Aker negotiating uncertain waters

With the global recession crimping demand for petroleum products, offshore drilling, and new ship orders, Aker Philadelphia Shipyard is feeling the pinch.

The nine-year-old Aker delivered its seventh product tanker in June and has orders for five more through early 2011.

But its only customer and buyer at the moment - American Shipping Co. - said this month it had still not been able to arrange financing for two of the five vessels.

One bright spot: A Brazilian petroleum company, Petrobras, wants to charter the two shuttle tankers and has signed a contract. Greg Matecki, American Shipping's chief financial officer, said he was "comfortable" that his firm would eventually obtain financing, and construction at the shipyard would not stop.

Aker's immediate concern is securing more orders for future ships - and keeping its 1,200 employees busy.

It takes Aker about 16 months to build a 10,000-ton tanker at a cost of $100 million.

Aker, which is the second-largest U.S. commercial shipbuilder behind General Dynamics Nassco, of San Diego, has four ships in various stages of production.

Because of the time it takes to get components, such as engines, Aker made financial commitments last year to build two additional tankers. But it has no buyers yet.

Company executives are spending a lot of time trying to convince potential customers that despite the economy, now is a good time to buy.

"It's a double-edged sword," said Jim Miller, Aker's president and chief executive officer. "On the one hand, the price of commodities, such as steel and things we buy for these ships, has come down. We've been able to lower our ship costs."

The negative is that, for the most part, the owners who want the vessels built need to secure bank financing, and credit is tight, he said.

With the price of crude oil down, major oil companies and refineries are in a holding pattern. "Money is not moving, and if the money is not moving, ships aren't going to get built," Miller said.

Aker builds ships under the U.S. Jones Act, an 89-year-old law intended to protect national security and U.S. shipbuilding by allowing only U.S.-made vessels to carry cargo between U.S. ports.

Aker's first four ships were cargo vessels designed to carry large containers, and they were delivered to Matson Navigation Co. to transport goods to and from California, Hawaii, Guam, and China. Those ships were delivered between 2003 and 2006.

The tankers under construction are part of a 12-ship deal, in which Overseas Shipholding Group of New York leases the vessels from American Shipping and charters them to U.S. petroleum companies.

In 2000, Aker, a unit of Norway-based Aker ASA, took over the former Kvaerner Philadelphia Shipyard. Norwegian entrepreneur Kjell Inge Rokke quickly made investments in Philadelphia and closed an initial deal with Matson. When Matson came back for a third and, later, a fourth ship, the yard's credibility grew.

"The vast majority of larger commercial ships built in the U.S. in the last five or 10 years have been coming out of Philadelphia," said Manuel "Manny" Stamatakis, chairman of the Philadelphia Shipyard Development Corp.

"Aker has made tremendous improvements since they built their first ship," he said. "The yard has state-of-the-art equipment, techniques, and the workforce has really gotten good at building ships."

Aker's immediate concern is to sell the two tankers, beyond the backlog of five. "It is absolutely the bridge to the future," Miller said.

After that, he said, he would like to see Aker diversify, whether building container vessels, windmill-installation barges for wind farms in the ocean, or short-sea vessels where goods are shipped by truck or rail in bulk to a U.S. port and then travel over water to another destination.

Longer term, Miller sees shipbuilding opportunities.

As a result of the oil-pollution act passed after the Exxon Valdez oil spill, single-hull ships must be phased out by 2015 and replaced with double-hull vessels that have an additional layer between the ship's oil tanks and the oceans.

Aker estimates there are 15 older tankers at sea that must be replaced or scrapped to comply with the law.

In a move that could potentially benefit Aker, the Philadelphia Regional Port Authority has authorized staff to apply for a federal grant, on behalf of a Newark, Del., wind-turbine firm, Blue Water Wind L.L.C.

The so-called tiger grants from the U.S. Department of Transportation could pay for 50 percent of the cost of specialty ships that erect electricity-generating wind farms. Aker could build those ships.

Another source of revenue for Aker could be building commercial vessels for the military. The Department of Defense now charters some foreign-made vessels, and members of Congress have questioned why the government does not use more U.S.-made ships.

"That would be another source of potential business for the yard, although this yard has focused historically on commercial shipbuilding," Stamatakis said. "Military is a whole different ball game."