An Executive Perspective on the Shipping Industry: INTERTANKO’s Chairman and Teekay EVP Graham Westgarth

Rob Almeida
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March 26, 2012

Graham Westgarth Teekay
Graham Westgarth, EVP, Innovation, Technology and Projects - TEEKAY

Amid the hustle and bustle of this year’s Connecticut Maritime Association Conference in Stamford, Connecticut last week, I met with the very modest and mild mannered Chairman of INTERTANKO, and Teekay’s EVP for Innovation, Technology and Projects, Graham Westgarth.

RA: Graham, thanks for taking the time to chat, tell me a little bit about your career and how you found yourself in your present role at Teekay.

GW: I started by going to sea in 1971, about 41 years ago, and spent 18 years going through the ranks.   My last 5 years were as ship’s master working for A.P. Moller/Maersk.  They then brought me ashore as a Superintendent and after several years I ended up as General Manager of their UK fleet.  I worked in shore-based roles for about 12 years until I was approached by Teekay to manage their fleet in 1999.

Shortly after I joined the company we started to expand and are now one of the largest shipping companies in the world, especially in the energy sector.  We’ve diversified from conventional tankers into LNG, FSOs, FPSOs, shuttle tankers.

It’s been an extremely interesting time and around two years ago I became Chairman of INTERTANKO which is an industry organization representing roughly 75 percent of the world’s independent tanker owners.  It has NGO status at IMO and it’s very active in engaging with the regulators and other key stakeholders.

RA: And Teekay is the world’s largest mid-size tanker owner, is that right?

GW: That’s correct.

RA: How many ships do you operate?

GW: It goes up and down due to the fact we charter ships, as well as own them, but at the moment we’re roundabout 150.

RA: Your FPSO fleet, where is that located?

GW: That’s run out of Trondheim, Norway we have a number of assets in the North Sea as well as down in Brazil.  Those are the two areas that we are active in the FPSO business.

RA: Do you see Teekay getting involved in the FSRU business?

GW: We see gas as certainly being an area that is going to grow and become a significant part of the energy chain, and we’re already the largest independent operator of LNG ships, so extending into other areas would just be a natural evolution.

We are looking at a couple projects at the moment, but there’s nothing concrete.

RA:  What kind of companies is Teekay partnering with?  Do you work closely with companies like BG or Excelerate?  I know they have their own fleets of gas ships, but how do you work together with those companies?

GW: BG is active in the gas business, and are a client of ours.  We’re actually building 4 shuttle tankers that will be chartered to BG, and also through Teekay Petrojarl, which is our FPSO organization, they engaged on an FPSO project with BG, so there are multiple touchpoints, and the same goes with Excelerate.

RA: We saw a recent spike in the tanker market, particularly for Suezmax and VLCCs, what was that from?  Do you have any insight as to what the factors were on that?

GW: It’s all just supply and demand.  In this particular case, I can’t say for sure, but sometimes ships gravitate toward one area and it tips the balance and then you see a spike in some areas.  Typically that’s what happens.

I think there was some particularly active fixing going on with the VLCCs, and sometimes that brings a regional cascade effect with the Suezmax’s.

RA:  I think that’s one of the great things about the shipping industry in they way it’s so influential and the economically dynamic on a global scale.

GW:  Well it’s a pretty cyclical and volatile industry, but that’s part of the fun of it.

RA: You gotta have balls if you’re gonna be a shipowner, that’s for sure.

GW: Exactly, it’s not like you’re going into a car manufacturing plant and knowing that you’re going to manufacture a thousand cars that day.

RA: Graham, what has your focus been here at the Connecticut Maritime Association conference this week?  You gave a speech earlier this week, what did you talk about?

GW:  I had a number of themes.  One was a little bit about legislation.  If you look at the way the industry is legislated, particularly through the IMO,  you realize that the way things are evolving with new rules and regulations, we never take anything away, the bureaocracy keeps piling up.

The way it’s managed through the IMO is via a number of different instruments, whether it be the STCW, SOLAS, MARPOL, etc, so the question I was posing is that IMO really, at some point, should take a step back, and really look at the impact all this legislation is taking, and ask, “is there a better, or more streamlined way, of enacting it so that it’s easier for the seafarers, so that they can concentrate on their real job which is managing risk.”

You now have new regulations on ballast water and emissions control and you need to look at it and ask what is the real impact?  How is the seafarer going to implement this?  It’s the seafarers themselves that concerns me, and the burdens we place on them.

RA:  So essentially it comes down to the training and the knowledge of being able to implement these regulations properly.

GW: You first of all have to understand them, then you have to comply and demonstrate compliance.  Demonstration of compliance is probably the most burdensome.

On the legislation front, we do see increasing trends toward regionalization as opposed to unilateral legislation through the IMO, and I think that’s dangerous.

For example, the EU is looking at the potential for applying a market-based instrument, such as a carbon trading scheme, to ships.  The IMO is doing the same thing.  If you don’t meet in the middle somewhere, you now have two sets of legislation which is more difficult to manage, could create added expense, and potentially could compromise safety.

RA: How active is the IMO in trying to sort these regionalized issues out?

GW: I think the new IMO Secretary General, who I met recently, is very clear sighted with a good understanding of the industry.  He was making a point that the IMO has to take it’s place and be the leader in developing legislation for the industry, and engage with the stakeholders so that they maintain that status.

RA: Piracy is of significant concern within our industry, and I believe you spoke on this topic on Monday.

GW:  I think the point I keep making is that this is not a shipping industry issue, this is a political issue.  What the shipping industry is having to do is to manage the consequences of a failed state.  Shipping is providing a service to the world… that’s what it does.  The politicians need to understand that and governments need to ensure they are providing the right of safe passage.

That’s the biggest point I make on the subject of piracy.

RA: What sort of steps does Teekay take to mitigate the threat of piracy to your fleet?

GW:  We have ships sailing through the Gulf of Aden weekly, and we look at this issue from a risk-based approach.  An LNG ship, which has very high freeboards, may simply transit the area at high speed, whereas the steps we take with slower ships may be quite different.  In some cases, we do deploy armed guards with our ships.

US Secretary of State Hillary Clinton has mentioned the idea of making the payment of ransoms illegal and during a recent piracy conference in London that was one of the outcomes.  The point that the industry made is that there’s one thing to say we’ll stop paying ransoms, but what is the alternative that the governments will offer?

RA:  That’s a good question, because look at the situation now with the Iceberg 1 which was captured two years ago this month.  There doesn’t seem to be much of an alternative to paying ransoms.

GW:  If that becomes the case, what are the implications?  If you were a seafarer, would you transit in these areas?

RA: Certainly not.

GW: So that’s not a practical approach, nor commensurate with the situation.

The other theme I had is the tanker industry, which as you know, isn’t in good shape right now.  The biggest cost we have is fuel, which is running around $700 per ton.  Right now the way the situation works is someone has a cargo and they want to carry it to charter, they use a broker in many instances to negotiate a rate with an owner.  If you look at that, the owner is trying to get the best rate he can, the broker is trying to get the lowest rate he can for the charterer, and the charterer wants to get the ship from A to B safely.

The questions I was raising, and we’ve done some work with INTERTANKO on this, is why do typical charter parties operate on or about 14 knots?

And nobody can tell me where we came up with this number, and shouldn’t there be a more scientific approach to managing the logistics chain?

RA: I think to a certain degree, there is.  When you order a ship, the naval architects design the hull, propeller, and power plant based on a certain hull speed per the shipowner’s specifications.

GW: You’re right about that, but charterers and brokers need to be looking at these ships on a more detailed, voyage-level basis to determine a vessel’s optimum speed based on the cost per barrel landed, the emissions design index, and the TCE.

If you put all these things in a formula, you may be seeing that the ideal speed is 12 knots, not 14 knots, for a given voyage.  And actually, the TCE rate goes up because you’re using less fuel, emissions go down, and cost per barrel landed is cheaper for the charterer as well.

We need to engage the industry in looking at moving toward a formula-based type of negotiation for ship chartering.

RA: Rightship for example, works with shipowners to assist them in making informed decisions when buying used ships.  To put this in the context of buying a used car, they analyze ships from an efficiency standpoint so that shipowners can get an idea of what kind of “mileage” they’ll be getting.  Perhaps this same concept that Rightship is using could be used on a voyage-level basis someday.

GW: And the point you made was right as well.  Once you’ve optimized the logistics chain, what type of ships should we really be building for the future?  As you say, looking at the hull, propellor, and machinery.  So that’s another area I think the industry needs to engage themselves in.

RA:  At the EEDI panel yesterday, one or two of them were pretty adamant about not building anymore ships, taking a step back to look at this issue, and to come up with some new ideas.  Is increasing efficiency by 20 percent with existing technologies feasible, or should we really thinking outside of the box and coming up with some other ideas to meet this goal.

GW:  I really think that 25 percent is easily achievable, but you need to optimize a lot of different things across the spectrum.

RA: I appreciate your time Graham, and the opportunity to talk with you.

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