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Environmental Regulation

and Innovation Dynamics


in the Oil Tanker Industry

Zoran Perunovic
Jelena Vidic -Perunovic

The maritime industry is widely seen as less permeable to innovation than other industries. However, the industry
is now recognizing that demands for increased environment protection can only be achieved by more innovation.
This study demonstrates that environmental innovation has played a significant role in changing the industrys
innovation paradigm. It has also been transformed over time. (Keywords: Environmental innovation, oil tanker
industry, innovation models)

T
he maritime industry is seen as less open to innovation than other
industries.1 According to this viewpoint, only explicitly defined strategies
with centralized and clearly guided managerial leadership can spark inno-
vation. High development costs and strict industry regulations have also
discouraged companies from innovating. Innovation has traditionally been incremen-
tal and based on experiential learning, in which each new ship is simply an improve-
ment on a previous design. Before the 1970s, the pace of innovation was slow, the
demand for new ships was high, and designers and shipbuilders could make profits
without being particularly innovative. The industry focused on the main components
of competitiveness: cost, quality, and delivery.
In the mid-1970s and again in the early 1990s, environmental friendliness
emerged as an important competitive priority. In response to a series of accidents,
national and international regulatory bodies tightened environmental requirements
for new vessels, particularly oil tankers. At the present time, the industry is undergoing
a change that will likely require further innovation to satisfy the demands for increased
safety and environmental protection. To increase innovation, organizations in the

The authors were visiting scholars from the Technical University of Denmark; Jelena at the University of
California Berkeley School of Engineering and Zoran at the University of San Francisco School of
Management. Being in the San Francisco Bay Area, surrounded by its unique innovative spirit, they
were inspired to collaborate in their free time on the research presented here. They are grateful to have
experienced the Bay Way and for the feedback from the three fantastic, anonymous reviewers.

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Environmental Regulation and Innovation Dynamics in the Oil Tanker Industry

maritime industry are expected to collaborate with other organizations both within
and outside the maritime industry; and open strategy and open innovation are ex-
pected to become an important approach.2
The maritime industry involves the design,
Zoran Perunovic is an Assistant Professor
construction, operation, and maintenance of vessels, at DTU Executive School of Business,
offshore structures, and their component parts. It Technical University of Denmark.
also includes a myriad of organizations involved in <zope@business.dtu.dk>
ship regulation, insurance, surveying, and financing. Jelena Vidic -Perunovic is working in
the offshore oil and gas industry.
This article explores how the green competitive
<jvidic-perunovic@doris-inc.com>
priority has changed innovation in this industry.
We conducted historical research using secondary
data to identify major innovations and determinants of the maritime industrys adop-
tion of new innovation paradigms. Due to the industrys diversity and complexity, we
focused on oil tankers. As the largest polluters among all ships, oil tankers are a prime
example of how environmental friendliness changes the way organizations innovate.

Background
Environmental Innovation
Environmental innovation (EI) theory is being developed by two schools of
research. The first school is focused on understanding the macro determinants of
EI. The second school, known as environmental management systems (EMS), con-
siders EI at the organizational level. The determinants (or triggers) of EI can be
grouped into three areas: supply (technological capabilities, appropriation issues,
and market characteristics), demand (expected market demand, social awareness,
environmental consciousness, and preference for environmentally friendly prod-
ucts), and institutional and political influences (environmental policy and institutional
structure).3 Sound environmental policy, using regulations to pressure firms to inno-
vate, is viewed as the principal determinant of environmental innovation.4 Techno-
logical or organizational innovations that would not exist without a previously
drawn policy are often referred to as policy-induced innovations.
Environmental policy influences EI through instruments (emission charges,
permits, and subsidies) and through prescriptive measures and monitoring. Early
works on the topic show that the incentive for companies to innovate is stronger
when environmental policy instruments are applied than under command and con-
trol.5 Indeed, abatement expenditures led companies to increase their EI-related
R&D expenditures, which further increases the number of EI patents.6 Increased
monitoring and enforcement of existing regulations did not provide any additional
innovation incentive. However, a new line of thinking about the determinants of
EI favors the importance of environmental policy prescriptions and measures, believ-
ing that higher pollution levels lead to strict regulations, which in turn provide strong
incentives for EI.7
As a result of EI, organizations have been increasingly adopting environ-
mental management systems. In the mid-1990s, environmental regulations were
perceived as both an inhibitor of innovation and an opportunity for early movers.8
At that time, firms were having difficulty recognizing the potential of EI because of

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Environmental Regulation and Innovation Dynamics in the Oil Tanker Industry

their inexperience in dealing creatively with environmental issues. Based on their


compliance with regulatory requirements, companies were categorized by Thornton
et al. as true believers, environmental strategists, committed compliers, reluctant
compliers, and environmental laggards.9 Currently, an in-house EI-specialized R&D
department is known to increase a firms EI, and the departments participation in
networks of innovators further increases EI.10 Improvements in an organizations
EMS system are a direct result of ongoing efforts to develop new technologies together
with partners across vertical supply chains and/or horizontal networks, rather than
from utilizing low-emission or emission-reduction technologies developed by
others.11 However, the environmental sustainability landscape is equally composed
of EMS embracers and non-embracers (the latter utilizing EI only as an opportunity
to improve brand reputation).12

Models of Innovation
Academics and practitioners have identified several innovation models.
Rothwell has identified five generations of innovation (see Figure 1).13 The first gen-
eration innovation model was a technology push model. In the late 19th century
and in the period following the end of WWII, attitudes in society were generally favor-
able towards scientific discoveries and industrial innovation. The innovation process
was perceived as being sequential, initiated by internal R&D activities and followed
by manufacturing and marketing. The 1G model assumes that more R&D will result
in more successful new products. A rapid increase in competition and customers no
longer satisfied with standard products led to a new second generation approach
toward innovation, market pull. The change in the direction of the innovation pro-
cess was obvious, and ideas for an innovation had begun to be sought out in the mar-
ket, while R&D kept a merely reactive role in this still sequential process. The third
generation, or coupling model, was defined in the 1970s as an intermediary model
between the previous push and pull models. As a reaction to the oil crisis, companies
focused on cost control and cost reduction. In order to reduce the number of failures
that were coming from either the push or the pull models, industry and academia
realized that a successful innovation process should be bidirectional. The coupling

FIGURE 1. Models of Innovation

Integrated
1G Market development
teams
4G Supplier External Partner
Parallel networking
product (horizontal &
development
vertical)

2G Market Parallel information processing


Supplier and
customer
integration
5G Supplier Customer
Data
Flexibility networking
3G Market

- Feed-back loops in product development

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model recognized the need for creating innovation by employing both approaches:
technological readiness and an awareness of customer needs. The 3G model is a
sequential, discontinuous process that consists of a series of distinct but interacting
and independent stages. It refers to a complex web of communication paths, linking
internal functions within the organization and linking the organization with scientific
and technological communities and the market in general. The 4G model was created
as a result of the changes in the business context following the economic recovery in
the 1980s. Companies started to concentrate on core business and core technologies
and their decision making was affected by forces such as the strategic importance of
technology, IT-based manufacturing, and globalization. Speed became imperative in
new product development and companies reorganized the way they innovate. The
4G model is the integrated model, in which there is parallel development with inte-
grated development teams. R&D, engineering, and production are integrated, and
horizontal and vertical collaboration with the leading partners (e.g., research institu-
tions, R&D-specialized companies, and leading suppliers) is encouraged. However,
the continually increasing competition in the global market puts pressure on compa-
nies to consider multiple strategic issues such as the intensified importance of technol-
ogy, better integration of product and manufacturing strategies, greater flexibility and
adaptability, and more emphasis on quality and environmental regulations. Being a
fast innovator is not possible without further increasing development costs. Therefore,
the focus of the fifth generation innovation model is to both shorten the time to
market and reduce the costs of new product development. The main characteristics
of the 5G model are further improvement of internal integrations, development of
strong inter-firm vertical linkages (deeper involvement of suppliers and customers
in new product development), further development of external horizontal linkages,
and radical use of sophisticated electronic toolkits. The 5G model is seen as a true
networked model.

Method
For studying innovation dynamics in the maritime industry, historical re-
search is especially suitable.14 In collecting data, we relied on archival records avail-
able from public archives, official documentary records from policy regulators,
publicly available company materials, media publications, and academic articles.
First, we looked for significant product and process innovations that occurred in
the different stages of a vessel life cycle: design, construction, operations, and main-
tenance. Then, we examined how those innovations were created and associated
them with the categories of the five innovation models. Finally, we followed the
development of environmental policies, identified antecedent events that led
towards the creation of each policy, and analyzed policy shortcomings and their con-
sequences for the design, construction, operations, and maintenance of oil tankers.
We relied on well-established procedures for the qualitative data analysis to study
the timing and causality of events.15 This has enabled us to determine the relation-
ships between environmental policies and innovation models in the oil tanker indus-
try. In accordance with the standard procedure in historical research, the findings are
presented in a narrative form.16

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Oil-Tanker Innovation
Our analysis identified three different periods of oil-tanker innovation and
specified the role of environmental innovation in each period. The first period
involved single-hull tankers. The industry is currently at the end of the second
period, which is the double-hull period. Due to new regulations, the forthcoming
third period is expected to generate a myriad of innovative activities in the industry.

Single-Hull Tankers
When the demand for kerosene significantly increased in prosperous Russian
cities, Ludwig Nobel, an oil entrepreneur operating from the Baku area, was puzzled
by how to transport it efficiently across the Caspian Sea. The traditional way was to
load a ship with wooden barrels filled with kerosene, which proved to be an ineffi-
cient method, as the barrels frequently leaked. Therefore, Nobel came up with the
idea of transporting kerosene in bulk. After being rejected by several local shipyards,
Nobel designed the concept of the oil tanker and refined it at the Motala shipyard in
Sweden. Built in 1878 for the Brothers Nobel oil company, the Zoroaster was the first
oil tanker to carry oil in two iron tanks joined by pipes.17
Nobels innovative ship was an immediate hit, but a number of safety issues
emerged during the operations of this new generation of oil tankers. This prompted
both Ludwig Nobel and the rising oil tanker owners community to deploy new tech-
nological and engineering solutions to improve the design and operations of oil tank-
ers. For example, in order to increase stability and capacity, Nobels Petersburg-based
engineering team designed the Moses, commissioned to the Motala shipyard in 1880,
the first single-hull tanker that incorporated the oil tanks into the hull structure. In
1883, Colonel Henry Swan, who worked for the Nobel company, designed three
tankers with their tanks divided into smaller compartments to eliminate instability
due to free-surface effects, a problem from which earlier designs had greatly suffered.
Another of Colonel Swans designs, the Glckauf, built in 1886 and classified by
Bureau Veritas, was the first prototype of a modern vessel designed to transport crude
oil in large, separated tanks. This compartmentalization was made by having a longi-
tudinal bulkhead along the centerline with transverse bulkheads dividing the cargo
space in eight oil tanks, built into the hull. The oil could be pumped directly into the
tanks. In case of increased temperature, expansion of the liquid was allowed through
the trunks running up to the upper deck. In addition, ballast tanks were designed that
could be filled with seawater when the ship was sailing in unladen condition.18
Until the 1950s, the tanker size did not exceed 15,000 DWT (deadweight
tons). Between 1950 and 1975, tanker tonnage increased by more than ten-fold
because of the expanding economy and increasing demand for oil. Tankers started
carrying crude oil rather than refined products because refineries were no longer
close to oil fields. The standard tanker was a T2, which grew from 16,000 DWT to
25,000 DWT. The Suez Canal limited the size of the oil tankers used to transport
oil from the main producers in the Middle East to the West, which was the largest
consumer base. For political reasons, the Suez Canal was closed twice (1956 and
1967), and the longer route around South Africa had to be used instead, which then
led to significant increases in tanker size. The first 100,000 DWT crude oil tanker was

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delivered in 1959.19 In 1966, the first tanker over 200,000 DWT was built. In the
1970s political turmoil led to the two oil crises,20 which triggered another increase
in tanker size. Shipowners saw an opportunity and followed a simple rule the larger
an oil tanker is, the more cheaply it can move crude oil, and the better it can help
meet growing demands for oil.21 The new generation of Very Large Crude Carriers
(VLCC) and Ultra Large Crude Carriers (ULCC) was born. For example, the Seawise
Giant, built in 1979, could carry more than 500,000 DWT. The Seawise Giant was ini-
tially commissioned by a Greek magnate, who went into bankruptcy while the ship
was under construction at the Sumitomo shipyard in Japan. The new owner, a Hong
Kong-based businessman, requested an extension of the ship, and in 1981 the largest
sea faring man-made structure was put to sea.
As the world tanker fleet grew, oil spills became more frequent, but concern
for the environment was still a minor issue for the International Maritime Organiza-
tion (IMO). However, oil pollution of the ocean was recognized as a problem, and the
first concrete policy, the International Convention for the Prevention of Pollution of
the Sea by the Oil (OILPOL), was introduced in 1954. Its main concern was the pro-
tection of ports and coastal regions. At that time, the common cleaning method for
oil tanks was to wash them with water and dump the oil-water mixture into the
sea. OILPOL 1954 prohibited the dumping of waste within a certain distance of land
and in other areas of particular environmental concern, such as the Mediterranean
Sea. Even with a limited scope and influence, the policy started a chain of events that
led to the creation of several innovations in the maintenance of oil tankers: in 1962, it
pushed the cleaning of oil tankers further from ports (100 miles); in 1969, it required
that the empty tanks be washed with the load-on-top procedure.22 Finally, a more
sophisticated cleaning system was introduced in the early 1970s;23 crude oil washing,
or COWing, uses crude oil itself to clean oil tanks. The solvent action of crude oil
makes it far more effective than water. The IMO-sponsored MARPOL convention
73/78 (International Convention for the Prevention of Pollution from Ships) made
COWing mandatory for tankers larger than 20,000 DWT.24 Initially, COWing was
a dangerous process because explosive gases accumulating in cargo tanks during
cargo offloading could cause explosions. Sudden explosions on tankers during tank
cleaning, regardless of whether water jets or COWing was used, were fairly common.
Therefore, inert gas systems (IGSs), which had been known to the industry for some
time, became an important component of oil tanker designs.25 Another advantage of
IGS is that the resultant lack of oxygen slows corrosion in cargo tanks. Regulatory
bodies recognized the importance of IGS and gradually made it mandatory. As a pre-
condition for trading with the U.S., the U.S. Coast Guard mandated that all newly
built tankers over 100,000 DWT use IGS as of 1974 and all oil tankers over 20,000
DWT use IGS as of 1977. In 1978, IMO adopted the IGS protocol at the International
Conference on Tanker Safety and Pollution Prevention (TSPP). This protocol required
all newly built tankers above 20,000 DWT delivered after May 1982 to use IGS. By
1985, the rules had been extended to all existing tankers.26 COWing and IGS are
known technologies in the petrochemical industry, but their installation on oil tank-
ers required changes in the design of vessels and cleaning systems. In the case of
COWing, an entirely new washing system had to be integrated onboard the vessel.
For IGS, the system had to be fitted to each of the vessels cargo tanks and the cleaning

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process had to satisfy a number of conditions related to the tanks atmosphere, wash-
ing machines and nozzles, and inert gas piping system.27 British Petroleum, Sun Oil
(Sunoco), and Shell were the pioneers in developing the load-on-top, COWing,
and IGS procedures. In doing so, they relied on their internal multi-disciplinary
teams. The oil company marine departments were the core of technical professional-
ism in the tanker industry. They utilized the knowledge and technologies already
known to industry and academia while also influencing the industry through their
experience and expertise.28
With regard to hull design and construction, no significant vessel improve-
ments occurred until the Torrey Canyon accident in 1967. The large spill from the acci-
dent led to the MARPOL 73/78 convention, which addressed some issues for the
prevention of, and financial liabilities for, the spills.29 The MARPOL 73/78 was a mile-
stone in the innovation of oil tankers. Apart from mandating COWing and IGS, it
required that new tankers be built with segregated ballast tanks in protective locations
(SBT/PL). MARPOL 73/78 forbids tankers built after 1982 from using ballast tanks as
cargo tanks. The intention of the convention was to reduce pollution risks, but it had
the unintended consequence of increasing spillage risk in the case of a grounding.30
During this period, the typical tanker-building process would start with a shipowner
commissioning an oil tanker from a designer (naval architects) who would draw a
concept design, followed by a preliminary design, and, finally, a contract design all
in constant consultation with the owner, the shipyard, and a classification society.31
In order to respond to the imposed changes in tanker design, naval architects had to
expand their engineering analysis, including both new structural and economical
aspects in the design process. Naval architects were still the engine of innovation,
applying existing knowledge to satisfy new regulatory requirements. Even so, the
linkages with external centers of expertise and technology needed to be intensified.

Double-Hull Tankers
The first significant change in tanker design was when double hulls were
mandated by regulatory bodies in response to a series of environmental catastrophes.
On March 24, 1989, the super tanker Exxon Valdez grounded in Prince William
Sound and spilled approximately 37,000 tons of crude oil. Almost 2,000 kilometers
of scenic Alaskan coast were affected, endangering important fisheries and wildlife.
The oil pollution was the largest in U.S. history until the Deepwater Horizon incident
in 2010. The Exxon Valdez spill generated significant media interest, many protests,
and a cleanup activity that involved 10,000 people at a cost of $2 billion.32
The accident prompted an almost immediate reaction from U.S. regulatory
bodies, who developed the Oil Pollution Act in 1990, also known as OPA 90.33 Unsat-
isfied with the existing MARPOL 73/78 agreement, the U.S. coined this unilateral
policy to protect their economic and environmental interests from future oil spills.
After exploring many potential tanker design improvements, policy makers decided
that tankers should have double hulls. A double-hull tanker is designed to carry oil in
bulk and uses double side and bottom spaces to carry ballast water, providing a shield
between cargo tanks and the environment.34 The OPA 90 act requires all tankers
wishing to sail in U.S. waters to have double hulls by 2015. Pre-MARPOL tankers
(built before 1982) were banned from sailing in U.S. waters after 2005.35

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Forced by OPA 90 act, the IMO established double-hull standards in 1992 by


amending the MARPOL 73/78.36 According to their rules, all tankers of at least 600
DWT delivered in or after 1996 had to have double hulls. Those with 20,000 DWT or
more delivered before 1996 had to comply with standards before they reach 25 or
30 years of age or the year 2015, whichever comes first.
However, these new regulations failed to eliminate accidents. The tanker
Katina spilled 72,000 tons of oil near the coast of Mozambique in 1992, resulting in
compensation claims of $11 million; the Thanassis A polluted the South China Sea
with 37,000 tons of oil in 1994;37 and the Nakhodka spilled 16,500 tons near Japan
in 1997, causing damages of $290 million in compensation claims.38 Unfortunately,
the regulatory bodies did not respond strongly until the Erika accident in the Bay of
Biscay in 1999. About 20,000 tons of oil was spilled, polluting the French Atlantic
coast, severely damaging fisheries and the tourism industry. The magnitude of the
spill and the length of the affected coastline resulted in large compensation claims.39
In response to the Erika accident, the IMO amended MARPOLs Annex I in
2001 to accelerate the phasing out of single-hull tankers. The amendment required
all pre-MARPOL tankers to be phased out by 2007 and all MARPOL tankers to be
phased out by 2015. However, another large accident mobilized the regulators to fur-
ther accelerate the phase out of single-hull tankers. In November 2002, the Prestige
spilled 70,000 tons in an accident near the Spanish coast, resulting in a cleanup cost
of $3 billion. In response to the Erika accident and to worries that the single-hull
tankers banned from U.S. waters would move into EU waters, the European Com-
mission (EC) developed their own regulation in 2002.40 These regulations mandated
the phasing out of different categories of tankers from 2005 to 2010. Following the
ECs example, the IMO amended MARPOL again, imposing the phase out of pre-
MARPOL tankers by 2005 with a cut-off date of 2010 for all tankers.

Technical Challenges
Accelerated phasing out of single-hull tankers put pressure on the industry to
speed up development of double-hull tankers. Time-to-market became imperative in
designing, building, and classifying new tankers. All of the important stakeholders in
the maritime industry raced to satisfy the new requirements, which would enable
them to continue operations in one of the most lucrative markets for oil transporta-
tion. However, today they still face many technical challenges, which have initiated
more innovation work on the double-hull tanker.
Double-hull tankers provide additional security in low-energy collisions and
groundings. If the single-hull tankers involved in the accidents described earlier
had been fitted with a double hull, the oil spills would have been smaller. However,
double hulls have distinctive structural behaviors. Compared to the old single-hull
tanker, the hull performance of the new double-hulled vessel is more vulnerable
to fatigue, stress, instability, and corrosion, which impose many technical challenges
for the design, construction, operations, and maintenance of new vessels.
In the case of double-hull tankers, the design must mitigate the high stress lev-
els, which are 30% higher than those of single-hull tankers.41 The overall stress level
in double hulls increases as though the outer hull were a single hull, thus affecting

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ship fatigue that may result in cracks and oil leaks. In addition, the double-hull
cross-section design significantly increases the number of joints between building
blocks, many of which are located in zones of high stress concentration. In the past,
a significant number of structural defects and fractures occurred in tankers that were
less than 10 years old, even though the hull girder strength of new ships usually
assumes a design life of at least 25 years.42
Intact transverse stability (a ships ability to float in an upright stable position) is
more compromised in a double-hull design than in a single-hull design. The double-
bottom ballast tank raises the center of gravity of the ship and thereby reduces the
ships intact stability. Furthermore, the double-hull cross-section provides enough lon-
gitudinal strength, and the bulkheads running along the ship that provide additional
strength may not be included in the design. In this case, the liquid cargo is not divided
into smaller areas, and the liquid in the cargo tanks may have a large free-surface
effect, resulting in compromised stability when the ship is moving in waves.43 Unless
designed with additional structure, a ship may suffer sloshing effects due to large
impact pressures on tank walls when the liquid in the cargo tanks is excited by the
motion of the ship.44
Design, construction, operations, and maintenance are highly interdependent
functional elements of a double-hull tanker. As noted, due to their complex design
and structure, the operation and maintenance of these ships must be held to a
high standard because double hulls are more susceptible to certain problems than
single-hull vessels. The new double-hull product represents an improved solution
if and only if all construction, maintenance, and operation aspects are adequately
addressed.45
Proper maintenance is solely the shipowners responsibility.46 To assess the
hull condition, regular inspections are made by the shipowner and other stakehold-
ers, including ship crew and port authorities, who ensure safe operation. Effective
inspection is a challenge because of the limited time a tanker spends in port. Corro-
sion is the biggest threat to double-hull tankers and, if undetected, may lead to cata-
strophic structural failure and environmental pollution. Anti-corrosive coatings on
the steel surface provide good corrosion protection, but the cellular nature of double-
hull spaces makes it difficult to inspect and repair the coatings. Furthermore, the steel
surface area is increased by several times in a double-hull girder, making the applica-
tion and inspection of the coating troublesome. The saltiness of the water in ballast
tanks in the double hull, the acidity of the cargo tanks, and temperature-induced
accelerated aging are detrimental to the tanker. Failure to maintain the coatings
and cathodic protection in the ballast and oil tanks may lead to oil leakage.
During operation in the open ocean or coastal zones and ports, several issues
must be addressed: safe cargo handling, monitoring ballast tanks for residual gasses
or oil leakage, and regular inspection of the structure for defects, especially because
a double hull is more susceptible to minor failures. In addition, modern navigation
and decision support systems should be available to the shipmaster to aid in the
avoidance of hazardous conditions.
Striving to achieve market dominance in double-hull tankers, the worlds
most competitive shipyards are using building techniques, such as the automation

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of the building process and robotics, combined with statistical quality control. High
accuracy must support the multiple robot welders.47 The first shipyards to apply this
approach were Odense Lind in Denmark and Hitachi-Zosen in Japan. In 1990, after
earlier successful testing, the first gantry-mounted robot was used in the Odense
shipyard. Thus, the necessary technology existed to build the worlds first double hull
in 1992. The design of mechanical and control systems to allow the welding robots to
access and operate in very restricted spaces still remains a challenge. To address the
limitations of existing welding robots Seoul National University and Daewoo Ship-
building & Marine Engineering jointly developed a significantly improved mobile
welding robot for double-hull structures.48
To comply with the double-hull requirements, owners needed to renew their
fleets and they needed to do it fast. Still, there were many technical challenges that
need to be considered. To tackle these challenges, key industry stakeholders had to
reorganize their innovation processes to allow for more collaboration with external
partners. An example of these changes is the co-operation between Kuwait Oil Tanker
Company (KOTC) and the classification society Det Norske Veritas (DNV).49 DNV was
used both as a technical consultant in the design process and as a classification society.
The KOTC and DNV teams worked together to accommodate the owners require-
ments for the design. KOTC benefited immensely from the analysis of critical areas
such as strength calculation, hull structure fatigue, noise and vibrations, and shaft
alignment. This was very effective as various deficiencies were highlighted during
the course of the construction work and appropriate counter measures were imple-
mented. DNV construction software was customized to better satisfy KOTCs specific
needs. All this resulted in the construction of six double-hull tankers at the Hyundai
and Daewoo shipyards.

Future Openings for More Innovation?


New challenges have arisen. The industry participants could not keep up with
the demand for double-hull tankers, the increasing need to innovate, and unspeci-
fied technical standards.
After a four-year gestation period, the International Association of Classifica-
tion Societies (IACS) has adopted the Common Structural Rules for Tankers and
Bulk Carriers in 2005, which came into effect in 2006.50 Common Structural Rules
(CSR) for new vessel design and construction are the result of cooperation between
the classification societies and the exchange of the latest knowledge, experience, and
technical expertise; however, they do not radically change the preexisting rules.51
Focusing solely on the double-hull oil tankers, the CSR covers vessels above
150 meters in length. The new rules are applicable to the double-hull requirement
and differ from the traditional prescriptive rules (which were valid in the last cen-
tury) such that the ship structure can be optimized in innovative ways, satisfying
the class rule boundaries. The CSR does not formally prevent radical design innova-
tion, but any new design must be demonstrated to be at least as structurally safe as
the CSR design. The American Bureau of Shipping (ABS) and Lloyds Register
(LR) have seen the introduction of the CSR as a business opportunity to position
themselves at the center of forthcoming innovation activities. The two rivals joined

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forces and developed software that will help design and assess oil tankers to comply
with the CSR.52
The CSR has been developed with the emerging IMO Goal-Based Standards
for ship construction in mind. Goal-Based Standards were adopted by IMO in 2010
and will apply to ships built in or after 2016. They are organized in a five-tier frame-
work and consist of the Rules for Rules (goals; functional requirements; verifica-
tion of compliance criteria; technical procedures and guidelines, classification rules
and industry standards; and codes of practice and safety and quality systems).53
The goal-oriented rules, rather than old-fashioned prescriptive rules, are
meant to give more freedom for innovation. Ship safety should be verified against
these goals at each stage of design, construction, and operation. Ultimately, the ship
should be safe and environmentally friendly, meaning that the ship should have
enough strength, structural integrity, and stability to minimize the probability of ship
loss or pollution to the marine environment. The technical challenges related to
double-hull design and construction are included in the functional requirements;
in the future, operation and maintenance issues should be considered in greater
depth. To comply with GBS, the Common Structural Rules are being harmonized
by IACS at the urging of designers, shipyards, and shipowners.54 To clarify, IMO sets
overall goals and safety levels to be satisfied by new construction, but the detailed
rules and recommendations are, in principle, the duty of the class societies. Regard-
ing the detailed regulations, the technical tools and procedures should include a risk-
based rather than deterministic methodology.55

Innovation Dynamics in the Oil Tanker Industry


The analysis of oil tanker innovation has yielded three groups of findings.
First, by observing the innovation dynamics using innovation models, we were
able to identify how industry innovation patterns change and how a conservative
industry opened up for collaborative innovation models. Second, the rise of inno-
vation paradigms is directly linked with the impact of environmental innovation,
which changed the innovation dynamics of the industry through a four-step
chain of events. Finally, the process of environmental innovation in the industry
has changed as well. Table 1 shows the development of oil tankers through three
periods.
The first period (single-hull tankers) covers one century, from the inaugura-
tion of the first tanker up to the 1990s. It is marked by a relatively short period of
innovation driven by technology push nestled between two waves of innovation
driven by the market pull: when tankers were incepted and when the demand for
oil following the post-WWII economic recovery intensified innovative activities.
The imperative was to build larger and faster oil tankers. Innovation was incremen-
tal, with modular adaptations of different ship elements. Radical innovative solutions
appeared in the 1970s in the design and operations phases of a tankers lifecycle with
environmental policies playing a significant role in stimulating those changes. For
example, in order to protect the seas from pollution resulting from the loading and
offloading of crude oil, environmental policies mandated the installation of cleaning
technologies known to the petrochemical industry, thus generating new excitement

140 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 55, NO. 1 FALL 2012 CMR.BERKELEY.EDU
Environmental Regulation and Innovation Dynamics in the Oil Tanker Industry

TABLE 1. Development of Oil Tanker Innovation

Period Characteristics Models of Examples


Innovation

Single-Hull First tanker Market Pull Nobel Tankers


Oil tanks incorporated into the Technology Push Nobel Tankers
hull structure
Division into compartments
Growth in size Market Pull Any VLCC or ULCC through
a generic process focused on
scaling up tanker sizes
(cf. Seawise Giant)
OILPOL sets the stage and Coupling Model British Petroleum
MARPOL officially imposes Sun Oil
cleaning solutions. Companies Any MARPOL tanker through
are also interested in maximizing a generic process where the
profits by minimizing the residual existing knowledge and
oil left in the tanks after they technology had to be slightly
have been emptied. revised to satisfy new
MARPOL imposes new design regulations (cf. Exxon Valdez)
(SBPT/PL)
Double-Hull OPA and MARPOL impose new Integrated Model Kuwait Oil Tanker Company,
design (double-hull) and MARPOL Det Norske Veritas, Hyundai,
accelerates phase-out of single-hull and Daewoo
tankers. Technical challenges Seoul National University and
require that key stakeholders Daewoo
collaborate in design, construction,
operations, and maintenance.
Regulations for Prescriptive approach in Networked Model A networked model could
Innovation regulating the industry is being Expected emerge from collaboration of
abandoned. Policy makers set American Bureau of Shipping
innovation-stimulating policies and Lloyds Register
(IMO designed GBS and IACS
designed CSR).

in innovations in the design of oil tankers and cleaning systems. Environmental


policies also mandated a new design of the oil tanker hull girder to protect the seas
from pollution caused by grounding and collisions. Eventually, the innovation mod-
els applied by the key stakeholders in the industry evolved into the coupling models.
In the second period, several environmental disasters prompted public reac-
tion about how the oil is transported in the waterways. The U.S. government reacted
with the imposed change of the oil tanker design from single-hull to double-hull.
Over the years, regulators have drawn policies to accelerate the phasing out of
old-fashioned and environmentally unsafe single-hull tankers. Some visionary and
financially solid companies, such as Mrsk, deployed their internal R&D resources
and began developing and building double-hulled tankers. However, the imposed
rules left the industry with many challenges that can only be solved by cooperating
and collaborating on new product developments. The combination of accelerated
phasing out and technical challenges has placed speed as the imperative in new
tanker development. This need has motivated a transition to the more advanced
integrated innovation model.

CALIFORNIA MANAGEMENT REVIEW VOL. 55, NO. 1 FALL 2012 CMR.BERKELEY.EDU 141
Environmental Regulation and Innovation Dynamics in the Oil Tanker Industry

Finally, the industry is now in the third period, in which the opening of
innovation processes has become a necessity due to the new requirements and enor-
mous technical challenges. This period is characterized by progressive thinking on the
part of the national and international regulatory bodies of this slow and conservative
industry. These bodies have designed goal-based standards, which state the objectives
that must be achieved but let the participants find their own ways of achieving these
goals. New standards will become effective in 2016, while at the same time the global
oil tanker fleet has become saturated,56 thereby raising a concern among maritime
organizations about the profitability of newly built vessels. In this third period, both
speed and cost have become imperatives in new oil tanker development. Therefore,
it is reasonable to believe that such a framework will encourage the emergence of
the networked model, open innovation being a well-known example. Open inno-
vation is useful during tough times, in the sense that it strengthens operational
efficiency and also preserves and enhances R&D effectiveness.57 In this context, the
industry might see a deeper involvement of suppliers and particularly customers in
new product development, more collaboration of competitors in new product devel-
opment (like ABS and LR), and radical use of information technology in the design
and operations phases of the oil tankers life cycle (for example, development of a
real-time on-board decision support system). However, it will take several years for
the rules and guidance by classification societies58 to be verified by the IMO before
the participants in the maritime industry can collaboratively exploit them to create
more innovation.
The data analysis clearly shows how environmental innovation influenced
the overall innovation dynamics in the oil tanker industry (see Figure 2). This change

FIGURE 2. Innovation Dynamics in the Oil Tanker Industry

DISASTERS
DISASTERS

PUBLIC PRESSURE
PUBLIC PRESSURE
IMPERFECT GOAL-BASED

PRESCRIPTIVE POLICY POLICY


IMPERFECT V
[generation & EI]

TECHNICAL
PRESCRIPTIVE POLICY
CHALLENGES
Innovation

IV
TECHNICAL
CHALLENGES
III

Models
II II (generations) of
innovation

I Environmental
innovation

1878 1970 1990 2016


Time [year]

142 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 55, NO. 1 FALL 2012 CMR.BERKELEY.EDU
Environmental Regulation and Innovation Dynamics in the Oil Tanker Industry

in dynamics happened twice, in the 1970s and the 1990s, through a distinct four-step
chain of events. The first step refers to the occurrence of a large environmental disas-
ter or many smaller environmental disasters. In the second step, there is increasing
public pressure for governmental action. In the third step, national and international
regulatory bodies craft an environmental prescriptive policy relatively quickly, the
imperfections of which lead to the fourth step. The fourth step refers to a large num-
ber of technical challenges that require new solutions from the participants in the oil
tanker industry. New solutions are discovered and implemented by applying new
ways of innovating, which eventually lead to the rise and dominance of a new inno-
vation model or paradigm.
The dynamic interaction between environmental innovation and the indus-
trys change of innovation models has changed environmental innovation itself.
Imperfect prescriptive policies have created many technical challenges, which have
not been particularly welcomed by the major industry participants. These challenges
require a significant amount of additional time and resources. Learning from these
experiences, major participants have been amending polices and working together
with regulatory bodies to create a better context for environmental friendliness in
the oil tanker industry. These activities have led to a new policy, namely, goal-based
standards. Although the effects of this policy have yet to be seen, environmental
innovation has clearly transformed over the years as well, changing from policy-
induced innovation to policy-stimulated innovation (see Table 2).

TABLE 2. Major Environmental Policies Affecting Design, Construction, and


Operations of Oil Tankers

Policy Characteristics

OILPOL 1954 Recognized that most oil pollution resulted from routine shipboard operations such as
the cleaning of cargo tanks. Prohibited the dumping of oily wastes within a certain
distance from land and in special areas where the danger to the environment was
especially acute. Amended in 1962 to extend the limits of protected area, and in 1969
to introduce new tank washing procedure load-on-top.
MARPOL 73/78 Seen as major step in raising construction standards for tankers through more stringent
regulations. In 1973, MARPOL required segregated ballast tanks on new tankers over
70,000 DWT. In 1978, the protocol expanded the requirements for segregated ballast
tanks to all new crude oil tankers of 20,000 DWT and above. Since it entered into
force, there have been a number of amendments regarding mandatory introduction of
double-hull tankers and acceleration of phasing out of single-hull tankers. It also
regulated tank washing procedures by mandating COWing and IGS procedures.
It has been criticized for incomplete regulation where the requirements for SBT/PL
had a number of important impacts on more spillage in groundings.
OPA 1990 Requires new tank vessels operating in U.S. waters to be constructed with double-hulls
and the existing single-hull or double-bottom or double-side vessels to be phased out
under a timetable based on the tank vessels age and tonnage.
CSR 2005 Initiative made by classification societies. CSR abandons traditional prescriptive rules
allowing for ship structures to be optimized within pre-set rule boundaries.
GBS 2010 IMO stops with stringent prescriptive regulations. Overall goals and safety levels are
still set by IMO, but the participants in the oil tanker industry should find their own
ways of achieving those goals. Detailed rules and recommendations will be set by
classification societies.

CALIFORNIA MANAGEMENT REVIEW VOL. 55, NO. 1 FALL 2012 CMR.BERKELEY.EDU 143
Environmental Regulation and Innovation Dynamics in the Oil Tanker Industry

Our study also detected two interesting phenomena that contribute to the
development of the theories of environmental innovation and generations of inno-
vation. These phenomena are also relevant to managerial decision making in compa-
nies outside the maritime industry.
First, the concept of generations of innovations argues that each generation
has emerged in response to social, economic, and technological events. It is perceived
as natural for any organization and industry to advance their innovation processes
sequentially from the first to the fifth generation. However, innovation dynamics in
the oil tanker industry (see Figure 2) has shown that different patterns can emerge.
This means that companies need to recognize the context and then design adequate
innovation processes. Many industry giants from Silicon Valley are doing well by
applying archaic technology push and market pull models.
Second, environmental innovation theory recognizes that environmental pol-
icy influences innovation through instruments and through prescriptive measures
and monitoring, where the latter has proven to be more successful in stimulating
innovation. However, in order to enhance safety, the contemporary practice of reg-
ulating for environmental innovation sets the risk threshold level that a product must
satisfy during the design process, in production, and in use. Participants relying on
the risk-based approach are thus encouraged to come up with solutions and method-
ologies within the acceptable safety boundary. In a pollution-sensitive industry,
the policy-stimulated environmental innovation enabled by the acceptable safety
boundary policy seems to be the most efficient way of pushing organizations to shift
from closed to collaborative innovation models. Therefore, the theory of environ-
mental innovation should recognize a new category of environmental policy: the
acceptable safety boundary policy.

Conclusion
Historical research has shown that the oil tanker segment of the maritime
industry had been using traditional innovation strategies in which (incremental)
innovation is only triggered by shipowners desire for larger and faster oil tankers.
At that time, the traditional manufacturing competitive priorities prevailed in the
industrys strategic landscape. Even when environmental friendliness emerged as
one of the most important competitive priorities, the industry reacted only after a
strong push from its regulatory bodies. The environmental policies have been devel-
oped because of intense public pressure, and their imperfections and prescriptive
character have created many technical challenges for the key industry stakeholders.
Although imperfect, the policy-induced requirements have shaken the conservative
tanker industry, which was inert for almost a century.
However, environmental innovation as described here isnt the sole external
force that influences the dynamics of innovation in this industry. Factors such as
competition and corporate image are also driving the innovation of oil tankers. Price
is no longer the primary factor in an oil companys decision to charter a tanker. Com-
petition has drawn down prices such that chartering the most innovative, reliable,
double-hulled tanker with modern navigation equipment costs almost the same as
an older, less well-equipped tanker. Playing it safe on environmental concerns is also

144 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 55, NO. 1 FALL 2012 CMR.BERKELEY.EDU
Environmental Regulation and Innovation Dynamics in the Oil Tanker Industry

important because every disaster is a significant blow to corporate image, a public


relations catastrophe that could harm oil companies in the long run. To improve their
image, companies set significant amounts of money aside for internal, external, and
joint research projects.
Still, environmental innovation is the most powerful driver of innovation in
the oil tanker industry, which has transformed the industrys innovation paradigms
several times; from the former domination of linear and conservative models, the
new rules are setting the stage for a fully networked and open innovation processes.
Over the decades, the stakeholders innovation processes have been closed and
strictly confidential, but the safety requirements for each phase of a ships operational
life can only be achieved and sustained in a limited time frame by increased collabo-
ration between the stakeholders. However, due to the complexity of ship design,
construction, and operation, clear guidance and industry standards are still needed
for innovative products to satisfy the safety margins, placing the responsibility in
the field of classification societies. The best methodologies and tools must be recog-
nized, and they will require more involvement with universities and other R&D
centers. The new policy-stimulated innovation could open the industry to the col-
laborative and open innovation models. Therefore, participants should be ready to
understand and apply the basic principles of the fifth generation of innovation, the
networked innovation model. Only organizations that recognize this trend and
unfreeze, move, and institutionalize their open innovation processes will be viable
in this highly lucrative but competitive market.

Notes
1. Observations about innovation activities in various segments of the maritime industry can be found
in Jan I. Jenssen and Trond Randy, Factors that promote innovation in shipping companies,
Maritime Policy & Management, 29/2 (2002): 119-133; Jan I. Jenssen and Trond Randy, Perfor-
mance effect of innovation in shipping companies, Maritime Policy & Management, 33/4 (2006):
327-343; David Doloreux and Yannik Malano, On the dynamics of innovation in Quebecs
coastal maritime industry, Technovation, 28/4 (April 2008): 231-243; Australian Maritime Safety
Authority, Comparison of single and double hull tankers, discussion paper, 2001, available at
<www.amsa.gov.au/Publications>.
2. The importance of collaborative and open models of innovation for improving the safety and
environmental issues in the maritime industry was emphasized by a Chairman of the Confed-
eration of European Maritime Technology Societies [Trevor Blakely, Innovationthe key to
success, keynote speech at the 1st European Maritime Research Policy Conference, Brussels,
Belgium, October 18, 2007] and by a Chairman of the International Association of Classifica-
tion Societies (IACS) [Oh Kong-gyun, keynote speech at International Maritime Organization/
IACS Reception, London, UK, June 26, 2009]. Scholars also stressed that importance. For
example, see Jan I. Jenssen, Innovation, capabilities and competitive advantage in Norwegian
shipping, Maritime Policy & Management, 30/2 (2003): 93-106; Henry W. Chesbrough and
Melissa M. Appleyard, Open Innovation and Strategy, California Management Review, 50/1
(Fall 2007): 57-76.
3. Jens Horbach, Determinants of environmental innovationNew evidence from German
panel data sources, Research Policy, 37/1 (February 2008): 163-173.
4. David Popp, Richard G. Newell, and Adam B. Jaffe, Energy, the Environment, and Techno-
logical Change, in Bronwyn H. Halland and Nathan Rosenberg, eds., Handbook of the Economics
of Innovation, Volume II (Burlington, VT: Academic Press, 2010): 873-938.
5. See for example Paul B. Downing and Lawrence J. White, Innovation in Pollution Control,
Journal of Environmental Economics and Management, 13/1 (March 1986): 18-29; Scott R. Milliman
and Raymond Prince, Firm incentives to promote technological change in pollution control,
Journal of Environmental Economics and Management, 17/3 (November 1989): 247-265.

CALIFORNIA MANAGEMENT REVIEW VOL. 55, NO. 1 FALL 2012 CMR.BERKELEY.EDU 145
Environmental Regulation and Innovation Dynamics in the Oil Tanker Industry

6. Adam Jaffe and Karen Palmer, Environmental Regulation and Innovation: A Panel Data Study,
The Review of Economics and Statistics, 79/4 (November 1997): 610-619; Smita B. Brunnermeier and
Mark A. Cohen, Determinants of environmental innovation in US manufacturing industries,
Journal of Environmental Economics and Management, 45/2 (March 2003): 278-293.
7. For example, evidence that the innovation behavior of organizations is correlated with the
stringency of the environmental policy can be found in Manuel Frondel, Jens Horbach, and
Klaus Rennings, What triggers environmental management and innovation? Empirical evi-
dence for Germany, Ecological Economics, 66/1 (May 2008): 153-160.
8. Michael Porter and Claas van der Linde, Toward a New Conception of the Environment-
Competitiveness Relationship, Journal of Economic Perspectives, 9/4 (Fall 1995): 97-118.
9. Dorothy Thornton, Robert A. Kagan, and Neil Gunningham, Sources of Corporate Environ-
mental Performance, California Management Review, 46/1 (Fall 2003): 127-141.
10. Klaus Rennings, Andreas Ziegler, Kathrin Ankele, Esther Hoffmann, and Jan Nill, The influ-
ence of different characteristics of the EU environmental management and auditing scheme on
technical environmental innovations and economic performance, Ecological Economics, 57/1
(April 2006): 45-59; Massimiliano Mazzanti and Roberto Zoboli, Economic instruments and
induced innovation: The European policies on end-of-life vehicles, Ecological Economics, 58/2
(June 2006): 318-337.
11. Richard Florida, Lean and Green: The Move to Environmentally Conscious Manufacturing,
California Management Review, 39/1 (Fall 1996): 80-105; Ans Kolk and Jonatan Pinkse, Busi-
ness Responses to Climate Change: Identifying Emergent Strategies, California Management
Review, 47/3 (Spring 2005): 6-20.
12. Knut Haanaes, Balu Balagopal, David Arthur, Ming Teck Kong, Ingrid Velken, Nina Kruschwitz,
and Michael S. Hopkins, First Look: The Second Annual Sustainability and Innovation Survey,
MIT Sloan Management Review, 52/2 (Winter 2011): 77-83.
13. Their brief description is based on Roy Rothwell, Successful industrial innovation: critical fac-
tors for the 1990s, R&D Management, 22/3 (July 1992): 221-239; Roy Rothwell, Towards the
Fifth-Generation Innovation Process, International Marketing Review, 11/1 (1994): 7-31; Zoran
Perunovic and Thomas B. Christiansen, Exploring Danish innovative manufacturing perfor-
mance, Technovation, 25/9 (September 2005): 1051-1058.
14. Bruce L. Berg, Qualitative Research Methods for the Social Sciences, 5th edition (Boston, MA: Pearson,
2003).
15. Matthew B. Miles and Michael A. Huberman, Qualitative Data Analysis, 2nd edition (Thousand
Oaks, CA: Sage Publications, 2004).
16. Berg, op. cit.
17. The complete story about first tankers can be found in Robert W. Tolf, The Russian Rockefellers:
The Saga of the Nobel Family and the Russian Oil Industry (Stanford, CA: Hoover Institution Press,
1976).
18. Richard Woodman, The History of the Ship: The Comprehensive Story of Seafaring from the Earliest
Times to the Present Day (New York, NY: Lyons Press, 1998).
19. International Maritime Organization, <www.imo.org/OurWork/Environment/PollutionPrevention/
OilPollution/Pages/Background.aspx>.
20. The Yom Kippur War in 1973 and the Iranian Revolution in 1979.
21. Mark Huber, Tanker Operations: A Handbook for the Person-In-Charge (PIC) (Centreville, MD:
Cornell Maritime Press), 23.
22. IMO explains the load-on-top procedure as follows: A mixture of water and residue is pumped
into a special slop tank. During the course of the return voyage to the loading terminal this mix-
ture separates. Oil, being lighter than water, gradually floats to the surface leaving the denser
water at the bottom. This water is then pumped into the sea, leaving only crude oil in the tank.
At the loading terminal fresh crude oil is then loaded on top of it. The process had advantages for
the owner of the oil, since the oil normally lost during tank cleaning can be saved (as much as
800 tons of oil on a large tanker), but the main beneficiary was the environment.
23. The introduction and subsequent legislation of COWing 20 years after the unloading problems
were recognized and regulated by OILPOL in 1954 were most likely due to the increase in oil
prices and corporate desire to maximize profits by minimizing the residues left after the tanks
had been emptied.
24. Walter C. Cowles, Practical guide to the design and installation of crude oil washing systems,
TransactionsSociety of Naval Architects and Marine Engineers, 88 (1981): 27-53.
25. An inert gas is a non-reactive gas with low oxygen content that is used to fill empty spaces in
tanks. More information about inert gases can be found in Alfred E. Stanford, What inert gas

146 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 55, NO. 1 FALL 2012 CMR.BERKELEY.EDU
Environmental Regulation and Innovation Dynamics in the Oil Tanker Industry

systems mean to marine operator, TransactionSociety of Naval Architects and Marine Engineers,
71 (1963): 203- 219.
26. International Maritime Organization, Resolutions adopted by the Assembly from 1979-1985,
<www.imo.org/knowledgecentre/howandwheretofindimoinformation/indexofimoresolutions/
documents/julian.pdf>.
27. Cowles, op. cit.; Stanford, op. cit.
28. British Petroleum Shipping, Clean Seas: Our commitment to the environment, 2005, <www.
bp.com/downloadlisting.do?categoryId=9019843&contentId=7037116>; Jack Devanney, The
Tankship Tromedy: The Impending Disasters in Tankers (Tavernier, FL: The CTX Press, 2006).
29. Peter Burgherr, In-depth analysis of accidental oil spills from tankers in the context of global
spill trends from all sources, Journal of Hazardous Materials, 140 (2007): 245-256.
30. Devanney, op. cit., 41-42.
31. David J. Eyres, Ship Construction, 6th Edition (Oxford: Butterworth-Heinemann, 2007), pp. 3-6.
32. The International Tanker Owners Pollution Federation Limited, <www.itopf.com/information-
services/data-and-statistics/case-histories/elist.html>.
33. Oil Pollution Act of 1990, <http://epw.senate.gov/opa90.pdf>.
34. Australian Maritime Safety Authority, op. cit.
35. Oil Pollution Act of 1990, op. cit.
36. International Maritime Organization, Amendment to Annex I of MARPOL 73/78, Interna-
tional Convention for the Prevention of Pollution From Ships MARPOL, 1992.
37. No data is available for the size of claims. The reason might be that the ship sank so far away from
any coast, thereby minimizing the visible damage to the coastal environment and industries.
38. Nathan Menefee, Severe Hogging: Tanker splits in two, The Maritime Blog, 2009 <http://
themaritimeblog.com/1202/severe-hogging-tanker-splits-in-two-in-suez>.
39. The International Tanker Owners Pollution Federation Limited, op. cit.
40. European Commission Regulation 417/2002.
41. Australian Maritime Safety Authority, op. cit.
42. Philip G. Rynn, Structure Defects on Double Hull Tankers, Tanker Structure Cooperative
Forum Shipbuilders Meeting, Bussan, Korea, October 24-25, 2007; International Maritime
Organization, Decision of other IMO bodies MSC 77/2/6, Maritime Safety Committee, sub-
mitted by Intertanko, 2003.
43. International Association of Classification Societies, Guideline for scope of damage stability
verification on new oil tankers, chemical tankers and gas carriers, London, Revision 01, 2010.
44. American Bureau of Shipping, Guidance Notes on Sloshing and Structural Analysis of LNG Pump
Tower, Houston, April 2006.
45. Paul Markides, Tanker Safety Issues, International Seminar on Tanker Safety, Pollution Pre-
vention and Spill Preparedness, Shanghai, China, 2005.
46. For more detailed description of oil tanker maintenance see: International Association of Classifi-
cation Societies, Recommendation 87: Guidelines for Coating Maintenance & Repairs for Ballast
Tanks and Combined Cargo/Ballast Tanks on Oil Tankers, Revision 1, 2006; International Asso-
ciation of Classification Societies, Double Hull Oil TankersGuidelines for Surveys, Assessment
and Repair of Hull Structures, 2007; S.G. Kalghatgi, C. Serratella, and J.B. Hagan, Life Cycle of
Ships and Offshore Structures: Hull Inspection and Maintenance System, American Bureau of
Shipping Technical Papers, Houston, 2009.
47. R.L. Storch, Structural Design for Production: A Human Factors Viewpoint, The Society of Naval
Architects and Marine Engineers (SNAME) and the Ship Structure Committee (SSC), 1996.
48. Namkug Ku, Ju-hwan Cha, Kyu-Yeul Lee, Jongwon Kim, Tae-wan Kim, Sol Ha, and Donghun
Lee, Development of a mobile welding robot for double-hull structures in shipbuilding, Journal
of Marine Science and Technology, 15/4 (2010): 374-385.
49. Det Norske Veritas, Close cooperation on new tankers, DNV Tanker Update, 1 (2008).
50. International Association of Classification Societies, Common Structural Rules for Double
Hull Oil Tankers, London, IACS, 2006.
51. Bureau Veritas, A Commentary on the IACS Common Structural Rules for Tankers and Bulk
Carriers, Paris, Bureau Veritas, 2006, DCM 06/00033 FJV.
52. Marine Log, LR and ABS release jointly developed CSR software, April 2011, available at
<www.marinelog.com>.
53. For more about goal-based standards see International Maritime Organization, Goal-based new
ship construction standards: Generic guidelines for developing goal-based standards, Note by the
Secretariat MSC 87/5, 2009; Heike Hoppe, Goal-based standardsA new approach to the inter-
national regulations of ship construction, WMU Journal of Maritime Affairs, 4 (2009): 169-180.

CALIFORNIA MANAGEMENT REVIEW VOL. 55, NO. 1 FALL 2012 CMR.BERKELEY.EDU 147
Environmental Regulation and Innovation Dynamics in the Oil Tanker Industry

54. International Maritime Organization, Goal-based new ship construction standards, Harmonized
Common Structural Rules (HSR) for oil tankers and bulk carriers, MSC 87/5/6, submitted by
IACS, 2010.
55. Standard ship rules are deterministic in nature; they consist of prescriptive regulations, derived
from experience and statistical data, representing the best engineering practices at the time of
origination. Prescriptive regulations can constrain innovation, especially if a novel design falls
outside the scope of class and regulatory requirements. Risk-based methodology utilizes prob-
abilistic approaches in ship life phases, accounting for information that is not adequately con-
sidered by traditional deterministic assessment (e.g., uncertainties in wave loads, hull girder
strength, and different analysis procedures). Having safety as the main goal, this methodology
can be used for innovative ship designs. The concept has been on the agenda of IMO since
2004 and is being progressively accepted. Risk-based methodology is well established in other
industries. More information about the methodology can be found in Apostolos Papanikolau,
ed., Risk-based Ship Design: Methods, Tools, and Applications (Berlin: Springer, 2009).
56. Robert Wright, Mini-boom is small relief for shipowners, Financial Times, March 28, 2012.
57. Alberto Di Minini, Federico Frattini, and Andrea Piccaluga, Fiat: Open Innovation in Down-
turn (1993-2003), California Management Review, 52/3 (Spring 2010): 132-159.
58. A classification society establishes and maintains technical standards for the construction and
operation of ships and offshore structures. According to the International Association of Clas-
sification Societies the purpose of a classification society is to provide classification and statu-
tory services and assistance to the maritime industry and regulatory bodies as regards maritime
safety and pollution prevention, based on the accumulation of maritime knowledge and tech-
nology. There are around 27 classification societies in the world and some of the oldest and
largest are Lloyds Register (UK), Bureau Veritas (France), RINA (Italy), American Bureau of
Shipping (USA), Det Norske Veritas (Norway), Germanischer Lloyd (Germany), and Nippon
Kaiji Kyokai (Japan).

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