Fuel Solutions: Shelter from the Financial Storm

By Susan Buchanan
Monday, March 10, 2014
The Steamship Authority’s M/V Eagle ferry serves the Hyannis to Nantucket route.

Vessel operators seek protection by hedging fuel needs. It’s easier than you might think. 

Some workboat operators defend themselves against higher diesel prices by buying futures contracts, while others purchase fuel at prices fixed in advance from their suppliers. Others, perhaps less-savvy and/or smaller companies, however, take their chances by buying in the spot market. While some operators are uncertain about their future fuel requirements and consumption, domestic ferry operators for the most part know exactly what they’ll need in the year ahead. For these passenger vessel and commuter ferry outfits, the need to protect themselves against fuel spikes can lead to creative solutions – like, for example, ‘hedging’ when purchasing bunkers. It’s easier than you might think.

Options
When it comes to defending your operating budgets and, at the same time, sparing paying passengers the pain of sudden fare increases, you do have options. In February, we asked Richard Larkin, president of Hedge Solutions, Inc. about workboat operators and hedging. His Manchester, NH-based firm provides risk management to fuel users, distributors and retailers. One client is The Steamship Authority in Massachusetts, the largest ferry service operating between Maratha’s Vineyard, Nantucket and Cape Cod.
“Our vessel operator clients use ultra-low sulfur diesel fuel,” Larkin explains, adding, “All vessels need to adhere to federal diesel-program regulations. But right now we have a patchwork quilt of federal and state regulations.” Low sulfur and ultra-low sulfur diesel, or ULSD, is being phased in for non-road, locomotive and marine or NRLM engines from 2007 to 2014, according to the U.S. Environmental Protection Agency. Those changes, along with new pollution-control technologies, will cut emissions from engines by over 90 percent, the agency says. The changes will also cost operators money, as it is more expensive to produce ULSD and the new hardware solutions also come at a premium.

Hedging, Fixed Price Contracts & Surcharges … Oh My!
ULSD prices rose to $3.15 a gallon last August and have since eased a bit. Fuel prices remain volatile, but even now, only a small percent of U.S. workboat operators hedge their costs. “My finger in the wind guess is it’s less than 10 percent,” Larkin said. “A lot of operators view hedging in futures as mysterious, and it makes them nervous. We’re trying to demystify it, to get them to use hedging as a way to control their budgets.”
Larkin discussed the ways vessel operators can protect themselves against higher fuel. “The ones that hedge use the Chicago Mercantile Exchange’s (CME) Nymex ULSD futures contract for paper hedging, or else they’re facilitating their hedging through fuel suppliers with fixed-price contracts,” he said. “They tend to buy further out on the calendar in the Nymex market and well into the future.” CME New York Harbor ULSD futures are traded in all calendar months, going out four years.
“Vessel operators, like The Steamship Authority, are planning a year in advance,” Larkin said. “A user might be long a futures contract, or buying call options, with the expectation of buying physical diesel down the road.” One CME Nymex contract is 42,000 U.S. gallons or 1,000 U.S. barrels.
A user’s hedge plans might be made when the company decides its next annual budget. “We often meet with companies then,” Larkin explained. “A company might draw up its annual budget in the winter and will make its hedge plans a year in advance. They’re looking at a price point, asking where risk exists for them. They look at futures prices and try to plan around them.” But given the market’s volatility, “timing-wise, one never knows when prices will be advantageous,” he added. For The Steamship Authority, he says, “we plan during their lowest volume months in the winter, before the high-volume summer months, which have the biggest impact on them,” Larkin said.

Hedging 101
Hedging in futures can be done a number of ways. “One approach is to use perpetual hedging twelve months forward, doing it on a rolling-forward basis,” Larkin said. When a futures contract is about to expire, the position is moved into a more distant month. Being unprotected against fuel price surges can hammer a firm. “A tugboat company that isn’t hedged, or doesn’t have a fuel surcharge, quotes someone a future job, then fuel prices go up,” Larkin said. “An unhedged OSV operator quotes a job and fuel prices rise. A ferry service that isn’t hedged may have to raise ticket prices at the last minute because of higher fuel.”
And surcharges don’t necessarily work in the marine industry. “In some cases, when a user tries to offset an increase in fuel prices with some kind of surcharge, the surcharge isn’t enough,” he said. Then too, operators employing a customer surcharge must decide whether to remove it if diesel prices retreat. For any vessel operator who relies on a surcharge, however, “there are ways to hedge it, and things you can do to augment it,” Larkin said.

Fuel: Big Expense for Ferry Operators
Wayne Lamson, general manager of The Steamship Authority, said the service’s biggest annual costs are wages and employee benefits, fuel and insurance. “Fuel, including the cost of hedging, has accounted for 9 to 10 percent of our annual expenses in recent years,” he said. “We started using Hedge Solutions in 2009 after trying to do our hedging in house. We were concerned when crude oil reached $150 a barrel in 2008.”
The Authority knows about how much fuel it will need in the year ahead. “After working on our annual budget each fall, we set our ticket prices in the winter for the next summer,” Lamson said. “We don’t use customer surcharges. Customers start buying their ferry tickets for the summer early in the year.” As for the fuel it uses, The Steamship Authority switched to ULSD five or six years ago. “We’re long two Nymex contracts, so we’re about 90 percent hedged,” Steamship Authority treasurer and comptroller Robert Davis said. “Although hedging has been a net cost to us in recent years, we’re protected if something happens to fuel prices on the upside. It’s like having fire or health insurance; you’re covered during adversity.”
Meanwhile, at Washington State Ferries, the largest such service in the United States, fuel is the fastest-growing, operating expense. Fuel accounted for over 29 percent of its fiscal 2011 to 2013 costs, versus 12 percent when the decade began. “In FY12 and FY13, we locked in prices in advance on 10.8 million gallons of fuel or about 50 percent of fuel consumed,” WSF deputy chief Jean Baker said. “We did this with our fuel supplier through fixed-price physical contracts. The prices we paid were less than what we’d budgeted for those gallons.” Savings, in this case, were considerable.
Fuel used by WSF isn’t hedged in the futures market now. “We’re working to get financial hedging contracts in place,” WSF spokeswoman Joy Goldenberg said. Lamson said The Steamship Authority will have another ULSD-fueled ferry built soon. When asked about LNG, he said it’s the vessel fuel of the future. “LNG is popular in Europe, and we’ll be considering it down the road,” he said. LNG is used to fuel ferries in Norway, Japan and Argentina.

Peace of Mind
Hedging strategies aren’t free, but buyers can choose from a wide range of brokers and/or consultants to get the job done. Larger operators with a bit more wherewithal might even get the job done in-house, if their operating budgets allow for that kind of staff expertise. For those who choose an outside service, Richard Larkin says, “Fees are all over the map and depend on the size of the hedge program, and on how many hours a broker or consultant assists on it,” Larkin said. “Fees usually come in anywhere from a quarter of a cent to a penny a gallon, depending on the work involved.”
A vessel operator who negotiates a reasonable fee with a hedge manager and has a price-protection program in place has peace of mind if diesel prices suddenly spike. A ferry service that’s hedged doesn’t have to ask customers standing at the ticket counter to cough up higher fares. And, a professional boat delivery service can safely quote a fixed price contract without worrying about a fuel increase eating the entire profit margin. ECA’s, increasingly low sulfur bunkers and a dozen other variables can negatively impact your fuel purchasing power. Today, and for those employing hedge strategies, price doesn’t have to be one of them.



(As published in the March 2014 edition of Marine News - www.marinelink.com)
    
 

  • Richard Larkin, President of Hedge Solutions, Inc.

    Richard Larkin, President of Hedge Solutions, Inc.

Maritime Reporter July 2015 Digital Edition
FREE Maritime Reporter Subscription
Latest Maritime News    rss feeds

Finance

Work Begins on $1.6 bln Container Terminal at Jebel Ali Port

DP World Chairman Sultan Ahmed Bin Sulayem announced the start of construction work on a brand new container terminal at Jebel Ali Port, Dubai.   Phase 1 of the

Singapore MPA Wants LNG Bunkering Options

Singapore's Maritime Port Authority is seeking proposals on liquefied natural gas bunker supplies as it shifts away from fossil fuels towards gas while trying to

China's Navy Drills in South China Sea

China said it conducted air and sea drills in the South China Sea on Tuesday as it stakes an increasingly assertive claim to virtually the whole sea despite rival claims by neighbours.

Fuels & Lubes

Diesel Spill in Houston Ship Channel

A small section of the Upper Houston Ship Channel was closed Tuesday morning after a report of 1,000 gallons of diesel entered Greens Bayou from a cement facility, the U.

Singapore MPA Wants LNG Bunkering Options

Singapore's Maritime Port Authority is seeking proposals on liquefied natural gas bunker supplies as it shifts away from fossil fuels towards gas while trying to

Rolls-Royce Bolsters R&D for MTU Engines

New R&D test facilities in Friedrichshafen already in service; 40 million euros invested for greater fuel economy and lower emissions    Rolls-Royce Power Systems

Vessels

New Research Vessel for University of New Hampshire

All American Marine, Inc. (AAM) has entered into a contract with the University of New Hampshire (UNH) for the design and construction of a new aluminum catamaran research vessel.

Carnival’s Costa Brand Orders Two LNG Cruise Ships

Costa’s two new cruise ships will be the largest ever built based on guest capacity; Costa will join sister brand AIDA Cruises in building the first-ever cruise

Rolls-Royce Power Package for USS Zumwalt

Rolls-Royce announced delivery of the twin fixed pitch propellers to Bath Iron Works for installation on the U.S. Navy’s most modern surface combatant, the future USS Zumwalt,

Ferries

Calais DFDS Ferries to Restart Tuesday; Talks to Reconvene

DFDS Seaways Calais-Dover ferry service, suspended by a workers' blockade of Calais port during the weekend, will resume on Tuesday morning, Transport Minister

Nile Collision Death Toll Rises to 31

The death toll from a boat collision on Egypt's Nile river Wednesday has risen to 31, a ministry of health spokesperson told Reuters on Friday. The accident occurred on the Nile near Giza,

US Senate Panel Ends Restrictions on Travel to Cuba

U.S. Senate panel passes amendment to end restrictions on travel to Cuba   The U.S. Senate Appropriations Committee voted 18-12 on Thursday to end restrictions on Americans travel to Cuba,

 
 
Maritime Careers / Shipboard Positions Maritime Security Maritime Standards Naval Architecture Offshore Oil Pipelines Pod Propulsion Ship Electronics Ship Repair Winch
rss | archive | history | articles | privacy | contributors | top maritime news | about us | copyright | maritime magazines
maritime security news | shipbuilding news | maritime industry | shipping news | maritime reporting | workboats news | ship design | maritime business

Time taken: 0.0078 sec (129 req/sec)