Heading for rougher water: Unlimited liability for accidents in the US will worsen the plight of the world's tanker operators, writes Gail Counsell

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The Independent Culture
IT IS a risky business being a tanker owner, and it is growing riskier by the day. As the beaches around the Shetland Islands blacken because of another oil spill, things look equally dark for the shipping industry.

The cause is US legislation that starts to bite later this year. The 1988 Exxon Valdez disaster off Alaska prompted a draconian piece of federal legislation, the Oil Pollution Act 1990, under which the owners of tankers involved in oil spills in US waters face virtually unlimited liability.

The fragmented nature of the shipping industry means that no one knows how many tanker owners there are - anything between 1,000 and 2,000 operating about 3,250 vessels, according to the most reliable estimates. Shell, Exxon, Chevron, BP, Mobil and Texaco - which together control around 12 per cent of the world fleet - rub shoulders with umpteen one-boat bands.

But one thing is certain. With the bill for the Exxon Valdez accident coming to more than dollars 3bn ( pounds 1.9bn), and with no likelihood of obtaining insurance cover for such vast sums, unlimited liability in American waters is a terrifying prospect for them all. Moreover, unlimited liability is only part of the problem; the Act imposes other requirements that will be difficult and expensive for the industry to meet.

Outside US waters, tanker owners are relatively protected. Their liability for accidents is limited as a result of two international agreements, the 1969 Civil Liability Convention and the 1971 Fund Convention.

The 56 signatory states to these conventions (including Britain) agreed to a system under which the maximum the owner of the tanker (or his insurers) has to pay in compensation for an accident is around dollars 19m.

This is topped up to a maximum of about dollars 83m by means of a fund financed through a levy imposed on oil buyers - mostly the big oil companies - as and when necessary.

A new agreement last year will increase this maximum compensation to dollars 187.5m, or possibly even dollars 278m, with the shipowner contributing up to dollars 83m. But it has still to be ratified by member countries.

Accidents involving larger sums are rare - industry sources say that only the Exxon Valdez incident (which they argue was a special case because of the escalating level of American claims and clean-up costs), and possibly the 1978 Amoco Cadiz spill off the Spanish coast, would have breached the new limits.

Which is just as well, as few other sources of compensation are available: cargo owners such as big oil companies have no individual responsibility for spills unless they also own (or effectively own) the tanker involved. Ultramar, for instance, whose cargo has been poured into the sea around the Shetland Islands by the stricken Braer, will escape any liability other than its obligation as an oil company to pay its share of the fund's liability. (With more than 300 oil companies contributing to the fund on the basis of oil deliveries they receive, that will be a relatively small sum.)

Most tanker owners do carry much larger sums in insurance than they are ever likely to pay out under the conventions: dollars 700m is typical. But this is designed to cover the unlikely instance in which the tanker owner is held to be so personally negligent that the convention limitation can be waived (something most lawyers think is virtually impossible to prove), or in case the tanker has an accident in US waters where, even before the 1990 Act, some states imposed a much more extensive liability than that of the conventions.

The Oil Pollution Act has traumatised the tanker industry. As well as unlimited liability, tanker owners will have to obtain certificates to prove they can meet claims of around dollars 250m - and currently there is much doubt about whether simply having evidence of insurance will be sufficient.

Tankers also have to have individual response plans for accidents and (progressively, depending on the age of the tanker) by the year 2015 all tankers calling at US ports will need to have double hulls.

All this is prompting a big shake-up of the industry. Many larger companies, especially the vulnerable 'deep- pocketed' oil majors, are running down their fleets in favour of chartered ships to restrict their liability for spills. Shell, for example, had more than 60 tankers in the mid-1980s, but now has only around 40 and will reduce its fleet further to about 30 by the middle of the decade.

Although that trend began some time ago, partly because tanker operations generally ceased to be viable profit centres in their own right in the 1970s and partly because of structural changes in the oil industry, that switch from owner to charterer is being rapidly accelerated in the light of the OPA and the trend towards greater personal liability.

Some owners have threatened to boycott the US altogether. But for many that is not an option. According to Michael Naess, managing director of PetroBulk, one of the largest independent tanker owners: 'The US is far too important a market for any modern tanker operator simply to opt out.' Yet he calculates that simply complying with the OPA's requirement that progressively by 2015 all tankers calling at US ports must have double hulls will cost an ailing industry up to dollars 40bn.

The only way this circle can be squared in the longer term is for freight rates to the US to rise. There should be scope for this. Freight constitutes a tiny proportion of the total costs to the consumer of oil products, especially compared with the tax take - in the US, it accounts for about dollars 1.55 of the dollars 49.45 cost of a barrel of petrol. 'For an extra 10 cents a litre, you could build virtually unsinkable boats,' observes one cynic.

The consequences of the OPA are thus by no means limited to tanker owners and operators. The US now imports half the oil it consumes. It needs the tanker owners as much as they need it. If, in the long term, tanker owners will only transport oil to the US if the risks are compensated by much higher freight rates, it will be consumers who will have to pay.

Yet in the short term, the high degree of overcapacity in the industry - at least 20 per cent according to insiders - will stop rates rising. Nor will it be easy to lower capacity. With many independent tanker owners - they make up around two thirds of the total - the dominant philosophy is that, having paid for their boat, they may as well generate what revenue they can from it.

For the industry, the OPA could not have come at a worse time. Not only does its introduction coincide with a number of serious European spills, increasing the likelihood that there will be pressure on European countries to emulate the American approach, but there is also the fact that business has been bad for a long time.

Freight rates have yet to recover completely from the slump that followed the 1973 oil crisis. As prices soared, the world voted with its feet and used less oil.

Tankers were caught in the crossfire as the demand for ships to shift oil around the globe declined.

The boom times before 1973 had produced an equivalent boom in shipbuilding. These vessels began to be delivered as the market was turning down, and overcapacity and vicious price competition were the inevitable result.

With odd exceptions, the market has been depressed ever since. Things gradually became a little better during the 1980s but following the end of the Gulf war, the market collapsed.

According to Oslo-based Intertanko, the shipowners' association, it would have cost on average around dollars 30,000 a day in 1990 to charter a very large crude carrier from the Middle East to Europe. By 1991, that figure had slumped to less than dollars 10,000, a rate that barely covers the typical tanker's daily operating expenses before capital costs. Nor have things improved much since then.

With a new double-hulled tanker costing about pounds 110m and needing freight rates of dollars 60,000 a day to justify the investment, it is no surprise that owners are reluctant to modernise their ageing fleets, no matter what the environmental considerations. Small wonder if tanker owners feel they cannot yet see the bottom.

(Photograph omitted)