Crude Carrier Consolidation and Capital Cost
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Crude Carrier Consolidation and Capital Cost TT GILJE1, J DINWOODIE1 & J CHALLACOMBE1 1
Shipping, Logistics and Law Group, Institute of Marine Studies, University of Plymouth, Drake Circus, Plymouth, Devon, UK, PL4 8AA. E-mail: [email protected]
This paper investigates the role of consolidation strategies amongst crude carrier operators anxious to reduce costs and attract institutional capital. Could consolidation combat erratic tonnage demand, mounting regulatory pressure to provide quality service at reduced costs, rising costs of finance and unpredictable long-term returns that deter institutional capital? A questionnaire survey of capital providers' and charterers' attitudes towards consolidation found that long-term vessel employment concerned all potential capital providers, with perceptions of management experience and reputation critical to risk evaluation. Debt type providers were more supportive of consolidation practices, expecting more predictable repayment of principal and interest payments in larger companies, but equity type providers feared reduced opportunities to participate in speculative capital gains or asset play. Comparative interviews with two major crude carrier operators revealed contrasting strategies. One concentrated on pursuing short-term wealth maximisation through ensuring operational autonomy and asset flexibility and another on long-term wealth creation based on ballast minimisation and tactical capacity expansion. Long-term, a trend towards oligopoly is expected in crude tanker carriage, with competitive strategies likely to focus increasingly on differentiation as the potential for operational cost-reduction fades. International Journal of Maritime Economics (2002) 4, 35-54. DOI: 10.1057/palgrave/ijme/9100032
Keywords: Financing crude oil carriage; consolidation strategies.
INT RODUCT ION Recently, corporate consolidation has challenged the crude carrier market. This may reflect insufficient price incentives to provide a more efficient or reliable
TT Gilje et al. Crude Carrier Consolidation and Capital Cost
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service, where a low cost, homogenous service has promulgated regulations to supplement voluntary safety and pollution prevention initiatives (Oldham, 1998, p. 63). Reengineering of the major oil companies (oil majors) has accompanied their waning hold on oil sources and in developing a complete logistics system to manage their extensive industrial supply chain, their participation in the commodity market trading of oil has increased. Where transport costs represent a low proportion of total costs in the oil supply chain, coupled with geographically diverse trade and nationalisation of assets in producing countries, trading practices have changed. Less reliable oil sourcing and increased market dependence on futures instrument trading to hedge corporate exposure have created an oil supply chain requiring a reliable and flexible transportation system in which transport providers require larger fleets. As the oil majors abandon transport operations due to exte
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