Onshore and Offshore: The New Maritime Norway

Abstract

At the end of the 20th century Norway had a very vibrant shipping sector. Tenold shows that the manner in which it is organized has changed substantially. Deep-sea shipping is practically completely manned by foreigners, and there has also been an increase in multinational ownership. The industry has become professionalized and more like other industries. In addition to the traditional merchant marine, Norway had the world’s second largest fleet of oil rigs and supply vessels, operating all over the world. In contrast to most other European countries, Norway—together with Denmark and Greece—managed to maintain a substantial shipping industry despite the tendency for such activities to “go East” by relocating to Asia.

At the beginning of the 20th century, Norwegian shipping had a significant position, both domestically and internationally. Shipping was one of the cornerstones of the Norwegian economy, and no country had put so much of its resources into their merchant marine. Although there was a predilection for relatively outdated sailing tonnage, Norwegian owners had managed to carve out important niches in the world market. However, the strong expansion that had characterized development in most of the second half of the 19th century appeared to be over.

From the late 1870s to 1900 the Norwegian share of the world fleet declined, from around 6 per cent to between 4 and 5 per cent.¹ However, the fleet was in the midst of a structural transformation. The technological shift from sail to steam and wood to steel led to changes in a number of areas: the trades in which the ships operated and the manner in which they were managed, the skills that were needed both at sea and on shore, the localization of shipping companies, the manner in which vessels were financed, and so on.

At the end of the 20th century Norwegian shipping was going through a similar structural transformation related to the increasing activities within offshore petroleum exploration. Both the “Norwegian” and the “shipping” element had changed significantly over the preceding 100 years. The standard, early 20th century definition of a Norwegian ship—a seagoing vessel with Norwegian flag, Norwegian seafarers and Norwegian owners, but typically operating all over the world—would no longer be relevant. Moreover, “shipping” had become a far more diverse activity than it was at the start of the 20th century, and during the century the geographic basis of the industry had developed. The North Atlantic, which was the main arena at the start of the century, had been supplemented by strong growth in other regions, with the Pacific becoming particularly important.

The Power Centre in the World Economy Shifts

The increasing role of Japan in the world economy and international shipping in the decades after the Second World War was just a harbinger of what was to come. Two generations of Asian “tigers”—led by the super exporters Hong Kong, Singapore, South Korea and Taiwan—were followed by the enormous resources of China.² The end result was a dramatic transformation of world production and trade in the second half of the 20th century.

The strong growth of international trade, investment and income in the second half of the 19th century is often referred to as the birth of the international economy. Resources in Africa, America, Asia and Australia—resources that had previously been left isolated and unused—became important in an intercontinental exchange of goods. The integration of resources from different continents led to a strong increase in both production and productivity. Nowhere was this more evident than on the American continent, particularly the northern part, where the coupling of European labour and capital with domestic land and resources led to “the first era of globalization.” It also paved the way for the strongest nation—the world’s first superpower—in the 20th century.

The post-war integration of several billion Asian workers and consumers in the international economy has had a similar effect, although the economic importance has been more important than the strategic role. New technological possibilities have encouraged specialization and division of labour; outsourcing and foreign direct investment, from “Made in Hong Kong” in the 1970s to “Made in China” in the 1990s. Gradually, Asian countries have produced and exported more and more advanced products—to the benefit of workers at home and consumers abroad.

For many European companies, the Asian expansion came at a cost, as businesses that were unable to compete had to downscale production or seek subsidies or other types of support. The manufacturing sector was particularly vulnerable, and deindustrialization was a phenomenon that demanded a tough social and economic transformation in many Western countries.³ However, the imports from Asia were only part of the story. Although low-cost production in Asia was seen as a culprit in much of the rhetoric about the loss of manufacturing jobs in the Western World, increasing wealth (giving a higher relative demand for services), productivity growth and domestic outsourcing were more important than international trade in explaining the loss of jobs within manufacturing.⁴

A case in point is the shipbuilding industry. When the demand for new ships dried up during the shipping crisis of the 1970s and 1980s, European authorities responded first by subsidizing production, then by orchestrating a controlled downsizing—and in some instances total removal—of the industry. Theshipbuilding industry moved to Asia—where three countries are now totally dominant, particularly in the high-volume segment of the industry. China, Japan and South Korea produced around 90 per cent of the world’s tonnage in the first decades of the 21st century

In the last part of the 20th century and the beginning of the 21st, Norway was lucky. The country’s industrial structure—primarily exporting raw materials and services rather than manufactured products—meant that this high-income economy got a double benefit from the manner in which globalization unfolded. The demand for petroleum and shipping increased, pushing up the price of the country’s exports. At the same time, the spread of low-cost production put a downward pressure on the price of the country’s imports—but without any serious adverse effects on Norway’s domestic industries.

The result was a massive improvement in the terms of trade—a measure of how much import a given amount of export can buy. From 1995 to 2000, the Norwegian terms of trade, measured relative to its most important trade partners, improved by almost 40 per cent.⁵ The only other time Norway had seen a terms of trade improvement as strong as the one around the year 2000 was during the First World War, when shipping earnings, in particular, boosted export prices.

The Centre Shifts at Home

As conventional shipping declined and the exploitation of oil and gas increased, the power centre of the Norwegian economy gradually shifted from one volatile maritime industry to another.

Norway started the 20th century as one of the world’s leading maritime nations, sending ships and sailors all over the world to carry goods across the sea. At the end of the century, Norway was still a major shipping nation—and Norway’s welfare was still closely linked to the sea. However, the country’s shipping industry was both quantitatively and qualitatively different from what it had been 100 years earlier. Some of the main features of the last century—the rapidly increasing ship sizes and the reliance on distant markets—had been reversed over the last decades. This reflected the fact that traditional seaborne transport—deep-sea shipping in foreign waters—was supplemented by local activity related to the offshore petroleum industry. In 1992 the offshore fleet—including rigs and ships—made up less than 19 per cent of the value of the Norwegian fleet. By 2006 the share was more than 40 per cent, and this increased to approximately half of the fleet, if the shuttle tankers serving in the North Sea are included.⁶

In the last decades of the 20th century the offshore workers on platforms and vessels had more in common with the fishermen than with the sailors a hundred years earlier. They work in a maritime setting, often near the Norwegian coast, harvesting resources, those of the sea and those below the seabed. There was thus a proximity to Norway and Norwegian society that was very different from that of the old sailors on sailing ships or early steam vessels, whose visits to Norway were short and far between.

Traditional deep-sea shipping saw an increased concentration in the last decades of the 20th century, reflecting the fact that the activity has increasingly been confined to a few major maritime centres, from which large parts of the Norwegian merchant marine were managed and operated. Many of the smaller home ports along the coast relied on a handful—or even fewer—companies, and if these folded and there was no longer a critical mass, the result was often the complete disappearance of shipping. At the beginning of the new millennium almost three-quarters of the Norwegian fleet was controlled by companies in Oslo and Bergen.⁷ Several other communities—Grimstad, the Tønsberg area, Haugesund—also retained companies involved in deep-sea shipping, but for many coastal towns and cities the link to the sea was largely lost, as shipping companies gave up or moved elsewhere.⁸

While traditional shipping saw regional concentration, the services related to the offshore petroleum exploration resulted in a new distribution of the activity along the coast. The establishment of a petroleum-industrial complex in Stavanger, which was chosen as Norway’s “oil capital,” implied that much of the oil and gas activities were centred there. The city’s shipping companies took advantage of the possibilities. Tellingly, Smedvig, the city’s major shipping company, was an early investor in oil rigs and facilities for the offshore sector. Following disastrous investments in supertanker tonnage, the company made the transition to a full-fledged rig company in the middle of the 1990s.

The shipping side of the Norwegian offshore industry around the turn of the millennium exhibited two traits that it shared with the development of foreign-going shipping more than a century earlier; the international component and the local component.

With respect to the international dimension, the industry built up skills and competence in local and regional markets. This was subsequently used to gain market share in foreign waters. The offshore industry is in the process of doing the same, although it still has a stronger home presence that the shipping sector did around 1900.⁹

There is another parallel at the local level, concerning the manner in which the offshore industry is embedded in local communities. The expansion of Norwegian shipping in the 1850s and 1860s was primarily based on ships built, equipped, financed and manned locally, particularly on the South Coast. For the offshore supply vessels, there was a similar local base, though the centre had shifted to a number of smaller villages on the West Coast. The majority of the supply companies are located north of Stavanger, south of Bergen and in Møre og Romsdal, a county previously primarily known for fishing.

The offshore industry was characterized by new and more advanced solutions. Shuttle tankers and floating production/storage vessels revolutionized the production process, and the latter types of vessels became particularly important in connection with the exploitation of marginal oil blocks with limited reserves. Supply shipping saw a similar move towards more advanced vessels. Converted fishing vessels began to be replaced by purpose-built supply ships at the beginning of the 1970s. By the last decade of the 20th century, there had been substantial growth and diversification of the supply fleet.

The new ships were not only larger and more powerful versions of the old platform supply vessels, designed for transport, support or anchor handling. There was substantial investment in ships that could perform advanced underwater (subsea) operations, ships with special equipment for seismic surveys, cable and pipe laying ships, construction vessels and so on. Some of the companies were based in traditional shipping centres such as Oslo, Kristiansand, Stavanger and Bergen. However, many smaller places were also engaged, including Skudesneshavn (with deep-sea shipping roots) and Bømlo, Austevoll, Fosnavågand Ålesund (mainly with a basis in fishing).¹⁰

As a result of the shift from deep-sea shipping to offshore, the structural composition of the Norwegian fleet changed. The strong growth after the introduction of the Norwegian International Ship Register (NIS) had included a number of large and relatively simple ships. Among those was Knock Nevis, the world’s largest ship, which had been declared a total loss after having been hit by bombs during the Iran-Iraq war. The ship was bought by Norman International, refloated, repaired and renamed: firstHappy Giant (1989–1991), then sold and renamed Jahre Viking (1991–2004).

Norman International is an example of the new manner in which shipping could be conducted. In the period 1985–1990 the company, primarily via ships bought by limited partnerships [kommandittselskap], rapidly built up a fleet of more than 4 million dead weight tons (dwt) and became Norway’s second largest shipping company. In 1991 the company decided to wind up operations, and make a quick exit—the fleet of 4.1 million dwt in January 1991 had dwindled to zero in January 1992.¹¹

The NIS euphoria in the late 1980s had given rise to a lot of speculative purchases. Even Rolf Sæther, Managing Director of the Norwegian Shipowners’ Association, criticized the companies that followed an “asset-play” strategy, based on an increase in shipping values, substandard tonnage and high gearing—often 80 per cent mortgage financing by the banks.¹² When vessel values collapsed in early 1992, following a strong reduction in freight rates, many of the newcomers were forced to ship their oars.

During the 1990s there was gradually a reduction in the role of large tankers and dry bulk ships, as the trend towards specialized tonnage continued. The competitive situation in the different segments partly explains this development—there was substantial variation in the profitability of the various parts of the shipping market. A survey of stock exchange listed companies in the 1990s suggests that while the average annual return on companies involved in chemical shipping and offshore was around 12 per cent, the corresponding figure for dry bulk companies was minus 7 per cent.¹³

The relative reduction in high-volume shipping in Norway was not unique. In fact, the transformation was far more muted than in other Western countries. In the last decades of the 20th century, two groups of countries, in particular, increased their importance in world shipping. The East Asian tiger economies took over a larger part of the value chain with investments in tonnage, and the Flags of Convenience continued to grow.

A Two-Faced Industry

As shown in Chap. 4, the shipping industry was a pioneer in the use of companies and registration in “unrelated” foreign domiciles. Until the beginning of the 1970s, Flags of Convenience were primarily used by American and Greek shipping companies, in addition to companies in some countries where special geo-political considerations played a role, such as for instance Israel. In connection with the shipping crisis, both the extent and the geographical spread of the use increased substantially.

The establishment of second registries—such as the NIS—only temporarily halted the move towards Flags of Convenience. In the last decades of the 20th century and the beginning of the 21st, Flags of Convenience have basically become “an industry standard.” Like fast-food chains, the leading Flags of Convenience offer miniscule and user-friendly variations of an established menu, with the pricing and the product on offer more or less identical, and speed of service an important competitive parameter. By the end of 2000, Panama had a fleet of almost 163 million dwt, Liberia more than 75 million dwt and the Bahamas almost 45 million dwt. The three leading Flags of Convenience controlled almost 38 per cent of the world fleet.

If we go “behind” the Flags of Convenience, and look at the actual ownership of the world fleet, the increasing role of Asia—and the disappearance of many of the old European shipping nations—becomes evident. A comparison of Table 9.1 and Table 2.1 reveals the massive changes in the ownership of the world fleet during the 20th century. Moreover, these changes reflect even more dramatic changes in world production, international trade and global income levels.

Table 9.1 The 15 most important maritime countries and territories, January 2001

With limitations on cross-border investments disappearing, a process of international consolidation took place in shipping, and there were many Norwegian targets.¹⁴ By joining the resources of the Høegh and Smedvig families, among others, Bona shipholding had become the world’s second largest operator of Aframax-tankers, oil tankers in the 60,000–100,000 dwt range, and also controlled a fleet of larger combination carriers. In 1999 the company was bought by the Bahamian company Teekay, based in Vancouver, listed on the New York Stock Exchange and originally established by a Dane. Two years later, Teekay took over Ugland Nordic Shipping’s fleet of 16 shuttle tankers, but the shopping spree was not over. In 2003 Navion, owned by the oil company Statoil, with a fleet of 50 vessels, was sold to Teekay for around USD800 million. With Stavanger as base, much of the shuttle tanker fleet had been consolidated under the auspices of this Bahamian-Canadian-Norwegian venture. In shipping, nationalization questions were becoming more and more complex.¹⁵

The internationalization of ownership was not a one-way street. Just like foreign interests bought Norwegian shares and ships, Norwegians invested abroad. For instance, after the merger of Bona and Teekay, the Høegh family was among the largest shareholders in the latter company. The Rasmussen family of Kristiansand had been Statoil’s partner in Navion, but sold its share before the Teekay takeover. Subsequently, the family reduced its exposure in Norway, but became major investors in Norden, one of the leading Danish shipping companies, where they at times owned more than 20 per cent of the shares.

The most well-known, and definitely most international, of all “Norwegian” shipowners, is John Fredriksen. After training and working as a broker in Montreal, New York, Oslo and Singapore, he moved to London in the late 1970s, became a Cypriot citizen in 2006 and used the Swedish company Frontline, listed on the stock exchanges in Oslo and New York, to become one of the world’s largest tanker owners. The case of Fredriksen illustrates that perhaps the whole idea of using the nation state as a label may become outdated in the case of shipping.¹⁶

Redefining the Maritime Nation

Up until the middle of the 1970s, Norwegian shipping had been dealt a very good hand in the card game that is domestic politics. Relevance, importance and money are always convincing arguments. The industry’s crucial role in the balance of tradehad been one trump card. More than 50,000 seafarers—many of them living in rural areas with few employment alternatives—had been the other. By the late 1980s, these arguments were no longer valid.

The Norwegian Shipowners’ Association had to look elsewhere when it wanted to convince the authorities that it was still relevant and important. Its new arguments centred around the idea that it played a crucial role in a broader maritime industry, what it referred to as Norway’s “maritime cluster.” The relationships and interconnections among companies that were engaged in different parts of the Norwegian maritime industry created competitiveness and value. Internationally leading companies—shipping banks, shipping insurance companies, naval architects and a classification society—depended upon the shipping companies.

Words are important. The shift from “shipping” to “maritime,” which was first introduced during the fight for NIS, gained ground. It was reflected in new cooperative organizations such as Maritimt Forum [Maritime Forum], established 1990, which promoted the significance of a wider network of maritime activities and businesses. Moreover, the argument was accepted by the authorities, who in the 1990s gradually replaced the notion of a “shipping policy” with the need for a “maritime policy.”¹⁷

In 1984 there had been a similar rebranding, when the Norwegian Shipowners’ Association changed its name from Norges Rederforbund (the Norwegian word reder means an individual owning ships) to Norges Rederiforbund (where a rederi is the Norwegian word for a shipping company). This change was more than semantic. It reflected the new realities and the manner in which the industry had developed; shipping had become a modern industry, where there was often a separation of ownership and management. As such, the name change was overdue. However, it was also a meaningful clarification vis-à-vis the general public; “we serve companies, not wealthy individuals.”

From the late 1980s onwards there was a shift in the reasoning about economic policy in many countries. Inspired by the Harvard professor Michael Porter, politicians and industry federations embraced the ideas of economic “clusters,” where competitiveness was enhanced by interplay between agents in a specific industry.

The Norwegian Shipowners’ Association was among the pioneers in the use of such arguments in a Norwegian context. A huge research project on the competitiveness of Norwegian industries emphasized the strong international position of the maritime industry in general and the shipping companies in particular. They were the driving force in “the most complete, the most international and the most knowledge-based” industrial cluster in the country.¹⁸ The very first table in the 1992 report on Norwegian shipping presents “maritime employment.” Deep-sea shipping companies—referred to as the “core activity”—employed 22,300 Norwegians, around a quarter on land and more than 17,000 on rigs and on NIS- and NOR-registered ships. However, the central message was the fact that these people were crucial for the wider maritime activities, which added almost 40,000 employees.¹⁹

For more than 150 years the demand for Norwegian shipping has been quite detached from local markets. Consequently, the driving force in the maritime clusters is not the competition for customers and market shares domestically. Rather, it is the competition for labour and skills, technology, knowledge and ideas in the local market. Moreover, the strength of the cluster allegedly lies in the manner in which the shipping companies interact with companies performing auxiliary functions such as insurance, finance, consulting, classification and research.

The maritime cluster contained a number of companies that had managed to climb on the shoulders of Norwegian shipping companies and build up leading positions internationally. Det Norske Veritas had developed a substantial consulting and naval architecture business along with its role as one of the leading international classification societies. The company had also followed the shipping companies into the North Sea and beyond, and built up a position as an important technical and business consultant for both shipping and offshore companies.²⁰

Another group of companies that had managed to develop strong international market positions were the maritime insurance companies, which in 2000 received premiums amounting to almost USD600 million. Hull and protection and indemnity (P&I) insurance each made up around 40 per cent of the total, with energy and cargo insurance providing the rest of the turnover.²¹

The initial international expansion of Norwegian banking to a large extent followed in the slipstream of Norwegian shipping. They “followed their customers” and the one area in which they had “unique competence” was within shipping.²² London-based Hambros Bank was the banker par excellence for the Norwegian state, and also for Norwegian shipowners. The bank employed a substantial number of Norwegian nationals, and was a typical merchant bank, based on relationship banking. In 1968 three Norwegian Banks, in cooperation with a Dutch bank and Hambros, established Ship Mortgage International in Amsterdam, in order to provide first-priority mortgages.

Gradually, as the domestic markets became liberalized, other banks increased their interest in shipping, often acquiring competence and personnel from within the shipping companies. Kredittkassen in the mid-1980s decided to market itself as a leading shipping bank for European customers, regardless of whether their business was related to Norway. The basis was its “considerable expertise in shipping and the long history of dealing with shipping customers.” The bank saw this as a competence for which there had to be a market abroad.²³

Classification, insurance and banking lived side-by-side with the shipping companies for more than a century. However, the manner in which shipping developed—with a separation of seafaring labour and the ownership of the vessel—opened up a number of new business opportunities. One was the sale of manning and ship management services. Several companies with Norwegian connections established themselves in this new market.²⁴

With the question of flag and labour costs out of the picture, the main differences between shipping companies in various countries were related to onshore elements such as tax, wage levels for office personnel and the quality of infrastructure. For the Norwegian Shipowners’ Association, the tax question became a priority. A tax reform introduced in 1992 made the conditions for Norwegian shipping companies much more difficult. Aiming at “inter-industry” neutrality, shipping lost some of its tax advantages. In addition to strengthening the previously generous depreciation regime, the reform reduced the availability of capital by tightening up the rules regulating limited partnerships.

In 1996 the Norwegian authorities changed their minds. The introduction of a tonnage tax system, where tax is paid on the basis of the tonnage, rather than operating profits, was welcomed by the shipowners.²⁵ Moreover, the introduction of a system of reimbursement for the use of Norwegian seafarers made it more attractive to use local labour, and increased the competitiveness of ships operating in Norwegian waters. The special tax arrangement for shipping companies and reimbursement for the use of Norwegian seafarers created optimism. However, towards the end of the century the frequent political challenges to the regime put the sincerity of the “shipping friendly” Norwegian policies in doubt, and the arrangement was considered very unpredictable.