Overseas Shipholding Group, Inc., a Delaware corporation incorporated in 1969,
and its wholly owned subsidiaries own and operate a fleet of oceangoing vessels
engaged primarily in the transportation of crude oil and petroleum products
in the International Flag and U.S. Flag trades. The Company manages the operations
of its International Flag and U.S. Flag fleets through its wholly owned subsidiaries
OSG International, Inc. (“OIN”), a Marshall Islands corporation,
and OSG Bulk Ships, Inc. (“OBS”), a New York corporation, respectively.
The Company’s vessel operations are organized into two strategic business
units and focused on broad market segments: International Flag, including crude
oil and refined petroleum products, and U.S. Flag. The International Flag unit
manages International Flag ULCC, VLCC, Suezmax, Aframax, and Panamax crude tankers,
as well as LR1, LR2 and MR product carriers. The U.S. Flag unit manages the
Company’s U.S. Flag vessels. Through joint venture partnerships, the Company
also operates four LNG carriers and two floating storage and offloading (“FSO”)
service vessels.
Charter Types
Spot Market
Voyage charters, including vessels operating in Commercial Pools that predominantly
operate in the spot market. Accordingly, the Company’s shipping revenues
are significantly affected by prevailing spot rates for voyage charters in the
markets in which the Company’s vessels operate. Spot market rates are
highly volatile because they are determined by market forces including local
and worldwide demand for the commodities carried (such as crude oil or petroleum
products), volumes of trade, distances that the commodities must be transported,
the amount of available tonnage both at the time such tonnage is required and
over the period of projected use and the levels of seaborne and shore-based
inventories of crude oil and refined products.
Seasonal trends affect world oil consumption and consequently vessel demand.
While trends in consumption vary with seasons, peaks in demand quite often precede
the seasonal consumption peaks as refiners and suppliers try to anticipate consumer
demand. Seasonal peaks in oil demand have been principally driven by increased
demand prior to Northern Hemisphere winters and increased demand for gasoline
prior to the summer driving season in the United States. Available tonnage is
affected over time, by the volume of newbuilding deliveries, the number of tankers
used to store clean products and crude oil, and the removal (principally through
scrapping or conversion) of existing vessels from service. Scrapping is affected
by the level of freight rates, scrap prices, vetting standards established by
charterers and terminals and by international and U.S. governmental regulations
that establish maintenance standards.
Time and Bareboat Charter Market
The Company’s operating fleet currently includes a number of vessels that
operate on time charters. Within a contract period, time charters provide a
predictable level of revenues without the fluctuations inherent in spot-market
rates. Once a time charter expires, however, the ability to secure a new time
charter may be uncertain and subject to market conditions at such time.
Commercial Pools and other Commercial Management Arrangements
To increase vessel utilization and revenues, the Company participates in Commercial
Pools with other shipowners of similar well-maintained vessels. By operating
a large number of vessels as an integrated transportation system, Commercial
Pools offer customers greater flexibility and a higher level of service while
achieving scheduling efficiencies. Pools consist of experienced commercial operators,
while technical management is performed or outsourced by each shipowner. The
pools collect revenue from customers, pay voyage-related expenses, and distribute
TCE revenues to the participants after deducting administrative fees, according
to formulas based on the relative carrying capacity, speed and fuel consumption
of each vessel. Pools negotiate charters with customers primarily in the spot
market. The size and scope of these pools enable them to enhance utilization
for pool vessels by securing backhaul voyages and Contracts of Affreightment
(“COAs”) reducing wait time, generating higher effective TCE revenues
than might be otherwise obtainable in the spot market and providing a higher
level of service to customers.
Fleet Operations
The bulk shipping of crude oil and refined petroleum products has many distinct
market segments based, largely on the size and design configuration of vessels
required and, in some cases, on the flag of registry. Freight rates in each
market segment are determined by a variety of factors affecting the supply and
demand for suitable vessels. Tankers, ATBs and Product Carriers are not bound
to specific ports or schedules and therefore can respond to market opportunities
by moving between trades and geographical areas. The Company has established
three reportable business segments: International Crude Tankers, International
Product Carriers and U.S. Flag Fleet Operations, which we also refer to as “U.S.
Flag.”
For additional information regarding the Company’s three reportable segments
for the three years ended December 31, 2014, see Note 5, “Business and
Segment Reporting,” to the Company’s consolidated financial statements
set forth in Item 8, “Financial Statements and Supplementary Data.”
International Crude Tankers and International Product Carriers
Our International Crude Tankers reportable business segment is made up of a
ULCC and a fleet of VLCCs, Aframaxes, and Panamaxes engaged in the worldwide
transportation of unrefined petroleum. Our International Product Carriers reportable
business segment consists of a fleet of MRs, LR1s and an LR2 engaged in the
worldwide transportation of crude and refined petroleum products. Our diverse
fleet gives OSG the ability to provide a broad range of services to global customers.
Overseas Shipholding Group, Inc.
Refined petroleum product cargoes are transported from refineries to consuming
markets characterized by both long and short-haul routes. The market for these
product cargoes is driven by global refinery capacity, changes in consumer demand
and product specifications and cargo arbitrage opportunities. In contrast to
the crude oil tanker market, the refined petroleum trades are more complex due
to the diverse nature of product cargoes, which include gasoline, diesel and
jet fuel, home heating oil, vegetable oils and organic chemicals (e.g., methanol
and ethylene glycols). The trades require crews to have specialized certifications.
Customer vetting requirements can be more rigorous and, in general, vessel operations
are more complex due to the fact that refineries can be in closer proximity
to importing nations, resulting in more frequent port calls and discharging,
cleaning and loading operations than crude oil tankers. Most of the Company’s
MR Product Carriers are IMO III compliant, allowing those vessels to carry edible
oils, such as palm and vegetable oil, increasing flexibility when switching
between cargo grades.
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