Lightering - The Back Story

Fall 2009

http://www.osg.com/index.cfm?pageid=74&itemid=29

The Sabine lightering a VLCC in the U.S. Gulf of Mexico

Lightering, a relatively new market for OSG, involves the process of transferring cargo
from a larger vessel (typically a VLCC or Suezmax) to a smaller vessel, or service ship
(typically an Aframax). In general, lightering is done when restrictions such as depth of
water, narrow entrances or small berths impede a large vessel from entering a port.
Lightering can also be done in reverse, loading from a terminal and carrying cargo out to a
bigger vessel offshore. Service-only lightering is the provision of hoses, fenders and
mooring masters to ships without providing the service ship. The number of lighterings
performed in the United States is largely driven by long-haul crude oil import volumes,
which fluctuate depending on demand for petroleum products and refinery utilization. It is
also a fast-paced environmentcargoes bought and sold while afloat, changing customer
requirements, short scheduling horizons, mooring and unmooring vessels offshorethat
requires best-in-class skills both at sea and on shore.
OSG Lightering Stakes Its Claim
OSG Lightering, the Company's international flag lightering division, boasts a broad
customer base of more than 20 multi-national oil companies and major oil traders. A team
of 12 shoreside staff and 17 mooring masters and assistant mooring masters is headed by
Managing Director Jim Enright. Based in Houston, U.S. Gulf operations expanded to the
U.S. West Coast in 2007 and in 2009 to the U.S. East Coast, with access to a workboat
stationed on Staten Island, New York.
"We have assembled a seasoned team of commercial and technical professionals focused
on what's most important to lightering customers: on-time performance," says Jim.
"Customers also care about logistical coordination, follow-up and using the best equipment
available. Ultimately, our customers receive a more consistent, cost-effective delivery of
their cargo from OSG." While industry-wide lightering volumes are down compared to last
year, OSG Lightering volumes are up, thanks to our market share doubling to 36 percent,
resulting from competitive take-aways and strong marketing and performance efforts.
Cooperation in the Name of Optimization

In down markets like today, lightering provides a natural hedge to the more volatile
Aframax spot market, as business is predominantly conducted based on fixed-rate
contracts with customers. In the second quarter of 2009, average TCE rates earned by
Aframaxes in the lightering trade were US$27,542 per day compared with US$16,757 per
day for Aframaxes trading spot. Further, the synergies between OSG Lightering and our
commercial pools Aframax International (AI) and Panamax International (PI) are even
more compelling. The AI pool operates the largest Aframax fleet in the Atlantic Basin,
which makes ships available to OSG Lightering for use as service ships and enhances
reliability and on-time performance for lightering customers. The benefit to AI is it can
take advantage of the waiting time between transatlantic and Caribbean voyages to go on
hire in the lightering trade.
"The relationships between OSG Lightering and AI are win-win for everyone," says Mats
Berglund, Senior Vice President and Head of the Crude Oil strategic business unit, which
includes OSG Lightering. "With good communication about vessel positions, both parties
can optimize utilization of its fleet." In a big friendly Texas way, there is even good
cooperation between the three competing lightering companies and oil companies that run
their own fleets so that ships can be swapped to maximize utilization. Jim explains, "We
each charter our ships to the other party and take their ship in return at an agreed rate
and delivery date. Swapping boosts fleet utilization and on-time performance, which is a
key performance indicator for our customers."
The Fleet at Work
The OSG Lightering fleet currently comprises eight OSG-controlled Aframax vessels, of
which four are service ready, meaning outfitted with davits and fenders, and five
workboats that deliver equipment to service ships. Additional ships are chartered-in on a
short-term basis. In the U.S. Gulf of Mexico, lightering takes place 60-to-80 miles offshore
in designated lightering zones, whereas operations off the U.S. West Coast are completed
130 miles offshore. Lightering areas in the U.S. Gulf are relatively shallow, seas are
typically low and swells are minimal. Director of Marketing Clayton Wrenn says, "The
Pacific Ocean is a different story all together. The seas are big, with average swells of 10
feet in the best weather. Sea depth at the lightering areas is 3,500 feet or more, making it
impossible to anchor. Challenging conditions require seasoned mooring masters and
specialized equipment that only OSG Lightering provides."
U.S. Flag Lightering
OSG's U.S. Flag lightering in the Delaware Bay is based out of the Company's Philadelphia
office and is a Jones Act business. The Delaware Bay lightering operation is made up of
three vessels and services seven refineries handling between 240,000 barrels per day
(bpd) and 280,000 bpd representing 17 percent of the total refining capacity in the region.
A shoreside staff of seven based in Philadelphia along with the lightering crew eagerly
await the arrival of two new 330,000 barrel capacity ATBs. These are the largest ATBs ever
built, the first of which is expected to deliver in December 2009. "We'll soon have the
ability to carry larger parcels for our customers and to lighter larger ships and river-traded
cargoes," says Tom Burgess, U.S. Commercial Vice President of Business Development.
"From a technical perspective, the new vessels will be fully capable of vapor balancing and
heating cargo, which will also lead to higher volumes."
Complying with the stringent vapor balancing regulations of DNREC (Delaware Department
of Natural Resources and Environmental Control) will be easier as the new ATBs have
closed vapor balancing, which controls the amount of hydrocarbon emissions into the air as
cargo is transferred from ship to ship. The environmental standard is closely measured and
monitored by the lightering coordinator during the operation and monthly by shoreside
staff against total barrels lightered to maintain compliance. Another good piece of news is

that a long-time competitive threat to the business was recently put to rest. A proposal by
the U.S. Army Corp of Engineers to dredge and deepen the Delaware River was recently
denied by DNREC. Dredging would have enabled larger vessels to transit the river,
eliminating the need to be lightered. All of Delaware Bay lightering is arranged by
Lightering Scheduler Mary Ann Brinkos, who has worked in the lightering organization for
28 years and on site at Sunoco since 1995. She works to optimize utilization of OSG
America's fleet between Sunoco, which accounts for 70 percent of the U.S. Flag lightering
business and two other major customers, Conoco Phillips and Valero.
A Bright Future Ahead
In the near term, OSG's lightering operations offer good reasons to be optimistic:
expansion and anticipation of new business when oil demand increases, the significant
amount of oil stored on tankers offshore that will deliver to refineries and new ATBs for the
U.S. Flag fleet. Looking forward, both international flag and U.S. flag lightering groups
offer operational synergies and profitable growth potential, making them integral to OSG's
future.

Do
You
Know
How
Long
It
Takes
to
Lighter
a
VLCC?
Typically a VLCC has about 2 million barrels of cargo to transfer and needs four Aframax
size parcels of about 500,000 barrels each to be completely lightered. This takes about a
day for each parcel, or four days for the entire operation. Oftentimes a VLCC may be
discharging a portion of her cargo to the LOOP (Louisiana Offshore Oil Terminal), in which
case only a portion of the total VLCC cargo is lightered.
Market
Size
In 2008, U.S. seaborne crude oil imports averaged 8.1 mbpd, about two-thirds of which
were destined for the U.S. Gulf of Mexico (GOM). There are approximately 1,400 lightering
lifts per year in the GOM, far exceeding lightering activities on both the west and east
coast areas.