Piracy Pushes Up Cost of Crude Oil Transport

Nairobi, Dec 21, 2009 (The Nation/All Africa Global Media via COMTEX) -- Piracy in the Indian Ocean is beginning to take its toll on oil firms as shipping companies jack up the cost of transporting crude oil to Mombasa.

High freight charges resulting from increased insurance risk cover purchased by vessel owners have pushed up the cost of transport and other operations.

Marketers in Kenya are incurring additional costs of between $500,000 and $1 million to hire a tanker with a capacity of 80,000 metric tonnes as piracy has spread from the Gulf of Aden in the Somali coast deep into the Indian Ocean.

According to Petroleum Focus Consultants, the cost to insure oil tankers is rising along with the risk because pirates are using more sophisticated weaponry like rocket launchers to hijack large tankers and demand multi-million-dollar ransoms.

Increased danger

"Shipping operators will face more expensive premiums as a result of the increased danger of navigating areas such as Gulf of Aden and along east coast of Africa," said Petroleum Focus director George Wachira.

A significant increase in piracy could deter ship owners from using the Indian Ocean route, a move likely to disrupt the availability of oil products in the local and regional markets that depend on Kenya and Tanzania for supplies.

Marketers are now incurring additional costs of between $6.25 and $12.5 a tonne to deliver one metric tonne of crude oil to Mombasa as tankers sail an additional 1,100 nautical miles into the Indian Ocean to avoid the normal route off the Somali coast.

A tanker sailing from the Gulf first heads towards India, then veers south to the Seychelles prior to heading to Mombasa, adding an extra four days travel on to the normal seven days to avoid the pirate-infested waters.

Delivery risks

On November 25 oil marketer KenolKobil warned that delivery risks had increased as reputable vessel owners expressed reluctance to sail the Indian Ocean as the piracy that began along the Somali coastline has now spread into the wider ocean.

On November 20 the Margarita, a tanker heading from Mombasa to the Gulf, was attacked by pirates in six small boats firing grenades that hit the ship's accommodation quarters and life guards.

The tanker was 950 nautical miles from the nearest continental mass and 450 nm off the Seychelles archipelago.

KenolKobil said there are indications tanker owners will declare the entire ocean a high-risk zone, and those still willing to sail it will charge high deviation costs due to increased risk insurance premiums. The result will be expensive fuel.

Ships have marine (hull) insurance which covers risks like grounding or damage from heavy seas. War risk covers acts of terrorism and, increasingly piracy, while a third type of policy of protection and indemnity covers crew.

"The war risk policy includes a clause that requires extra insurance charges for ships that venture into areas considered as high risk because of geopolitics and piracy among others," Mr Wachira said.

Since last month, Somali pirates appear to be back with a vengeance, attacking ships plying the Indian Ocean and Gulf of Aden after seasonal monsoon weather kept the modern-day buccaneers onshore.

The International Maritime Bureau (IMB) received 306 piracy reports in the first nine months of this year, compared to 293 for the whole of 2008.

Extended reach

The bureau said Somali pirates have extended their reach to the southern region of the Red Sea, the Bab el Mandab Strait and the east coast of Oman. Clive Stoddart, head of the kidnap and ransom team at Lloyd's broker Aon, advises ship owners to review their insurance cover if transiting the Gulf of Aden or parts of the Indian Ocean in light of the recent rise in pirate attacks.

He says even though the Gulf of Aden is now relatively well-protected by naval vessels, the Somali basin is a vast and relatively unprotected body of water. "Traditional marine insurance policies do not always cover piracy, so ship owners should consider specialist marine kidnap and ransom policies," he said.These provide guaranteed access to advice at the time of an incident in addition to reimbursement of the ransom, cost of delivery of ransom and legal charges that may occur during a period of illegal seizure.