It’s how satcom brings profitability to shipping companies that will dictate how fast VSAT and other communications systems are adopted into commercial shipping. “Price pressure has been considerable,” Sea Tel’s Broadhurst noted, “from pushing back on us and us pushing back on our suppliers and shipping companies pushing back and demanding the lowest price. Price pressure through a recession is probably the hardest thing. I expect margin erosion just about all the way down the value chain.” Although the industry has been hit hard in the recession, Broadhurst sees
NoVEMbER/DECEMbER 2010

58

trade volume beginning to pick up. He predicts a slow recovery and looks for consolidation among satcom companies, with some failing and others being swept up by mergers and acquisitions. “It’s going to be a slow recovery, like all the economists ashore are saying, but it does seem that the trend is improving,” he said. “The next 24 months is the period in which I expect the majority of satcom consolidations to be done.” Business overall at Denmark’s Thrane & Thrane is doing “very well. We’re doing fine,” said Jens Ewerling, Product Line Manager for the company’s maritime satcom operations. “The commercial shipping business has been picking up for the past three to four months,” he reported. “There was a slight slump, a bump in the road for 2009 and maybe a little bit into 2010, but it wasn’t that bad for us. The business didn’t collapse by like half. We got through it quite well, driven by a huge surge in demand for Inmarsat broadband termiVisit us at the nals. Our business with FleetBroadband has International tripled in a year.” Work Boat Show Thrane & Thrane is more than a satellite company; it also makes GMDSS (Global Dec. 1-3 Maritime Distress and Safety) System 6000 2010 consoles for large ships of all sizes. The units will be on the market in the first quarBooth 2855 ter of 2011. “We have a flurry of new products coming,” Ewerling said. The System Full Service Splicing Facilities 6000 integrates an entire communications console containing everything needed by a Lubricants Chain/ Wire Rope commercial vessel of more than 300 tons, ATB Pin Grease Anchor Chain Towing Hawsers for which a GMDSS is mandatory. Wire Rope Dressing Tow Plates Push Cables The company has a 120-page product Kenters Face Wires Hardware catalog that includes a positioning device Anchor Swivels Wide Mouth Rope that transmits the position of a vessel back to Towing Shackles Other Marine Defiance® Brand shore over satellite and is price-tagged from $2,000. A broadband system can run up to Tug Assist Lines Hawser Thimbles Products $50,000 “and everything in between,” EwerHawsers Marine Hardware ling said. Consoles, “allowing for there being Samson Rope Dist. a million different versions,” cost in the area One call gets you quick delivery of $20,000 for smaller units, with large ones from our warehouses in New York, priced between $35,000 and $40,000. New Orleans and Houston port areas. There has been a renewed interest in the maritime satcom industry with the broader availability of broadband. “Until two-anda-half years ago there really was only very, very narrow band services, unless you spent an absolute fortune on VSAT,” Ewerling pointed out. “But it’s all consolidating now, all going toward broadband. Three to five years ago, an antenna for broadband at sea To view our complete catalogue of products, go to cost $70,000 to $100,000 plus a hefty tab www.atlantic-group.com for a satellite link. Today, you can buy a terminal for around $6,000 for the smallest one,” Ewerling said. “It’s become a totally ATLANTIC CORDAGE different ballgame.” marEx 35 Mileed Way, Avenel, New Jersey 07001

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The Shipbroker’s Art
NoVEMbER/DECEMbER 2010

By Barry Parker

60

“Fixed assets” are not always Fixed. Unlike most capital equipment listed on company balance sheets, ships and boats can be easily moved geographically in search of better financial returns. their mobile nature makes them likely to change hands more often and between parties who are unrelated and geographically distant. Moreover, because the maritime business is so fragmented, with hundreds if not thousands of participants in the major sectors, it’s impossible for one person to know what everybody else is doing. into this vacuum of insufficient information flow and geographic distance steps the intermediary, more colloquially called a shipbroker, or vessel sale and purchase (s&P) broker. the international network of s&P brokers provides the glue that enables buyers and sellers to transact their deals – sometimes locally, but more often globally.

THE MARITIME EXECUTIVE

Reaching across the globe to bring buyer and seller together, today’s shipbroker has a lot to offer.
Marcon International (based outside Seattle) and Ocean Marine Brokerage (based in Schriever, Louisiana), for example, connect their clients with worldwide markets. In conversations with Marcon’s Bob Beegle and Ocean Marine’s Steve Kokinos, both were quick to dispel the notion that their shops served only narrow interests. Kokinos said that Ocean Marine handled everything from oilfield and fishing vessels to passenger and cargo ships. He told MarEx, “We’ve been reselling vessels in the non-domestic market for the past 18 years and have a wide network of foreign buyers throughout the world.” Beegle, who founded Marcon in 1981, covers the towing, offshore petroleum, research and marine construction markets, supplemented by “a dabble here and a dabble there as the market requires.”

the Shipbroker’S Art
provides educational services (along with contractual forms for handling actual sales), offered the following: “Thousands of ships change hands every year, although their prices are hugely governed by the laws of supply and demand. The S&P broker has a good idea of the current position in the trade cycle and whether prices are likely to harden or to fall in the short term. This is notoriously difficult to establish, and a good S&P broker is a successful analyst, researcher, valuer and shipping market ‘futurologist.’” Among listed companies, workboat behemoth Tidewater (NYSE: TDW) proudly points to its strategy of “continually acquiring new, and disposing of mature, vessels.” Such strategic vessel sales have generated $665 million in proceeds (and $276 million of pretax profits) for Tidewater over the past decade. Executive Vice President Stephen Dick, who is responsible for vessel sales at Tidewater, told MarEx, “When we sell vessels, it’s at the end of the useful life that we have for the vessel; the vessels may well have remaining economic life. Almost without exception, they are sold out of the offshore business – for example, for use as towing vessels. Recently we sold boats to Nigeria, which are now used as security vessels.”

technology vs. the human Factor

61

NoVEMbER/DECEMbER 2010

part broker, part Seer

Brokers wear many hats. The Baltic and International Maritime Council (BIMCO), an international trade association which

Communications and computers have advanced dramatically in the past three decades. Yet despite changing technologies, the sale of vessels remains a very personal business. Marcon’s Beegle put it very succinctly, “Personal relationships are the key and still the
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the Shipbroker’S Art
most important factor in business.” His thoughts were echoed by Ocean Marine’s Kokinos, a one-time commercial fisherman: “Interpersonal relationships with both buyers and sellers are a must to be both competitive and successful.” Technology does play an important role. “It’s helpful in getting our message out – what kinds of equipment we have for sale, who we are – and in communicating with clients we might not otherwise be able to reach,” Kokinos explained. Beegle acknowledged technology’s importance but cautioned, “It’s only a tool to be used as a convenience for both the broker and the client.” Though BIMCO and broker organizations focus on the mechanical aspects of the shipbrokers’ art, what separates a technically competent broker from the consummate professional is a good feel for psychology along with insight into the buyer’s and seller’s real motivations. Marcon’s Beegle elaborated, “In some of the sales that we handled, the rewards to the buyer or seller were not just revenue but also keeping a valuable asset outside the hands of a competitor.” He cited company prestige as another motivator which has fueled deals. When asked about the use of brokers, Tidewater’s Stephen Dick stated, “We have no problem dealing with brokers. If we know the other party well, we may deal directly. Many times the sellers will prefer to put their equipment in the hands of a broker.” The intermediary can facilitate deals in ways that go far beyond passing offers back and forth. Beegle said that brokers can provide “distance and diplomacy between the buyers and sellers” and recounted a story about Marcon’s role as a buffer. He said two principals started on a direct deal but in midstream came to Marcon. “They found that they would not, or could not, talk to each other.” He explained that the deal was done, “but otherwise it would have been dead.” He described a similar negotiation where the buyer and seller were “just across the river from each other, and they knew the equipment that the other always had for sale.” He joked, “Even though we regularly inspected and appraised it, they probably knew more about it than we did. We were asked to act as the broker in the purchase, which we did successfully.”

NoVEMbER/DECEMbER 2010

Asset player or Growth player?

62

Companies in the deepsea shipping trades are continuously buying and selling tankers, bulk carriers and containerships – much like Tidewater’s transactions. International tanker giant Tsakos Energy Navigation (NYSE:TNP), listed since the early 1990s, is quick to acknowledge that vessel sales are a regular contributor to its profits. It reckoned, as of mid-2010, that “total capital gains since 2004 have been close to $260 million.” Dale Ploughman, CEO of Seanergy Maritime Corp. (Nasdaq: SHIP), told MarEx: “The buying of ships for a fledgling company like Seanergy is very important and, being in the public sector, the price-to-EBITDA ratio is important to the investor and becomes one of the focal points when analyzing the acquisition of a particular target.” Ploughman, with decades of top management experience, added, “The selling of a ship depends on the com-

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the Shipbroker’S Art
pany’s overall strategy: Is it an asset player or is it a long-term growth player?” Shipbrokers’ access to capital markets and private institutional money has helped facilitate asset transactions. Ploughman offered a principal’s viewpoint, where financial considerations influence company strategies: “Seanergy is a long-term growth player and as such will hold on to its ships and generate its profits through trading. However, Seanergy will also keep close watch on the S&P market, and if the market is such that it can make a substantial profit by selling a particular unit and reinvesting the money at a higher return, then this opportunity will be taken.” Tidewater’s Stephen Dick added, “In addition to the selling that we discussed, we are also buyers of equipment. It must be the vintage, style and specification that can fit into our portfolio. If we see a good deal, then we will try to make the acquisition, but it must meet our needs.” Fearnleys, based in Oslo, provides an example of how ship brokerage is integrated into multiple business units conducted through a full-service worldwide office network. When it was founded in 1869, its competitive advantage came from an “earlier adopter” strategy: utilizing the new Oslo-to-London telegraph cable. A century and half later, its ship sales professionals sit alongside tanker, gas carrier and dry cargo brokers, whose market coverage will include interaction with its far-flung offices. Fearnleys is also active in the North Sea exploration, production and supply markets, brokering both charters and equipment sales. As finance has grown in importance, a number of the ship sale brokers (including Fearnleys, Platou, Clarksons and SSY, along with Poten and McQuilling in the U.S.) have hired in-house teams of bankers. Stephen Dick noted this trend but observed, “Some of the bigger brokers try to get their finance arms involved. For us, we generally do our own finance.” Communications tools, worldwide breadth and money sources notwithstanding, the personal relationships stressed by both Marcon and Ocean Marine are vital. Seanergy’s Ploughman told MarEx: “Deals are done both directly and through brokers. It depends very much on the circumstances and the deal relationship that the parties have. A broker can facilitate a deal tremendously if the negotiations start to get a little sticky.” MarEx
•Ad Parker is a 4.875:Layout 1 9/22/10 5:10 barry G 3.375 x frequent contributor to the magazine. PM Page 1

NoVEMbER/DECEMbER 2010

Full-Service Shops

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Traditionally, the major broker groups have been headquartered in London or Oslo; these days they have outposts in shipping centers across the globe. Two of the biggest brokers in the world, Clarksons and Braemar Seascope, are part of shipping service providers listed in London, while a third, EA Gibson, is part of the listed Hunting Group (with a business in oil well services). London-headquartered SSY, established in 1880, is privately held, as are the Norwegian stalwarts Fearnleys and R.S. Platou.

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AdvAnces in cleAn MArine ProPulsion
By richard carranza

66

Mention propulsion to soMeone and they generally think of jet engines or a 12-cylinder Ferrari. and while propulsion does mean power, it also means pollution, particularly when it comes to powering ships. Burning diesel and hFo (heavy Fuel oil) creates greenhouse gases, mainly sox, nox and Co2, that are emitted into the atmosphere. propulsion systems, because they require seals and bearings to reduce friction, can also leak lube oil into the ocean when seals weaken due to harsh conditions and varying loads. these are among the issues being addressed by the international Maritime organization (iMo) in its continuing efforts to reduce maritime pollution worldwide. the iMo’s tier iii regulations, scheduled to take effect in 2016, would require dramatic reductions in greenhouse gas emissions from ships, including a massive 80 percent in nox when transiting designated emission Control areas.

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Faced with looming deadlines and high compliance costs, natural gas as an alternative energy source is looking more and more viable. For one thing, methane (the main ingredient in natural gas) has the potential to deliver large amounts of energy. during complete combustion, fuel plus oxygen are converted to carbon dioxide and water. the heat derived from combustion propels the ship. Compare the heats of combustion (kJ/g) for the following fuels (approximate values): methane, 55; propane, 50; gasoline, 47; diesel, 45; and ethanol, 30. Methane delivers more energy than any other fuel. Moreover, the combustion of natural gas is much cleaner. during complete combustion, the only byproducts are carbon dioxide (a greenhouse gas) and water, both colorless. natural gas is, in fact, a “no sulfur fuel” and can reduce nox emissions by up to 90 percent and Co2 by up to 20 percent with little or no smoke. in the case of incomplete combustion, as occurs with other fuels, side reactions and other compounds (including carbon monoxide and elemental carbon) are produced and give off black smoke. diesel has a tendency to produce smoke. liquefied natural gas (lnG) can be used as a fuel in ships because it occupies one-six hundredth the volume of natural gas. in the 1970s lnG cargo ships were propelled primarily by steam turbines, and the fuel used to generate the steam for propulsion was the lnG cargo itself. in the 1990s there was a paradigm shift in the industry, and lnG ships employed both diesel propulsion and dual fuel propulsion (engines with the capability to use either natural gas or diesel). since the 1990s lnG has supplied the energy source for the dual fuel electric propulsion system. despite

The natural Gas solution

N AVA

L

Clean Marine ProPulsion

Can lnG-fueled vessels save the planet?
the fact that the LNG cargo is insulated, heat transfer does occur, thereby resulting in vaporization – methane gas is generated. The vapors are either liquefied via cryogenic refrigeration and returned to the storage system or collected and used to propel the ship.

Wartsila, a Finnish company, is presently the market leader in large industrial maritime propulsion due to its ingenious dual fuel electric propulsion system that utilizes both natural gas and diesel. The system primarily works with natural gas but can be switched to diesel when necessary. The fuel is sent first to electric generators. The electricity is then used to drive electric motors, which are linked to the ship’s propulsion shaft. Although the energy transfer undergoes one additional step by using the dual fuel electric propulsion model, the dual fuel system is preferred because the Wartsila engines are highly efficient. Variable frequency drives help keep the system operating at its optimum point as load conditions change, which is not possible under traditional fixed-speed motor installations. In other words, the dual fuel system actually provides higher efficiency. Moreover, the excess electricity is portable to other ship services, like cargo pumps. Tony Teo of the ship classification society DNV in Houston believes that duel fuel electric propulsion utilizing LNG should be applied to smaller vessels as well as large LNG carriers: “The

Wartsila ship Power solutions

time is ripe for LNG to be used by ferries, offshore support vessels, tugs, and the Coast Guard. Growing in popularity on the Baltic and North Seas, today there are 21 vessels operating with LNG fuel and another 25 or so on order. These are all on short sea trading or coastal routes. Using LNG as fuel has big cost benefits and even bigger emissions benefits with the potential to reduce SOx completely, NOx by 80-85 percent, and CO2 by 20-25 percent.” While acknowledging that small ship owners are concerned about the availability of LNG, Teo stated that “The supply can be secured with many of the LNG terminals located along the U.S. coast. There is a huge potential market for new, small-scale LNG distribution systems in the U.S. We have spoken to several terminals and they are eager to sell their stock as LNG. They prefer not to compete with the pipeline gas market.”

NoVEMbER/DECEMbER 2010

Thordon’s seawater-lubricated stern Tube Bearings

On the high seas a ship’s propeller system is often put in peril. Fishing lines and fishing nets can get entangled in the propellers. If the ship is an ice breaker in the Arctic, then impact with ice can also place stress on the system. The net effect is that bending moments are exerted on the shaft that cause the stern tube seals and bearings to fail. Upon failure, lubricating oil is spilled into the sea. Governments around the world are concerned about oil releases originating from stern tubes. Oil spills can result in civil and

67

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criminal indictments, fines, and even imprisonment. Furthermore, unscheduled stern tube repairs are costly, both in terms of capital costs and lost time. In an effort of circumvent unscheduled stern tube repairs, Thordon Bearings of Canada offers a seawater-lubricated stern tube bearing system instead of the traditional oil-lubricated system. The bearings are made of elastomeric polymer instead of metal. The seawater is drawn from the ocean, pumped through the bearings and back into the sea. No oil is required. It should be noted that seawater-lubricated bearings may be more expensive than oil-lubricated. Since salt water is highly corrosive, bronze liners are required as well as corrosion protection for the shaft. However, since there is no lubricating oil present, the initial investment costs are recouped by lower maintenance costs related to seal maintenance, not to mention stern tube oil costs and the costs related to oil pollution. “Offering bearing packages with reliability equal to or better than an oil and white metal system has made switching to pollution-free bearings an easy decision for many ship owners,” stated Ryan Edmonds, Thordon’s Marketing Coordinator. “Our in-house engineering team and distributor network in over 100 countries offer worldwide availability and technical support. Many ship owners are taking advantage of converting their ships with an existing oil-lubricated system to seawater-lubricated Thordon COMPAC bearings that have a predictable wear life and a 15-year guarantee for newbuilds.”

NoVEMbER/DECEMbER 2010

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Caterpillar Marine Diesel electric Propulsion engines

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Although natural gas engines have a tremendous advantage when we look at emissions, new electric propulsion systems are allowing diesel fuel to maintain a strong position as well. Caterpillar is making significant advancements in the field of diesel electric propulsion and increasing the power efficiency relative to traditional direct drive diesel systems. In traditional diesel systems, the engine is connected directly to the propulsion line. In the electric propulsion systems, the engine is connected to an electric generator. The power is then relayed through a switchboard, transformer, frequency converter, electric motor and, ultimately, the propeller. The additional hardware adds about 10 percent energy consumption, but Caterpillar’s advanced technology reduces overall fuel

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THE MARITIME EXECUTIVE

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Shipbuilding…

we make it our business!

“the low cost, quality provider” of boats and barges.
Post Office Box 2727 | Morgan City, Louisiana 70381 Phone: (985) 384-2111 | Fax: (985) 384-2112

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Clean Marine ProPulsion
consumption, increases efficiency and lowers CO2 emissions. Caterpillar does this by utilizing an electronic unit injector fuel system (EUI) in conjunction with an ADEM™ III governor (controller). EUI does not rely on the mechanical synchronization of the injectors; rather, it uses electric solenoids to control fuel delivery. ADEM III controls the solenoids so that the timing and the length of fuel injection are matched perfectly with the speed and load requirements of the moment. ADEM III also has programmable features such as fuel/air ratio control. EUI, together with ADEM III, allows higher combustion efficiency, lower fuel consumption and reduced emissions. Ships do not always run at full load or optimum efficiency level. Diesel electric propulsion gives the user the ability to run appropriately sized generators based on the current demand, as opposed to simply having a large engine drive a propeller. Considering that diesel electric propulsion vessels use multiple engines of different sizes, the end user can exploit this combination and allow the vessel to operate at its highest efficiency. In addition, the ability to put generators on and off line leads to a double cost benefit: less fuel consumption and less maintenance (since the engine is periodically rested). Maneuvering and dynamic positioning are essential aspects of the offshore business. In some traditional diesel systems, the engine is full-on at low thrust; low speeds are controlled with propeller pitch. Contrarily, electric propulsion systems apply variable frequency motors. In other words, electric propulsion provides zero RPMs when there is little or no thrust requirement. Energy savings can be as high as 15 percent. Diesel electric propulsion is suitable for a very large variety of applications: workboats, cruise ships, ferries, tankers, ice breakers and warships. Furthermore, special environmental certification from organizations like DNV and Lloyd’s Register is available, and this can sometimes lead to lower harbor fees at some international ports. Luiz Pustiglione of Caterpillar Marine Power Systems added, “When we analyze marine construction trends over the last three years, we see that investment in diesel electric propulsion vessels has doubled while the construction of purely mechanically propelled vessels has slowed.”

NoVEMbER/DECEMbER 2010

Toward a Greener Planet

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The future of the maritime industry is sure to see more inspections and regulations as the U.N., IMO and local governments unite to make the air and water cleaner. Oil leakage from ship machinery and air emissions from propulsion systems will be significantly reduced by implementing advanced technologies including increased use of LNG-fueled engines. Seawater-lubricated bearings reduce shaft seal maintenance, and electric propulsion reduces engine maintenance and fuel consumption – all of which save money. Aside from saving the planet, it appears that tougher environmental regulations can also save the bottom line.

Richard Carranza is a chemical engineer and MarEx contributor.

THE MARITIME EXECUTIVE

Marine Deck Equipment
Supplying the world’s leading shipbuilders for over 30 years.

The Industry’s Most Proven and Reliable Data Communications!
Boatracs is the market leader in data communications and software applications and has been in business since 1990. We serve thousand of commerical vessels in the offshore, inland, workboat, fishing and government markets throughout North America. • Rely on mission-critical performance with always on data communications without dead zones • Achieve operational efficiencies with affordable order management, mapping and messaging applications Stay in control of your fleet with near real-time safety, crew, maintenance and location information Service your customers with timely and accurate order and billing information Receive world-class customer service and support with our 24/7/365 client care call center

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Globe iFusion The tide has turned

Nothing comes close Voice & GSM Crew services FB250 Satellite gateway Network router Firewall Optimised IP Applications Maritime Communications Reinvented

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Phone: +1 (321) 308-0112

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satcom Directory
beier raDio
Beier Radio has served the marine industry since 1945, supplying integrated vessel control, steering, navigation, monitoring and communication systems worldwide. SATCOM products offered include the Sailor FBB FleetBroadBand systems and Furuno Inmarsat Standard-C. From engineering and drawing submittals, to installation and service, Beier Radio is the One Source Solution for custom electronics packages.
beier radio T: +1 504 341 0123 buddym@beierradio.com www.beierradio.com

boatracs
Boatracs offers you more than a full range of wireless maritime information solutions - you also benefit from Boatracs’ breadth of experience as the market leader since 1990, proven reliability, and world-class customer service. We serve thousands of vessels in the offshore, inland, fishing, and government markets.

NoVEMbER/DECEMbER 2010

boatracs T: +1 800 262 8722 sales@boatracs.com www.boatracs.com

Datacom
Datacom is a dynamic Energy, Defense and Maritime communications provider. We provide integrated IT and communications solutions through an array of satellite, broadband wireless and two-way radio solutions designed to aid our customers’ communications with their remote field operations.

Delta wave communications
Delta Wave Communications, LLC is a mobile satellite service provider based out of Morgan City, LA. Products and services include Inmarsat®, Iridium®, asset tracking, VSAT Rentals and custom solutions. Founded in 1997, our roots are in the offshore Oil and Gas market. Customer service is always our top priority.

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Datacom, llc T: +1 337 593 8700 sales@getdatacom.com www.getdatacom.com
THE MARITIME EXECUTIVE

Delta wave communications T: +1 800 706 25 15 sales@deltawavecomm.com www.deltawavecomm.com

Globe wireless
Globe Wireless provides maritime communications and IT solutions. Their flagship product is Globe iFusion – a single platform combining a full shipboard network and satellite router, rock solid firewall, FleetBroadband 250, prepaid voice & email platform, shipboard GSM, shoreside remote access & control, and complete application suite.

mtn satellite communications
MTN Satellite Communications is the premier supplier of VSAT services and content for the cruise, commercial shipping and megayacht markets. MTN offers a unique value proposition of worldwide C-Band and Ku-Band coverage, high network reliability, always-on connectivity at fixed monthly costs, and guaranteed uncontended minimum bandwidth with on-demand surge capacity.

Globe wireless T: +1 321 309 1300 sales@globewireless.com www.globewireless.com

mtn T: +1 954 538 4000 www.mtnsat.com

raDio HollanD
Radio Holland is a total-supplier of Connectivity Solutions. Besides VSAT, Radio Holland also offers Inmarsat, Iridium and Thuraya satcom solutions. The VSAT solution of Radio Holland offers a reliable, cost effective always-on broadband communication solution for the maritime industry with automatic beam switching. Radio Holland covers the major shipping routes and provides Quality of Service.
radio Holland T: +31 10 4283344 pr@radiohollandgroup.com www.radiohollandgroup.com

transas marine
Transas Marine is a world-leading developer and supplier of a wide range of marine communication and navigation equipment, simulation systems and vessel traffic solutions. Transas product range includes: onboard equipment (ECDIS, Radar, AIS, VDR etc), integrated bridge system; electronic navigation; training solutions; vessel traffic management and monitoring solutions; 24/7 Service support.
transas marine T: +46 31 769 56 00 info@transas.com www.transasmarine.com

specialist

Looking for something bigger? ...make us your next call.
• Vice President Fleet Operations - Houston, TX - $200K+ pa • DP Marine Warranty Surveyors - New Orleans & Houston, TX - $115K pa • DP Regulatory Compliance Managers - New Orleans & Houston, TX - $100K pa Contact us now to find out more on 954-467-9611, email shipping@faststream.us or visit www.faststream.com

Cat EnginEs – Building solutions For Your suCCEss
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Cat® knowledge and experience have put us in a leadership position in the workboat industry, with engines designed to help you succeed even in the toughest conditions. And with the assurance of world-renowned Cat support, you can count on smooth sailing for every voyage. Visit Cat booths 721 and 821 at the international WorkBoat show in new orleans, december 1-3, 2010. For more information, visit marinE.Cat.Com/marinEoFFshorE

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