APPENDIX J Methodology for Determining Ship Replacement Costs

This appendix describes the methodology used in Chapters 4 and 5 in calculating whether a tanker owner will choose to extend the life of an existing single-hull tanker or replace it with a new double-hull tanker. The methodology is adapted from ICF Kaiser (1995). Data used in the committee's analysis are provided in the tables.

The analysis simplifies the decision process by assuming that the only decision to be made is whether or not to go through the fifth special survey1,2 and operate for another five years, after which the tanker will be scrapped and replaced. The annualized cost of continuing to operate the single-hull vessel, including the special survey costs, is compared with the annualized cost of purchasing and operating a new double-hull vessel in place of the single-hull vessel.

The least expensive alternative for a pre-MARPOL (the International Convention for the Prevention of Pollution from Ships, adopted in 1973 and amended in 1978) tanker when operating after age 25 is hydrostatically balanced loading (HBL), although such a tanker cannot trade to the United States unless it uses the deepwater port or the lightering areas. No investment is required, but cargo capacity is reduced between 3 and 8 percent because of the HBL requirement. To operate the tanker another five years, the annual costs involved are:

EC/year = OChbl + {CAPhbl - [SCRAP/(1 + i)5] + SS} x {i/[1 -(1 + i)-5]}

1  

Special surveys are required every five years by classification societies and will apply whether the ship-owner is operating under the International Maritime Organization Regulation 13G or the Oil Pollution Act of 1990 (P.L. 101-380).

2  

For the Jones Act vessel analysis in Chapter 5, the methodology has been modified to include decision points at both the fifth and the sixth special surveys.



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--> APPENDIX J Methodology for Determining Ship Replacement Costs This appendix describes the methodology used in Chapters 4 and 5 in calculating whether a tanker owner will choose to extend the life of an existing single-hull tanker or replace it with a new double-hull tanker. The methodology is adapted from ICF Kaiser (1995). Data used in the committee's analysis are provided in the tables. The analysis simplifies the decision process by assuming that the only decision to be made is whether or not to go through the fifth special survey1,2 and operate for another five years, after which the tanker will be scrapped and replaced. The annualized cost of continuing to operate the single-hull vessel, including the special survey costs, is compared with the annualized cost of purchasing and operating a new double-hull vessel in place of the single-hull vessel. The least expensive alternative for a pre-MARPOL (the International Convention for the Prevention of Pollution from Ships, adopted in 1973 and amended in 1978) tanker when operating after age 25 is hydrostatically balanced loading (HBL), although such a tanker cannot trade to the United States unless it uses the deepwater port or the lightering areas. No investment is required, but cargo capacity is reduced between 3 and 8 percent because of the HBL requirement. To operate the tanker another five years, the annual costs involved are: EC/year = OChbl + {CAPhbl - [SCRAP/(1 + i)5] + SS} x {i/[1 -(1 + i)-5]} 1   Special surveys are required every five years by classification societies and will apply whether the ship-owner is operating under the International Maritime Organization Regulation 13G or the Oil Pollution Act of 1990 (P.L. 101-380). 2   For the Jones Act vessel analysis in Chapter 5, the methodology has been modified to include decision points at both the fifth and the sixth special surveys.

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--> EC/year is the annualized extension cost of passing the special survey and operating another 5 years. OChbl is the operating cost of the tankers with reduced capacity due to HBL, SS is the special survey cost. CAPhbl is the capital cost associated with HBL, assumed to be zero. i is the annual discount rate assumed to be 10 percent. [1 - (1 + i)-5] is a factor that spreads out capital costs into their annualized equivalents, using the discount rate. SCRAP is the value of the tanker when scrapped. Each year the vessel is kept in operation delays realization of the scrap value by one year, so the scrap value is divided by a discount factor raised to a power equal to the number of years of life remaining for the tanker, assumed to be 5. The costs of operating the tanker must be compared to the costs of buying a new tanker. This comparison must include a factor reflecting the reduced carrying capacity of the existing tanker with HBL. The annual costs of a new double-hull tanker are: NC/year = {OCnew + (CAPnew) x [1 - (1 + i)-25]} x (1 - CAPREDUC) NC/year is the annualized cost of buying and operating a new double-hull vessel, as adjusted for changes in the carrying capacity of the existing vessel. OCnew is the annual operating cost for the new tanker. i is the annual discount rate, assumed to be 10 percent. [1 - (1 + i)-25] is a factor that spreads out capital costs into their annualized equivalents over 25 years (the assumed economic life in years for a new double-hull tanker) using a discount rate i. CAPnew is the capital cost of the new tanker. CAPREDUC is the reduction in carrying capacity in an existing vessel as a result of HBL (i.e., reducing the costs of the new vessel to compare it with the decreased carrying capacity of the existing tanker). The most difficult factor to estimate is generally the special survey cost SS. For an excellently maintained vessel the minimum cost will be $435,000 for dry-docking and survey (with no extra costs for repairs). Typically, one would expect the cost to be several million dollars more if repairs such as replacement of steel and the opportunity cost of an extended stay in the repair yard are included. The equations above can be evaluated using estimated data. If the special survey cost is not known, the equations can be solved for it as shown below. SS = (OCnew + (CAPnew) x {i/[1 - (1 + i)-25)]}) x ((1 - CAPREDUC)/{i/[1 - ( 1 + i)-5]}) —OChbl/{i/[1 - (1 + i)-5]} —[CAPhbl - SCRAP/(1 + i)5] This value can be expressed as the break-even special survey cost. If the actual

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--> TABLE J-1 Data for Calculating the Cost of Tankers in International Trade ($ million) Vessel Size (DWT) Existing Vessel Parameters Double-Hull Parameters   OChbl CAPhbl SCRAP CAPREDUC (%) i (%) OCnew CAPnew i(%) 40,000 3.80 0 1.60 0, 5, 8 10.0 3.20 33.50 10.0 60,000 4.10 0 1.80 0, 5, 8 10.0 3.40 37.00 10.0 140,000 5.10 0 3.20 0, 5, 8 10.0 4.20 54.00 10.0 280,000 7.00 0 5.20 0, 5, 8 10.0 5.80 85.00 10.0 special survey cost is higher than this, buying a new double-hull tanker would cost less than trying to get another five years out of the old single-hull tanker. Alternatively, if the actual special survey cost is lower than the break-even special survey cost, the owner would opt to continue operating the single-hull tanker for another five years. Data used in cost calculations for the international trade in Chapter 4 and the Jones Act trade in Chapter 5 are provided below in Tables J-1 and J-2, respectively. The cost data were taken from the ICF Kaiser study (1995) and other sources used in the report. Although vessels are presented as being particular sizes, each ship actually represents a size range. TABLE J-2 Data for Calculating Costs for Jones Act Tankers ($ million) Vessel Size (DWT) Existing Vessel Parameters Double-Hull Parameters   OChbl CAPhbl SCRAP CAPREDUC (%) i (%) OCnew CAPnew i (%) 40,000 (tanker) 7.60 0 1.60 0, 10, 24 10.0 5.60 41.90 10.0 120,000 (tanker) 11.20 0 2.80 0, 10, 24 10.0 8.10 67.00 10.0 13,000 (barge) 3.20 0 1.10 0, 10, 24 10.0 3.20 9.60 10.0 Reference ICF Kaiser. 1995. Regulatory Assessment of Supplemental Notice of Proposed Rulemaking on Structural Measures of Existing Single-Hull Tankers. Prepared for U.S. Department of Transportation. Cambridge, Mass.: Volpe National Transportation System Center.

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