Piracy Spurs Threats to Shipping Costs

(by John W. Miller, WallStreetJournal.com) – The seizure by pirates of a giant Saudi oil tanker far off the coast of Kenya could enlarge the “war risk” zone that already is [increasing] insurance costs for thousands of ships heading west of Africa, further raising the cost of piracy to world-wide shipping.

More vessels have begun avoiding the direct passage most often attacked by pirates and taking a much longer route around the southern tip of Africa. They’re hoping to pressure governments along the direct route, through the busy Gulf of Aden, to crack down more effectively on piracy or lose revenues from cargo-ship traffic.

But the unprecedented attack disclosed Monday on the MV Sirius Star, carrying $100 million worth of crude [oil] hundreds of miles from shore in the Indian Ocean, is undercutting that strategy. It could raise the cost of insurance and crews for ships that take the longer route, which already costs far more in fuel.

The boldness of the attack on the 1,080-foot Sirius Star may prompt insurers to require special “war risk” insurance costing tens of thousands of dollars a day to cover travel across a much greater area of water. It also could spur shippers to hire more onboard security for their vessels, which many have resisted because of costs and the fear of escalating armed conflicts with the pirates.

“This could be a game-changer,” says Peter Hinchliffe, maritime director of the London-based International Chamber of Shipping. “It’s no secret the whole industry is looking into this.”

Governments and shippers have sparred over who should bear responsibility for fending off the pirates, who seized 26 ships in the region during the summer alone and have collected up to $30 million in ransom so far this year, according to the International Maritime Bureau.

Shippers’ business is falling steeply amid the financial crisis and the slowdown in global trade. They are loath to take on extra costs such as hiring more security themselves. But there are more and more exceptions. Cyprus-based Interorient Marine Services is one firm looking into hiring licensed security guards, who would cost approximately $60,000 per trip, says company security officer Annes Lind.

Interorient trains its captains and crew on how to avoid pirates. Last month, when one of its tankers was attacked, captain Russell Davies increased the ship’s speed and drove S-patterns until a Spanish ship arrived. “The pirates’ bullets were going ‘ping’ off the side,” he says.

Mr. Davies says he would welcome an armed presence on board. The company already pays its crews double for every day spent in the Gulf of Aden, says General Manager Peter Bond.

Pirates attacked in the Gulf of Aden again Tuesday when a Hong Kong cargo ship laden with 36,000 tons of wheat headed for Iran was hijacked. Also Tuesday, the International Maritime Bureau said pirates on Monday hijacked a Thai fishing boat in the Gulf with 16 crew members.

The fate of the Saudi oil tanker anchored by the pirates near Harardhere, Somalia, remained unclear Tuesday evening. “At this time, Vela is awaiting further contact from the pirates in control of the vessel,” said Dubai-based owner Vela International, shipping arm of state oil company Saudi Aramco.

The North Atlantic Treaty Organization and the U.S. Navy’s Fifth Fleet said they would keep four warships in the Gulf of Aden, off the coast of Somalia on Africa’s horn, where most attacks have occurred.

If attacks continue, insurers will continue raising rates for ships making the trek through the Gulf of Aden and the Suez canal until governments prove they can clamp down on the pirates, says Simon Beale, an underwriter with Amlin PLC, a London-based underwriter.

Some 6,500 tankers, carrying 7% of the world’s oil, used the route in 2007, according to Lloyd’s Marine Intelligence Unit, many of them U.S.-bound. Pirates attack around one of 10 ships in the area; most attacks are unsuccessful, according to the International Chamber of Shipping.

In May, insurers declared the Gulf of Aden a “war-risk” zone subject to a premium of tens of thousands of dollars per day, say insurance and shipping companies. That could now be extended to the long route around Africa. “The jury’s still out on whether to declare the Cape route a war-risk zone,” says Brendan Flood, an underwriter for Hiscox, a syndicate of Lloyd’s of London.

Container vessels, which carry most trade in manufactured goods, sail too high off the water for pirates to board and are relatively fast. The slower-moving tankers and dry bulk vessels that carry oil, chemicals, coal, wheat and other commodities have more to fear.

Some shippers say they’re still confident vessels going around Africa can evade pirates by steaming even farther offshore than the Sirius Star. Odfjell SE, a Norwegian company with 100 chemical tankers, says it is now diverting all its vessels around Africa, at an extra cost of $30,000 a day. The route adds five days on a run from Asia, and 10 days from the Middle East.

The company, however, will save on the $200,000 fee the Egyptian government charges to use the Suez canal. “We’re hoping if other companies join us, we can put enough pressure on the Egyptian and other governments to solve this problem,” says Chief Operating Officer Jan Hammer.

Rob Lomas, secretary general of London-based Intercargo, a lobby group, says national shipping associations plan to step up a campaign for more protection off the East African coast.

Write to John W. Miller at john.miller@dowjones.com.

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