The good news is that the ‘great recession’ of 2009, one that bit so hard in historical terms, has come to an end and this is appreciated by oil and gas transportation service companies like us.  The challenges have not come to an end, but the challenges are more ‘normal’ than those we experienced in the first part of 2009.

We cannot claim to have seen the 2008/09 economic crisis long before it happened, but we did plan over the long-term to ensure that our business was better prepared for sudden changes in markets as they now have shifted. The changes now have caused the “output gap” for most industries that will cause lower margins for times to come for many with a lot of surplus production capacity. The changes ahead will also reinforce geographic shifts as well as changes in what type of goods are carried and where consumer demand alters and economics alter the trade flows. A change where the low cost producers will benefit in many industries. 

At I.M. Skaugen we believe the world has reached a turning point in its history, where the growth rates in the “West” will now decline and the “East” will rise. 

The “West” (meaning Europe as it was before the Berlin wall came down, along with the USA) has enjoyed, for a long time, access to cheap energy and it has consumed raw material supplies without competition and abused the environment in the world without any cash cost. The “West” now has competition for these raw materials and the cheap energy - primarily from the emerging nations in Asia.  The environmental challenges for the world are also insurmountable with the rise of the emerging nations and it will slow the growth when we all have to pay for the rights to pollute. 

The people of Asia will regardless see a tremendous economic growth, stemming from the need to satisfy, primarily, domestic consumption from a rising middle class. Their savings rate is high in many of these countries and this can pay for a lot of infrastructure and also consumption. The “West” has for a long time seen economic growth fueled by consumption on the back of easy credit and as the backbone of progress.

China as no other country has taken on these challenges at break-neck speed and illustrates the market model. Though growing at “half the speed” of China, India is making progress and the South East Asia region – including Indonesia - is coming along as well. Add to that the Middle East region (predominantly the Gulf region called GCC) and Brazil and you have a few tigers that collectively add up to a significant amount of the people on the planet.On paper, in the ”West” – particularly USA and Euroland – we have about 10 per cent unemployment right now. In reality it is higher. It is quite impossible for us to see where the drivers are going to be in order to push these unfortunate people into the active labour markets in the future. The public finances are for most in shambles. There are no special industry sectors that will take these people out of the ranks of the unemployed with our higher cost of operations in most areas. This as many, or most, industries are facing increasing competition from lower cost nations in Asia. Innovation is high in Asia and growing of significance and there are few areas that we can claim a superior performance in the West any longer. Most probably we will lose work places in the private sector in the “West” to companies in Asia and this will add to unemployment levels. 

That so large a per centage of our western population will remain unemployed for the rest of their lives will cause social strain. The cost of this burden is high and the social costs will be higher. Our democracies are not well equipped to deal with this. We have also a growing demographic problem in Europe that will increase the challenges in this field. We have labour unions that will resist change - more so in Euroland than in USA, but it is the same problem. Governments will have to add taxes to pay for the growing costs and to repair their finances.  We will also see pensions being reduced; and the need to keep people working longer in order to pay for their pensions is also a reality now. The way out is a reduction in standards of living in order to adjust our competitive position. This is not going to be easy in our lifetime and will probably not happen.

For too long the “West” has acted like the proverbial frog.  When placed in a pan of cold water that is slowly heated, we have not noticed the rising temperature of the water and have cooked to death.  It is only when suddenly placed in hot water – equivalent to the economic shock or a crisis of the past year or so – that we notice a life-threatening shock and jump out of the water. “The rise of the East” is now unceasing.  The time to take heed is now - and quickly - if Western-based businesses are to be effectively positioned to take advantage of the new world order. 

I.M. Skaugen has for some time started to tweak its strategy business approach and concentrate its efforts more and more on activities that stand to benefit from the above trends. It will aim to be involved mostly in the business areas that are a direct beneficiary of these above mentioned trends and to position itself for this through access to debt markets and in the equity and bond markets.

I.M. Skaugen will continue to pursue its strategy of developing as a global operator, supporting its customers as they extend the geographic scope of their activities. But the company will only remain competitive if it maintains its focus of developing innovative products and services that meet the demands of the oil and gas transportation industry.  At the same time we will continue to concentrate on keeping costs competitive while improving its operational performance and service leadership. 
The company has recognized the growing need for environmental solutions to the world’s energy challenges.  This means amongst others that natural gas is beginning to replace oil as the fuel of choice for transportation and power generation - and with it the need to develop extensive LNG supply chain infrastructure.  For this reason, we have spent upwards of seven years creating its small-scale “Mini LNG” service that will launch in the Nordic region in 2010. We are confident that this is a proof-of-concept that will enable a roll-out on a global scale and we hope to participate in its core markets. We should benefit from an ‘early mover attitude’ and IMS innovations – or Innovative Maritime Solutions (IMS).

At I.M. Skaugen we have also spent more than a decade building our much improved presence in markets in the Middle East/Gulf region and Asia.  As a service provider we have formed closer relationships in the Gulf region with companies that have access to most competitive feedstock for the petrochemical industry and state of the art technology. In China, where we have been for more than 15 years, we are building technologically the most advanced ships that take advantage of lower labour costs when compared not only to the West, but to Japan and Korea as well.  

In this annual report you will be able to see that we have managed to deliver a competitive return on our risk capital by our approach. We are aiming to continue to do so by our strategy as described above and our core focus on Asia and this is where the term “steady as she goes” applies as a motto. 

Morits Skaugen
Chief Executive Officer