356

Views

Storm Season

Hurricanes and other natural disasters mean big business for the global salvage industry, which is struggling with declining revenues and higher risks.

Global Salvage

By Tony Munoz 2017-12-08 08:50:08

(Article originally published in Sept/Oct 2017 edition.)

Hurricanes Harvey and Irma were catastrophic events that crippled southeast Texas, Louisiana and Florida and devastated the eastern Caribbean. Estimates of storm damage costs range from $150 to $200 billion, and the nation could lose up to $30 billion in economic output.

The hurricanes blasted through strategic economic areas of the U.S., leaving death and destruction in their wake and long-term economic uncertainty. Hurricane Harvey, which made landfall in Texas as a Category 4 storm on August 25 and produced record flooding, left about a quarter of U.S. refining capacity shut down, which only started back up in mid-September.

HURRICANE CLEANUP

Salvage companies were still clearing the Houston Ship Channel at the time of this writing, and Texas ports remained closed to large crude oil tankers, limiting the discharge of imported crude as well as U.S. exports. The Colonial Pipeline, which moves more than three million barrels of refined products a day, was still partially closed as well.

In the aftermath of the two storms, salvage companies are working throughout the stricken areas of the Caribbean, Florida and Texas to clear waterways, remove sunken vessels and partner with federal, state and local governments on efforts to protect life, infrastructure and the environment.

Jim Elliott, Vice President of T&T Salvage, was the Executive Officer on the U.S. Coast Guard Strike Team in the Gulf of Mexico after Hurricane Katrina in 2005. He says Hurricane Harvey is comparable to Katrina in its pure devastation to the region: “T&T Salvage has been busy clearing the Houston Ship Channel, refloating a drill ship that was blocking the Port of Corpus Christi, and removing multiple sunken barges. It’s important to remember that our Gulf Coast employees were also personally affected by Harvey, but they left their families and went to work in the aftermath because that’s what we do. It’s in our DNA.”

In fact, all the salvage executives who spoke to me for this article were in the field at a job site or in a remote office. Todd Schauer, Director of Operations for Resolve Marine Group and current President of the American Salvage Association, was in Puerto Rico as Hurricane Maria barreled down:

“Resolve has been working in Texas after Hurricane Harvey, and I’ve been here in Puerto Rico trying to coordinate getting response assets into St. Thomas, St. Maarten and the British Virgin Islands. But we’re evacuating today due to Hurricane Maria.”

He adds that “Salvors provide services anywhere in the world at any time because we respond to catastrophic events like hurricanes and ship accidents. As soon as Resolve can begin to move again we will be sending an armada of assets into the Caribbean to assist in the recovery, but there is also civil unrest on some of the islands and that can present other risks.”

FUKUSHIMA

Hurricanes are not the only kind of natural disaster that salvors respond to. On March 11, 2011, a 9.1 magnitude earthquake shook northeastern Japan and unleashed a savage tsunami. The one-two punch was especially devastating. More than 500,000 buildings were damaged or complete destroyed, and about 16,000 people died. Today, of the 150,000 evacuees who lost their homes, more than 50,000 are still in temporary housing.

Hiroaki Hattori, Associate Deputy General Manager at Fukada Salvage, says his company was contracted for recovery and wreck removal of about 53 vessels including small tankers, fishing vessels and pleasure craft at the Port of Kesennuma. Fukada towed the M/V Shirase to the Port of Onahama in Fukushima to monitor radioactive waves, which were of concern after the meltdown of the Fukushima Nuclear Power Plant. The company also repositioned mega-floating barges to store reactor-polluted waters and assisted the port with its rebuilding.

“In the aftermath of the Great Tōhoku Earthquake,” Hattori says, “Fukada deployed salvage personnel and essential assets to support recovery efforts that are still ongoing today.”

AN INDUSTRY IN CRISIS

Disasters like earthquakes and the recent hurricanes have put salvors on the front lines of waterway and harbor cleanup, pollution abatement and wreck removal – and none too soon. The three- year-old recession in global shipping has hit salvage companies hard, and the International Salvage Union (ISU) reports that its members have been providing more services but for less revenue.

Headquartered in London, the ISU is the representative organization for the industry. With 60 member companies from 34 countries, it restricts membership to only those companies with reputable salvage and pollution-prevention records and who conduct their business in accordance with the ISU Code of Conduct.

The ISU says its members suffered a forty-seven percent de- crease in revenues last year. Meanwhile, vital services to the ship- ping industry increased. “The numbers show a contradiction,” says outgoing ISU President John Witte. “It would be expected that a 47 percent drop in total revenue would have been brought about by a reduction in the number of cases. However, the total number of cases for both dry salvage and wreck removal increased from 276 in 2015 to 437 in 2016. Clearly, the average revenue from all cases declined. It may be due to fierce competition forcing salvors to undertake cases for much lower returns.”

Revenues from Lloyd’s Open Form (LOF) cases also declined, totaling just $69 million in 2016, the lowest since 2003. LOF is one of the oldest commercial contracts for salvage, and its principle of “no cure, no pay” means risks – both financial and physical – are on the salvor. Under LOF, the salvor receives a proportion of the salved value of the ship, its cargo and bunkers when the job is completed, and it’s considered a practical and expedient way to proceed, avoiding up-front negotiations and speeding response time.

But critics argue that the “no cure, no pay” clause can deter salvors from responding to high-risk or low-value casualties, resulting in higher expenses and increased environmental damage. Ships are getting larger and more complex, and responding to a mega-casualty like the Costa Concordia can create a whole new set of consequences and liabilities for financially strapped salvors.

After the Deepwater Horizon disaster many responders were drawn into frivolous lawsuits, which tested the willingness of salvors to respond to such catastrophic events. Confronted with marine firefighting, deepwater salvage and pollution mitigation challenges, they must keep investing in essential equipment for the new generation of ships and employ highly trained response professionals. Yet the rewards for such investment are not commensurate with the risks involved in extreme work under emergency conditions.

CHANGING THE BUSINESS MODEL

In an effort to keep crews and equipment employed, salvage companies have ventured into other services, such as offshore decommissioning, where they can maximize their expertise in engineering, technology and contracting. Fukuda Salvage recently invested in ROVs and autonomous underwater vehicles in order to work in deep sea exploration and help Japan develop its marine resources.

Ardent, which was created by the merger of Crowley Maritime’s Titan Salvage and Svitzer Salvage, took on a new challenge last year when it provided the Crystal Serenity, which sailed through the Northwest Passage, its Global Preparedness Cover to support the voyage. The 820-foot luxury cruise ship carried 1,070 passengers and 655 crew members on a 32-day voyage from Anchorage to New York City.

Ardent response staff were on 24-hour standby and maintained a network of tugs and barges, including divers, on alert as the ship sailed through the Bering Strait and across the Canadian Arctic to Greenland and the northeastern U.S. before docking in New York. “Ardent has continuously developed its response capabilities for the Arctic region with company assets and strategic partners,” says Operations Director Shelby Harris.

As the ice caps continue to melt, the Arctic will begin to see much more commercial traffic. In August the ice-class Russian LNG tanker Christophe de Margerie sailed on its maiden voyage from Norway to South Korea in just 22 days without an icebreaker escort. The voyage of the 80,000-ton-capacity tanker was hailed by Russian President Vladimir Putin as a big step in the opening of the Arctic to commercial traffic, which is expected to grow tenfold by 2020.

GOVERNMENT TO THE RESCUE?

The salvage industry provides valuable services to the shipping community and public at large but is being squeezed financially by operators, underwriters and competitors. If it is to remain vigilant and available, it needs enhanced funding from government and industry in order to reinvest in equipment and personnel.

The demands of the future are happening today in the Arctic, and mega-ships are moving people and goods in the trade lanes. How will the industry deal with the next incident if salvors are not supported? Will it be a chaotic dogpile of wannabe companies or will the professionals arrive on the scene?

While there are no remedies offered here, we would like to offer our appreciation to the men and women at salvage companies around the world. Thanks for being on the frontlines of disasters!       MarEx

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.