Latin America Forecast: Sunny and Bright

MarEx Senior Copy Editor Jack O’Connell says, "The mood at Marine Money’s 6th Annual Latin America Ship & Offshore Finance Forum was decidedly upbeat. And why not? This region is booming."

The one-day event at the fabulous Eden Roc Resort on Miami Beach last week attracted delegates from as far away as Norway, Switzerland and the U.K., not to mention our colleagues from south of the border, of which there were a goodly number. Seated at my table were two representatives of Intertug S.A. of Bogota and Cartagena, Colombia, a 21-tug enterprise with operations extending along the northern tier of South America and into Central America. They were attending the conference for the first time. Why? Because they felt the time had come to venture beyond their usual haunts and spread the word about their dynamic company to a wider audience. They also wanted to see what was available in terms of financing and leasing and perhaps pick up a new customer or two.

They weren’t alone. Many others were doing the same thing. And there were plenty of opportunities between presentations to pursue new leads and renew old acquaintances. Not that the presentations were boring. On the contrary, they were well thought-out and hugely informative. The morning session was devoted to an overview of energy and shipping, the afternoon to financing and the capital markets. Aliza Fan of IHS Herold kicked things off by noting that upstream E&P spending in 2009 would be down 18 percent from the prior year, the first such decline in recent memory. The decline was particularly severe in North America – off 45 percent. E&P spending had doubled in the previous five years and seemed on an ineluctable upward trajectory until the price of oil collapsed in late 2008. Queried on her outlook for 2010, she demurred, noting that oil companies were only now putting together their budgets for the new year. Average finding and development costs (F&D) in 2009 were approximately $25.50 per barrel for oil and $4.52 per mcf for natural gas – meaning ample profitability for oil at its current price of $80 a barrel but squeezing margins for natural gas, trading at about $4.50 per mcf. Brazil subsalt and Canadian oil sands, Fan added, were potential game-changers

Next came Tom Kellock of ODS-Petrodata in Houston, who discussed the offshore market and observed that it could be described in two words – “Petrobras” and “Pemex.” The market for rigs and vessels is dominated by these two players, with Petrobras rising and Pemex falling. Petrobras’s appetite for all things that float and drill is, in fact, enormous. No fewer than 147 new vessels and 28 offshore rigs will be delivered between now and 2015 to help develop and produce the vast and newly discovered reserves in the Brazil subsalt. On a global basis, noted Kellock, the lower end of the rig market (read jackups) is currently depressed, particularly in the Gulf of Mexico, while rates and profitability improve with depth. The deepwater and ultra-deepwater are the places to be, with steady demand and solid rates.

Bernardo Pinheiro of Maersk Broker America followed with a discussion of the global tanker market. Tanker charter rates peaked in the third quarter of 2008 and have steadily fallen ever since. Not only did demand for oil decline in 2009 for the first time in 25 years, but there were also record deliveries of new vessel tonnage ordered in the boom years of 2005-8. This perfect storm of falling demand and rising supply naturally led to a collapse in rates. Although Pinheiro sees a modest increase in oil demand in 2010, he foresees no real recovery in the tanker market until the second half of next year. In Mexico and Brazil and Latin America generally, the situation is better. Sixteen of Mexico’s 19 tankers are single-hull and will have to be replaced. New tankers will be needed to deliver Brazil’s massive new reserves as that country becomes a net exporter of oil and oil products. Later in the day a distinguished tanker panel made up of Jesper Bo Hansen of TORM, Felipe Menendez of Ultrapetrol (Argentina) and Wilmer Ruperti of Maroil (Venezuela) confirmed Pinheiro’s outlook, albeit with a great deal of humor and insight thrown in, given that the outlook for Latin America is much brighter than the global forecast.

Two more of my table companions gave the final pre-lunch presentations. Stirling Leech of Clyde & Co. in Brazil discussed the legal intricacies of doing business in that country, which is not easy. He also noted that Petrobras will spend nearly $200 billion over the next five years on upstream E&P, so there’s a big pot of gold at the end of the legal rainbow, if you can navigate its intricacies. Juan Federico Ruenes of Holland & Knight’s Mexico City office followed with a discussion of vessel leasing strategies in Mexico.

Lunch was mercifully free of presentations, so you had time to do what these conferences are really all about – network and make new contacts and, hopefully, generate some new business. You also had time to catch up on missed phone calls and the barrage of email requests that daily assault each of us, whether you’re at a conference or not.

After lunch we were treated to a series of presentations on offshore financing. Joe Bob Edwards of First Reserve, the biggest private equity player in the energy industry (Riverstone is a distant second), noted that private equity firms were sitting on $500 billion (yes, billion) of uninvested capital and that Latin America offered a smorgasbord of inviting opportunities. In Mexico, the new Chicontepec field will replace Cantarell as the leading producer of oil and gas in that country and will require extensive foreign investment in order to fully develop. In Brazil, subsea construction will be huge, not to mention helicopters, which are needed to transport workers to distant offshore platforms and vessels. Peter Metzner of Cypress Financial gave an interesting presentation on leasing and lease-equity as an alternative to traditional bank financing, particularly in these difficult times when banks remain gun-shy and reluctant to lend. Metzner said his firm likes low-tech industries like shipping, which utilize long-lived, low-obsolescence equipment.

Sten Gustafson of Deutsche Bank discussed the capital markets, noting that the equity and high-yield sectors were showing signs of life, while M&A activity was “picking up” and offered a “window of opportunity” in the current quarter and before year-end. He pointed out that many firms faced “looming maturities” of term loans and high-yield issues in the 2011-2014 time frame and would be well advised to refinance early, before the rush begins. A panel of bankers then offered a sobering view of the difficulties global banks faced, weakened and humbled and government-dependent as many of them are. Their contribution to the economic recovery would be constrained by the raft of defaulted assets on which they sit and are reluctant to foreclose.

Perhaps the most interesting of the afternoon presentations was that of Harry Vordokas of Germanischer Lloyd (GL). Vordokas, an engineer, discussed vessel operating costs and the fact that fuel constituted the single largest variable in that equation, representing about 36 percent of a typical vessel’s costs. With bunker prices having more than tripled over the past five years and currently averaging about $700 a ton, variations in hull design, trim, rudder cavitation and, of course, vessel speed can make a huge difference in fuel costs. GL’s ECO (Energy Consumption Optimization) program can uncover ways to reduce energy consumption significantly, paying for itself in as little as two years, claimed Vordokas.

Readers of the May/June 2009 issue of MarEx already know all about this thanks to Joe Keefe’s incisive reporting, and an article by Christopher Petrie in the upcoming issue sheds even more light on this fascinating and often overlooked topic. The issue is made all the more urgent and relevant by the emissions strictures of MARPOL VI and the looming deadlines for Tier II (20 percent reduction in NOx emissions) and Tier III (80 percent reduction in NOx emissions when operating in Emission Control Areas) compliance in 2011 and 2016, respectively. Tier II and Tier III will require the use of much more expensive low-sulphur fuels, so any reduction in fuel consumption will translate into significant savings. “Fuel efficiency is the key to survival for vessel operators going forward,” stated Vordokas, who claimed that alterations in vessel speed could result in savings in fuel consumption of as much as 10 percent; ditto for hull alterations, with up to five percent savings from adjustments in trim and appendages.

At the end of the day (not my favorite expression, but a fitting way to end this article since it was, in fact, the end of the day), it was a conference well worth attending and made all the more pleasurable by the Miami Beach ambiance and the quality of the attendees. – MarEx

Jack O’Connell is Senior Copy Editor of The Maritime Executive.