This is the second part of a four-part series on the rise of hijack-and-ransom piracy in the shipping lanes off the coast of Somalia, and the costs it poses to the merchant shipping industry and, perhaps, global trade as a whole.

>>The Pirates' Toll, Part 1

>>The Pirates' Toll, Part 3

>>The Pirates' Toll, Part 4

TALKING HEADS

Within the insular maritime-shipping community, disagreement reigns on the question of whether Somali piracy has levied any real cost on the business of moving goods across the oceans -- or whether it threatens to do so. The answers depend on who you talk to, and the more they talk, the more the notion of risk elides.

"It's no big deal -- insurance covers it," says the shipping investment specialist at a well-known New York fund.

"Put it this way: shipping companies aren't overly concerned about rising costs because of piracy," says the shipping-industry stock analyst at Jeffries & Co.

The maritime lawyer says: "It's putting a lot of pressure on costs at a time when the market is still quite depressed from where it was 18 months ago. Either you pass on those costs or it drops to the bottom line."
Pirate Interactive Map

Says the stock analyst at Oppenheimer: "The direct costs are fairly minimal. You just hope you don't get hit."

"The insurance industry hasn't completely got its hands around it," says the industry consultant.

"Piracy costs were thought to be a 'cost of doing business' that owners, insurers and their customers could absorb. That view appears to have changed," says the insurance-industry trade publication.

"This whole thing is costing the industry billions," says Per Gullestrup, CEO of the Clipper Group, which had a ship captured in 2008.

"The financial impact is not that significant," says Ion Varouxakis, CEO of FreeSeas, a dry-bulk shipping company that has never experienced a hijacking (though one of its carriers managed to evade an approaching boatload of pirates in the Gulf of Aden about a year ago).

IPO DREAMS
The hostage crisis James Christodoulou supervised for 56 days between Thanksgiving 2008 and late January 2009 has transformed him, a year later, into a bankable expert on all things piracy. In the aftermath of the hijacking of his company's ship, the MV Biscaglia pictured above, (a story first told in The Wall Street Journal days after the ship's release), his expertise has become almost a second career.

He recently gave a presentation at NASA. Topic: crisis management. His fame arguably reached its height during the Maersk Alabama drama of April 2009; he spent a lot of time in the Manhattan green rooms of cable all-news channels; he was a virtual sidekick of Shepard Smith. Larry King had him on twice. Christodoulou is also a frequent speaker at shipping conferences, where he sits on panels and keynotes seminars, and lectures in front of ballrooms full of maritime executives. He talks about anti-piracy measures, he says, "and about what we did, what our best practices were, and how best to deal with piracy."

He also says, "Regardless of the financial costs of piracy, it's still first and foremost a human issue -- period. The pirates are taking the ships because they know that the people, the crews, are what's being paid for to be released."

>>The World's Navies Respond to Somali Piracy

But the full meaning behind this insight would only come in time. Before the hijacking, Christodoulou was more concerned with the fiscal health of his company, Industrial Shipping Enterprise Corp., or ISEC, which he had taken over as CEO in 2007, hired by its seed-capital investors to prepare it for an eventual IPO, at which he had some experience.

Though his name might suggest deep nautical genetics, or whitewashed villages rising from a turquoise sea, Christodoulou was born and bred in New Jersey, the son of a printer. (He looks the part, though. Burly as a stevedore, he seems to prefer heavy woolen turtleneck sweaters. You wonders where's the corncob pipe.) He came to shipping in the late 1990s while working for a private equity firm that had transacted some business with the company that would become General Maritime ( GMR). He got to know its founder, Peter Georgiopolous, who brought him on as chief financial officer. He helped take it public in 2001. He did the same, a few years later, for OceanFrieght ( OCNF). In between, he worked as a shipping-industry banker for a boutique investment bank called Dahlman Rose.

ISEC, however, was a long way from the New York Stock Exchange. It employed five full-time people, Christodoulou included, outsourcing most of its tasks. Annual revenue approached $8 million, and it owned just two ships -- a pair of sibling double-hulled "product tankers," the kind of vessels outfitted to carry anything wet, save for crude oil. Built in 1986, the sisters had aged. Christodoulou's ultimate goal was to renovate and expand ISEC's "fleet," if that term was yet quite applicable, but any IPO dreams had been deferred in the late summer of 2008, with a global financial crisis and recession just then expanding into bloom.

In September 2008, when ISEC scored a cargo -- $600,000 to carry 25,000 tons of palm oil from Indonesia to Spain -- Christodoulou's main goal was to get through the rest of the year unscathed. He focused his attentions on the Biscaglia's latest voyage.

"DON'T WORRY ABOUT IT"
The fastest way to point B would take about 28 days and would mean a transit through the Gulf of Aden, a.k.a. "Pirate Alley," often abbreviated "GOA" by shipping people, and known in the Somali language as Khaleejka Cadan. Four times the area of Texas, the Gulf of Aden is 200 miles wide and 550 long -- a crocodile's mouth of water formed by the jaws of the Arabian Peninsula coast to the north and the Somali Horn of Africa to the south. It funnels all Mediterranean-bound traffic up the sluice of the Red Sea; in either direction, almost anything that wants to use the Suez Canal -- where ships ride the lochs over the sands of the Sinai -- must therefore traverse the Gulf of Aden.

Above, a convoy of merchant ships makes its way through the GOA, led by a warship.

The whole connected waterway -- GOA, Red Sea, Suez, Med -- is one of the busiest shipping lanes on earth. The goods of the East en route to the merchants of Europe (and vice versa) -- it isn't so much the descendent of the Silk Road as the current iteration of it. A guesstimated 20,000 to 25,000 merchant ships move through the waterway each year (no one knows for sure how many, not even the Suez Canal), including as much as 20% of the world's ocean-going oil. For the pirates of Somalia, this presents a rather target-rich environment.

Christodoulou and ISEC therefore faced a choice: either send the Biscaglia through the Suez, risking an attack or worse, or take the long route around Africa, around the Cape of Good Hope, up the west coast of the continent and on to Spain. It would add something like 8,000 miles and three weeks to the trip -- at the time, about $350,000 more in fuel costs than the Suez route. Of course, bypassing the canal would save ISEC about $250,000 -- the amount in fees the Suez charges for a ship of the Biscaglia's size.

It's well understood among shipping people that if the industry were to collude, and everyone agreed to bypass the Suez, freight rates would rocket; the longer voyages would pull ships off the market, squeezing supply. "Piracy could be considered a good thing," says a shipping-stock analyst, "if you look at the supply-demand balance."

But the longer journey would take money out of ISEC's pocket in other ways. Because the company hired out its ships on the spot market as opposed to fixing them into long-term charters, the longer the delay on one trip, the more it would reduce the available days for the Biscaglia to earn money on future voyages: the cost of the lost opportunity. ISEC figured that number at about $400,000, according to the going spot rate for a Biscaglia-size product tanker, which was then a little north of $20,000 a day.

Further, ISEC wasn't exactly in a position of cash strength. Things were tight. It owed a bank. The bank wanted a debt payment by the end of the year. ISEC needed the voyage's $600,000 in revenue to make the payment. If the ship had to circumnavigate a continent, it likely wouldn't discharge its palm oil -- and receive its $600,000 -- until January. Going around Africa, then, could possibly mean delinquency.

Piracy vs. delinquency, the odds of a hijacking against the probability of missing a debt payment, "which would send up red flags at the bank at a time when we didn't want to send up red flags": this was the calculus of the moment. And the calculus said: via Suez.

Back then, in the fall of 2008, piracy in the GOA had only just begun to make headlines in the U.S. By far the most famous pirate incident to date, the bloody attempted hijacking of the Maersk Alabama, when Navy SEAL sharpshooters killed three pirates holding the ship's captain hostage in a lifeboat after a botched raid, wouldn't occur for another five months. The aftermath of the rescue is pictured above; the orange craft is the Alabama's lifeboat.

Colleagues in the industry pooh-poohed Christodoulou's fears. "Don't worry about it. It's a few ragtag guys. Nothing's going to happen." They pointed out the miniscule odds of a ship getting hit. If twenty-some-thousand craft sail through Pirate Alley in a year, and a few dozen are hijacked, the result of the obvious math ought to ease any ship owner's mind. (Even considering the huge upsurge in Somalia-based piracy since 2008, the odds of capture remain microscopic. If the number of annual GOA-Suez transits are to be believed, in 2009, a ship had a 0.002% chance of getting hijacked.)

And yet, Christodoulou says, "There was just something in the pit of my stomach saying, 'You know what? I don't think so. Let me really look at this.' I studied every attack that had occurred within the last two years."

BELT AND SUSPENDERS
To that point in 2008, 57 ships had reported to the International Maritime Bureau (a group that monitors high-seas crime for the International Chamber of Commerce) that Somali pirates had attacked them; 38 had been hijacked.

Of those, perhaps a dozen were still anchored off the coast of Somalia, engines idle in a kind of pirate-induced doldrums, awaiting ransom deals as their owners negotiated with the pirate bands for their release.

Christodoulou took precautions, what he likes to call a "belt-and-suspenders approach." First, ISEC went all-in on insurance, paying up for every sort of policy on the market that promised to guarantee against piracy-induced losses. (Some of it purchased from Hiscox, the huge British underwriter, one of the largest syndicates at Lloyds' of London pictured above .) He bought loss-of-hire insurance, to cover the income the Biscaglia wouldn't be earning should pirates hold the ship for who knows how many weeks. He bought a kidnap-and-ransom policy, new to the maritime insurance trade, previously the domain of the famous, the super-rich, and those with business to conduct in places like Colombia. (Some shippers consider K&R insurance unnecessary, since war risk premiums are thought to be enough to cover ransom payouts.) Total cost for the voyage's insurance: $50,000.

He hired security guards (three of them): $40,000. He armed them with a so-called long-range-acoustical device, the amplifiers that somehow beam ear-splitting noise directionally over thousands of feet and into the ears of pirates or rioters or protesters, who -- the manufacturer's marketing literature assures -- will then double over in skull-clutching anguish: $5,000. (But he didn't arm the guards or crew with actual arms. Putting guns aboard ships remains taboo in the merchant-shipping business, not because of any pacific worldview on the part of ship owners, but for fear of the liability-lawsuit nightmare should a firefight erupt between pirates and the crew and any seafarer-workers get hurt, or worse. This taboo, however, might be changing.)

He had reams of concertina wire wrapped around the perimeter of the Biscaglia's deck: $10,000.

Totting it all up, Christodoulou says ISEC spent about $100,000 to protect itself from pirates and any potential damages caused by them.

There were other safeguards as well. The Biscaglia would take part in a convoy led by a French naval frigate. The ship would try to pass through the highest-risk part of the GOA at night; hardly any pirate attacks happen nocturnally. While in the GOA, the captain of the Biscaglia would ask the engine room to give him all she had: the ship's highest speed through the danger zone. All hands on deck. Water canons and fire hoses and at the ready.

"But the most important thing," Christodoulou says now, was his decision to "empower" the ship's officers and crew. At the cusp of the danger zone, the men on the Biscaglia -- most of them from India -- would vote on whether to steam ahead or abort and head south for the tip of Africa. "It was their decision, not mine, to asses the risk at that time based on what they were seeing and hearing." If there were a sudden burst of pirate activity in the neighborhood, for example, the captain could make the call to split.

In the event, at the cusp of the GOA, the men of the Biscaglia chose "go."

Thirty-six hours later, at five minutes past midnight on the day after Thanksgiving, Christodoulou was awoken by a phone call from his outsourced technical manager (responsible for ship logistics like food and fuel), based in Singapore. Latitude 13:54 North, longitude 49:09 East, in the heart of GOA, the Biscaglia, the manager said, had been "unlawfully boarded."

Despite all the carefully planned "defensive and counter measures," Christodoulou says, "at the end of the day, a loud speaker and a water hose are no match for an AK-47 and a rocket-propelled grenade."

-- Written by Scott Eden in New York

This is the second part of a four-part series on the rise of hijack-and-ransom piracy in the busy shipping lanes off the coast of Somalia, and the costs it poses to the merchant shipping industry and global trade as a whole.

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Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.

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