Savvy Fuel Management Fuels TOTE’s Growth

By Joseph Keefe September 24, 2014

As Tote pioneers the use of natural gas as a marine fuel with two groundbreaking projects, Anthony Chiarello combines the strength and diversity of the Saltchuk group of companies with a forward-thinking, environmentally correct Tote business plan.

As TOTE prepares to bring the world’s first natural gas-powered containerships to the maritime industry, the firm will also be the first to convert its existing fleet to run on natural gas. Two Orca Class vessels, operated by Totem Ocean Trailer Express (Totem Ocean) in the Alaska trade, will be converted with minimal time out of service and return as the most environmentally advanced ships in the nation. At roughly the same time, TOTE’s Marlin-class vessels will arrive and arguably be the most advanced, environmentally responsible vessels of their kind – reducing vessel sulfur emissions by 98 percent while providing safe, reliable cargo deliveries that keep communities moving. The first two Marlin-class vessels will be built at the General Dynamics NASSCO shipyard in San Diego. These American-made ships are scheduled to be delivered in late 2015 and early 2016, and will operate between Jacksonville, Florida and San Juan, Puerto Rico. NASSCO is also designing the conversion of the Orca vessels.
That part of the story isn’t breaking news, but the nexus of why it came about and how TOTE President and CEO Anthony Chiarello and his team will execute their business plan, certainly is. Chiarello, who joined TOTE (formerly American Shipping Group) in August of 2010, was previously COO and executive vice president of NYK Logistics (Americas), Inc. Prior to NYK, Chiarello was with the AP Moller/ Maersk organization for 16 years. Before that, Chiarello served as Deputy Executive Director of the Maryland Port Administration in Baltimore, Maryland. Along the way, he learned a few things about planning and logistics. That experience is evident as he guides TOTE forward – and leads the maritime industry – into a new era of environmentally responsible transportation.
TOTE’s headlong rush into LNG power and the realignment of the organization’s five operating companies into three distinct lines of business is not without risk. A lot of water has since passed under the proverbial bridge since the decision to repower the fleet and build still more vessels was made. The concept of using LNG as a fuel on this side of the pond has gathered momentum, but also seen setbacks in terms of commitments for bunker infrastructure and other fuels and environmental strategies have emerged. For his part, Chiarello hasn’t wavered one iota from his grand plan. MarPro caught up with him mid-summer at his Princeton, NJ offices for an update on all things TOTE, as well as his assessment of the state of the industry.

Fueling Change
As far back as the Spring of 2010, TOTE began an exhaustive investigation as to how its Alaska ships were going to meet the soon-to-be implemented eco-requirements. They looked at everything, including scrubbers. Chiarello explains, “After that two-year investigation, we came to the decision to convert the Orca ships to LNG. So that was the beginning of LNG for Tote as a marine fuel and then it just became a very easy decision when we decided to construct the Marlin ships to go with LNG as well. We’d already done the homework relative to the Orca conversions.”
Pressed on the wisdom of his decisions regarding LNG, now with two years of hindsight in his back pocket, Chiarello refused to concede a single point about his retrofit and newbuild plans. Concerns over the uncertain future price of LNG, the arrival of a (possible) new white knight in the fueling mix (methanol), the high cost of infrastructure – both on board and ashore – and the slow pace of progress on the domestic bunkering scene did not seem to concern the TOTE CEO.
Addressing the price issue first, Chiarello insists, “We did not – and I’ve said this every time I’ve been asked – make this decision from an economic perspective. We made this decision purely from an environmental impact perspective. When we first started the Orca conversion project, I said, ‘We don’t know what the cost of LNG is going to be when the ships come out. We hope it’s low, but we don’t know.’ So our decision was solely based upon the environmental impact of LNG. We hope that there’s an economic benefit as well, but we’re making a significant, half-billion dollar investment between the two new ships as well as a reconversion and re-engining of the Orca ships.”
In terms of today’s price, Chiarello couldn’t even guess as to where it was, adding. “I don’t follow it. I don’t watch it closely, to be honest with you, because it really doesn’t matter until the first ship is launched. But I don’t think it’s moved much and we don’t expect that it will.”
Logistics, as it turned out, played a large role in TOTE’s decision(s). Chiarello pointed to the fact that the domestic U.S. market is different than it is overseas. Not always constrained by the ECA’s, it makes sense for a carrier transiting open ocean much of the time to go with a low-sulfur diesel engine that you can scrub, if needed. The decision process for domestic, Jones Act carriers is a little different. Chiarello says, “Our Alaska trade is in the ECA one hundred percent of the time. We never get outside of 200 miles. Our Puerto Rico service, we estimate is probably around 35 to 40 percent of the time we’re in the ECA. So, absolutely – the LNG makes sense for us.” Using the Baltic bunkering model as an example, he added, “We have two ports of call, running two ships a week. It’s just a ferry service, basically, back and forth. As long as you know where you’re going, the logistics work.”
Conceding that the cost to build these environmentally correct vessels was 10 to 15 percent higher than those being built with conventional propulsion, TOTE’s CEO also addressed the question of lost deadweight and TEU capacity due to the LNG bunker configurations. He also declined to estimate how long it would be before TOTE earned back the engine price differential, saying instead, “The capacity loss, approximately 55 TEUs, is less than 2 percent. A very small amount.” And he added, because TOTE is bringing in twice the TEU capacity in that trade corridor, the built-in economy of scale for that route will be increased by a factor of two. Chiarello insists, “Losing 50 TEUs wasn’t really a factor in the decision. Absolutely not.”
As to the apparently slowing of bunkering infrastructure construction ashore, TOTE, says Chiarello, is naturally watching the developing landscape but remains not only upbeat, but on schedule with their own particular arrangements. “As soon as we announced that we were going to go with LNG in the new builds and also the conversion of the Orca ships, there were no less than half a dozen parties, literally, every week contacting us about being LNG suppliers, being partners with LNG suppliers. Shell [in reference to the oil major’s pullback in several high profile North American LNG projects] is a big player in that landscape, but there are other significant players, and as a result, we’ve got a network of what we feel very strong partners for the LNG supply in the Pacific Northwest, which we haven’t formally announced yet. In the Southeast, in the Jacksonville area, we have arrangements with AGL Resources, Pivotal and WesPac. So we have no concern today or going forward relative to having LNG supplied for our vessels, on either coast.”
Like Harvey Gulf CEO Shane Guidry, Chiarello and TOTE have no intention of ever running their new and repowered hulls on anything but LNG. Both CEO’s cite the enhanced maintenance issues that running on diesel would bring. On the other hand, TOTE went for the ‘dual fuel’ option for other reasons, some of which weren’t immediately obvious to the market. Chiarello explains, “We went dual fuel, in part, because these are U.S., Jones Act vessels. The military, as happened to one of our ships many years ago in Desert Storm, could come to us and say, ‘We need your ships. We’re in a time of war.’ With LNG, you know, our tankage is going to be enough to handle the trades that we’re in which are very short; +/- 1,200 nautical miles. But, If they’re going to end up going over to the Middle East or Asia, they will have to burn diesel. So, we want to be flexible to not have a stumbling block from a fuel source side, to be able to make those requirements.”

Partnerships: building blocks for LNG
TOTE is the first to admit that the effort to bring LNG propulsion to the container trades is anything but a task to be done in a vacuum. And the list of industry parties stirring the pot in the kitchen is wide, and it is impressive. General Dynamics NASSCO is constructing the Marlins at their shipyard in San Diego, CA while Daewoo Ship Engineering Company part of Daewoo Shipbuilding and Marine Engineering is providing the vessel design. Significantly, TOTE is the launch customer of MAN‘s innovative ME-GI engine design with the main and auxiliary engines manufactured by Doosan. LNG bunkering will be handled by Pivotal LNG, Inc., a wholly owned subsidiary of AGL Resources, and WesPac Midstream LLC will supply LNG in Jacksonville, FL.
In July, the arrival of the world’s first dual-fuel slow-speed engine at NASSCO marked the next phase of construction for TOTE’s Marlin Class vessels. Earlier this year, Doosan completed the engine’s Factory Acceptance Tests, a culmination of months of testing to ensure compliance with U.S. regulations and restrictions. In addition to the engines, two 900 cubic meter tanks, manufactured by Cryos, were delivered. These massive stainless steel cryogenic tanks weigh 380 tons each and will store liquefied natural gas aboard the Marlin ships.
Separately, Norwegian-based Air Products was selected by TOTE to provide Nitrogen Membrane Generators for the vessels. The system, approved by all international marine standards, has a reduced footprint and lowers the operational cost at the same time. Maintenance is kept to a minimum thanks to a robust design and carefully selected materials. Air Products also provided Nitrogen Membrane Generators – a key safety component for any LNG system – to another North American LNG pioneer, Harvey Gulf International Marine. Harvey Gulf, in its own niche OSV market, is transforming the offshore oil service sector in much the same way TOTE is shaping the future of ocean freight. For its part, Air Products has been in business for more than 30 years and claims a market share of 90 percent, having delivered almost 400 systems over time.
In terms of the Orca conversions, new standards for environmental responsibility will be set by reducing sulphur oxide (SOx) emission by 100 percent; particulate matter (PM) by 91 percent; nitrogen oxide (NOx) by 90 percent; and carbon dioxide (CO2) by 35 percent. In this case, Wärtsilä will supply main engines, generators and integrated LNG storage and fuel gas handling systems (LNGPac).

Shuffling the TOTE Deck
The realignment of five operating companies into three distinct lines of business – Tote Maritime, Tote Ship Management, and Tote Logistics, was, says the TOTE CEO, a carefully planned and executed move. He explains, “We wanted to re-brand and leverage some of our existing businesses. And certainly Totem was the first company that Saltchuk ever purchased. It had the strongest brand, so that’s when we decided to use Tote as the overarching holding company brand. And then we looked at our businesses and said, ‘We’re in marine – obviously Sea Star and Totem Ocean – we had some logistics services under the brand of Spectrum, which was in the Southeast.’ We hadn’t yet purchased Carlile Transportation. And we had what was previously known as Inter-Ocean American Shipping. So we had ship management, we had some logistics and it was definitely a look ahead that logistics would grow to try to leverage our existing asset infrastructure, and we had the maritime piece. When we started looking at rebranding, we placed it into three buckets: maritime, logistics, and services. And that’s how we’ve grown up from there. And any acquisitions we do, any organic growth, we try to keep into those three buckets.”
The three distinct lines of business interact with one another. But, Chiarello insists that putting targets of placing certain percentages of business within one group or the other is not the way to go. “We don’t do that to the point of saying, ‘You’re responsible for putting 10 or 20 percent of all the logistics business that you do on a Tote ship or on a Sea Star ship.’ I don’t think that drives the right behavior. I think it should be first what the customer needs and wants – it may be a Tote ship, it may not.”
When the talk turns to TOTE, people invariably want to focus on the LNG and the newbuilds because it’s exciting. But, there is more going on there than just LNG. The Saltchuk Group, TOTE’s parent, has grown to over 20 independent companies, 5 operating groups with TOTE being one of them. Today, TOTE is the biggest division within the Saltchuk Group, representing as much as one-third of all revenues. Fleshing out that relationship a bit more, Chiarello says, “The TOTE group has been a core part; it remains a very strong focus of the group, very capital-intensive, the largest capital-intensive group within the Saltchuk division. And, I think it just continues to provide a foundation for our growth in the Jones Act trades.” Chiarello pauses, and adds, “All of our divisions are very important; we all interact very, very closely. Take Foss, or interstate transportation, as an example. But I think there’s kind of a fondness in their heart for the Tote group of companies because of the fact that was the first acquisition that the founders ever had.”

TOTE & LNG: underway, full speed ahead
At NASSCO, the first hull is already under construction, with the keel laid. With the first piece of steel cut in February of this year, the launch of that ship will take place April of 2015. Chiarello adds, “It’s right on schedule, actually a little bit ahead of schedule. And then the launch of the second, hull 496, will take place the end of August 2015. We’ll take delivery early in the 4th quarter of the first hull, and delivery of the second hull early in the 1st quarter of 2016. So we’re actually a little bit ahead of schedule.”
Options for three additional ships, says Chiarello, have expired. “We had to execute. We probably could have held the options longer if there hadn’t been such a significant uptick in construction of Jones Act vessels, because the yard was getting full. So we just weren’t ready to pull the trigger on options yet.” That said; the market should not assume that TOTE isn’t bullish on what’s to come next.
Shedding full light on their plans – with or without the option vessels – Chiarello says, “Our position is that we’re running two vessels today of around 1,200 TEUs. These new vessels will be 3,100 TEUs, so the capacity that we’re bringing, or the capability of capacity that we can handle, is significantly greater than what we’re doing today.” Significantly, about half of that capacity will be capable of handling 53-foot containers.
The 53 foot model works in the Caribbean trade, and as Chiarello already knows, it works in Alaska. That’s because, if you don’t have to unpack a 53-footer that comes down the highway, you just roll it onto the boat, faster, with less labor involved and more economically. Chiarello adds, “That’s what we do in Alaska. They’re roll-on/roll-off ships exclusively. In the current trade today, we have, in Puerto Rico, a portion of the ship is roll-on/roll-off; a portion of the ship is lift-on/lift-off. So we wanted to go to lift-on/lift-off because we think in that particular trade it’s more efficient from a vessel perspective, but we needed 53-foot capacity. So we ended up going with half the ship being 53-foot.”
According to Chiarello, the on board combination will make TOTE’s competitive position extremely strong for that trade, insisting, “It’s going to be a major paradigm shift. Crowley was a year or so behind us on their announcement, and you see what they’re doing – they’re having some 53-foot capacity, as well. We believe it’s the right equipment for that trade.”

Looking Ahead
With the intent of improving its position in the trades that they currently service and growing the logistics platform (through acquisition of Carlile), the corporate vision of becoming a broader supplier of transportation and logistics services is coming to fruition. Chiarello charts the future by saying, “I think we’ll continue down that same path. Looking at trades – Jones Act trades – that we’re not in today, there’s one, obviously, very glaring place that comes to mind. So, we have thought about how we possibly service that market because there’s a lot of customers that ask us about it.”
Chiarello continues, “Hawaii is the one place that we don’t have ships and I’m not sure that we will have ships there any time in the near future, but there are other ways to provide logistic services into those trades, maybe as an NVOCC or something like that. So, we need to continue to look at that, because I’ve been in this business for 35 years, and I’ve always been very customer-focused. And if your customer who you’re providing reliable and timely and cost-effective services in Puerto Rico and Alaska says to you, ‘What about Hawaii?’ then, if we don’t have ships, we need to figure out how to meet their needs.”
In the end, Chiarello points to the fact that, very soon, he will be running the most environmentally responsible vessels in these trades. “If you can prove that, most times, if not a large percentage of the times, customers are willing to pay a premium for that. Because then they can go sell that to their customers and say, ‘Look, we’re running on the Tote ships and they are the most environmentally-friendly ships in the trades that they service.’ We aren’t in Hawaii today. Hopefully, someday we will be.”

Long Terms Rewards: more than awards
In May, TOTE President & CEO Anthony Chiarello was among 11 individuals honored by the White House as 2014 transportation industry “Champions of Change.” Chiarello was chosen for his role in leading the U.S. maritime industry toward natural gas as fuel. Separately, and before that, the Marlin-class earned the Next Generation Shipping Award at the 2013 Nor-Shipping Conference, making TOTE the first U.S. company to take home this prestigious award.
Chiarello takes the accolades in stride, saying only, “Certainly those awards were very humbling for the group. I don’t look at it for me; I look at it as for the group. Because as a result of the work of many people both internal folks within the Tote organization as well as partners such as the Coast Guard and MARAD and our suppliers on the LNG side, we were able to put in a solution here for Jones Act ships that hadn’t been done previously. That’s exciting and very rewarding.”
Given everything that’s happening at TOTE in 2014, it probably shouldn’t be any surprise that Saltchuk – TOTE’s parent – was also named in March by the Ethisphere Institute, an independent center of research promoting best practices in corporate ethics and governance, as a 2014 World’s Most Ethical Company. No doubt TOTE and Chiarello’s management team played a big role in that decision. With scores generated in the five key categories of ethics and compliance program, reputation, leadership and innovation, governance, corporate citizenship and responsibility and culture of ethics, the undisputed domestic leader in green marine practices probably got started with a leg up on the competition. And that’s exactly where Anthony Chiarello wants TOTE to stay. As he embarks on that effort, not too many folks will bet against him.