Q&A-How will Somali piracy affect shipping?
Source: reuters
(Clarifies that capacity cited in paragraph 16 is an annual figure.)
Feb 10 (Reuters) - Escalating pirate attacks in vital shipping lanes have raised fears that insurance costs could rise and vessels could be diverted, adding to demand for bunker fuel at a time of rising oil prices.
Suspected Somali pirates captured a U.S.-bound tanker carrying around $200 million worth of crude oil in the Indian Ocean on Wednesday in one of the biggest hijackings in the area so far. The hijacking of the Irene SL came a day after an Italian tanker was snatched, reinforcing industry fears that the piracy scourge is spinning out of control. [ID:nLDE7170PV]
Below are some questions and answers about the rising risks global trade faces from seaborne gangs.
WHY IS THE SOMALI PIRACY THREAT ESCALATING?
Pirate gangs are making tens of millions of dollars in ransoms, and their growing capabilities in recent months have enabled them to carry out more attacks even during tougher weather conditions. [ID:nLDE7180YF]
Despite successful efforts to quell attacks in the Gulf of Aden, international navies have struggled to contain piracy in the Indian Ocean owing to the vast distances involved. The latest hijacking took place some 1,000 miles off the coast of Somalia.
"By increasingly using bigger 'mother ships' equipped with more sophisticated equipment ... the pirates have augmented their ability to stay at sea longer and strike farther than they were able to do before," said J. Peter Pham, an African security adviser to U.S. and European governments and private companies.
"Thus, especially as the monsoon abates next month, expect more attacks in an even wider area, one that cannot possibly be secured by the available naval forces."
WHAT COULD THIS MEAN FOR OIL SUPPLIES?
Over 40 percent of the world's seaborne oil passes through the Gulf of Aden and the Arabian Sea, which is the northern part of the Indian Ocean.
INTERTANKO, an association whose members own the majority of the world's tanker fleet, warned that if piracy is left unabated in the Indian Ocean, it has the potential to severely disrupt oil flows to the United States and the rest of the world.
It said the latest hijackings took place in the north end of the Indian Ocean, and if a tanker comes out of the Middle East Gulf via the Strait of Hormuz there is no alternative other than passing through the Arabian Sea.
"When pirate attacks were still focused on the Gulf of Aden and western Indian Ocean, you were able to make a decision as a tanker owner not to proceed through the Gulf of Aden, Red Sea and Suez Canal but instead to go round the Cape of Good Hope, which can add up to 20 days to your round voyage," an INTERTANKO spokesman said.
"But now, a tanker coming out of the Middle East Gulf can no longer choose a route to pass through pirate-free waters."
WHAT HAPPENS IF SOME STILL CHOOSE TO DIVERT THEIR VESSELS?
Analysts say re-routing tankers around the Cape of Good Hope would have large implications for the industry by adding costs and increase demand for marine bunker fuels.
"By going via the Cape from Ras Tanura to Rotterdam you double the travelling distance, but also the bunker costs. Mostly crude but also product tankers are affected by the increasing threat from piracy," said Peter Sand, a shipping analyst with ship association BIMCO.
"Right now the tanker market is in tonnage oversupply, so the extra cost could prove to be difficult to transfer from the owner to the charterer, leaving the shipping industry in a tough position."
Sand estimated a very large crude carrier (VLCC) can transport around 17 million barrels of oil a year from the Middle East Gulf to Europe via the Suez Canal using a partial discharge at the Ain Sukhna Terminal. A VLCC can hold a maximum of 2 million barrels of oil.
"Should a shipping company transport the same cargo round the Cape of Good Hope instead of via the Suez Canal it would need to use more fuel and hire an extra VLCC for half a year to do the job," he said.
Sand said the cost of doing it would be $9 to $10 million per year -- one third of that for extra charter hire costs and two thirds for extra fuel.
"Higher Middle East and piracy risk combined with low charter rates and constant Suez canal charges will make the incentive of going south of the Cape higher. Hence higher fuel demand if it really starts happening," said Thorbjorn Bak Jensen, an oil analyst with Global Risk Management.
ARE PIRATES TARGETING OIL TANKERS?
Maritime security experts says that while pirates will target any vessel they can snatch, rising oil prices and hopes of bigger ransoms are making tankers more attractive prey.
"Pirates may not set out into the Indian Ocean with specific intent to capture oil tankers, but if they see one they will likely attack it with more determination and ferocity than other vessel types, simply because of the potential ransom sum they could secure," said John Drake, a senior risk consultant with security firm AKE Ltd.
ARE LNG SUPPLIES AT RISK?
There have been no reported hijackings of liquefied natural gas (LNG) tankers so far, the largest of which regularly carry over $50 million worth of super cooled gas from Qatar through the Suez Canal to Europe. An LNG carrier is much higher and more difficult to get onboard than an oil tanker.
Unlike gasoline or crude oil, which can be sold into the black market fairly easily, large and expensive terminals are needed to turn LNG back into gas before it can be used, rendering LNG tanker cargoes effectively valueless for the pirates except as a bargaining chip.
WHAT ABOUT GRAINS SHIPMENTS?
Shipping sources have said that potential Australian exports of feed-quality grain to Europe could be diverted around the Cape rather than making the journey through the Gulf of Aden to Middle Eastern buyers. [ID:nLDE70B1D6] [ID:nLDE70Q1PT]
But most of the world's grain is shipped from North and South America on Pacific northwest and Atlantic routes, and so the Somali piracy issue is not at the forefront of grain traders' minds, a UK-based physical grains trader said.
"Grain operators are not worried about this yet," the dealer said, adding that the market could feel the impact of rising oil prices if piracy in the Indian Ocean affected oil flows.
WHAT ABOUT INSURANCE PREMIUMS?
London's marine insurance market has expanded the stretch of waterways deemed high risk from seaborne raiders to include the Gulf of Oman and a wider stretch of the Indian Ocean. [ID:nLDE7191MO]
"Premiums may rise further if the Lloyd's market makes larger losses," AKE's Drake said.
He said a growing number of underwriting syndicates were willing to negotiate their premiums on the basis of whether or not a shipping firm was adopting proper security procedures on board its vessels. [ID:nLDE6BK0U1]
"While some measures, such as re-routing and employing armed guards are costly, there are numerous more simple measures ... such as crew training and the implementation of a variety of non-lethal vessel hardening techniques," he said.
(Additional reporting by Daniel Fineren and Ikuko Kurahone in London and Regan Doherty in Doha, editing by Jane Baird)
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