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Friday, 30 January 15
CONTANGO AND TANKERS - SKULD
 KNOWLEDGE TO ELEVATE
Like an invitation to a dance, the word contango may have some people flustered, but for tanker owners this market phenomenon is a serious matter of securing revenue for their vessels, while ensuring that they remain safe when employing them as floating storage facilities.
The Association is grateful to Messrs. London Offshore Consultants and Andrew Moore & Associates for providing input towards this advisory.
Contango
This word encapsulates a specific situation on the commodity markets where the future price of a given commodity is above the expected future spot price.
It arises where buyers are willing to pay more for a commodity, in the future, than the actual expected price.
A driving factor may be due to a willingness to pay a premium for the commodity in the future, without incurring storage and transportation costs of buying it today.
The fall in oil prices, contango and the impact on the tanker market
The last time oil prices fell dramatically was during the financial crisis of 2008, when it dropped from a record USD145 per barrel to under USD40. While this led to a lot of financial losses, enterprising parties seized the opportunity to buy cheap oil and given the shortage of land based storage they used tankers as floating tank farms. When the price rebounded, the oil was likely sold at a profit.
Oil prices fell significantly at the end of last year and at present they remain very low. The impact of this is felt across the world particularly when a number of oil economies as well as development projects work towards a price of USD100. The current price of below USD50 per barrel puts them under pressure while providing a boost to intensive oil consumers.
Again this market situation has given rise to contango, and again this has meant that tankers found themselves in great demand towards the end of last year. At first this was due to the rush to buy perceived cheap oil, but as shore side storages started to fill up, increasingly tankers were hired to act as floating storage facilities. Either way this was a welcome development to tanker owners and long term period charterers who saw their vessels fetch a solidly improved rate in the spot market.
Risks arising from the use of a tanker as a floating storage facility
How long will this period of low oil prices last? That is a question on which a lot of money will turn. Not least because buying and storing oil now is based on the goal of being able to sell it at a profit in the future, but that requires oil prices to rise by more than the cost of shore or ship storage and subsequent transport to the actual receiver.
The future development of oil prices is beyond the scope of this advisory, but events in the middle east will no doubt have a bearing on it.
For tanker owners, however, there are a number of issues that need to be considered before fixing a vessel out as a floating storage facility. Issues include:
- the vessel may engage in multiple STS operations if cargo is sold off in parcels, this may lead to shortages given that sea conditions can make exact ullages difficult
- if the cargo on board is bunker fuel, there may be requests for blending on board to achieve particular specifications (this may specifically be in breach of SOLAS)
- the origin of the cargo needs to be carefully checked, as in some places in the world there have been issues with smuggling and sanctions breaches
- cargo quality may be affected by long term storage at sea and therefore a full understanding of the cargo specifications and the cargo properties is important: cargo may become unstable, produce sediment, have significant microbial activity, there may be settling of contaminants and sludge, separation of water content or otherwise deteriorate over time
- particularly with sludge / wax formation (made up of both organic and inorganic materials) may lead to very significant pumping and ROB issues
- tank coatings, pumps, lines and valves may be affected if cargo becomes unstable, separates or on loading contains a significant amount of aggressive materials, including any prolonged contact with hydrogen sulphide (H2S)
- tank cleaning: long term storage of crude is likely to mean that the tanks will need more than a usual COW wash and a full tank cleaning may be necessary
- otherwise routine tank vapour management may become an issue, as venting may not be possible in all locations, and this is exasperated if the oil had a high (H2S) content, say greater than 15 ppm
- temperature fluctuations can cause venting during afternoons which may be followed by a drop in pressure at night, thus necessitating the running of the TUG (Top Up Generator) to avoid air being sucked in to the tanks or risk the atmosphere reaching the explosive zone
- if the vessel will be at anchorage, suitable preparation and maintenance of the main engine and auxiliaries will be necessary
- the hull may become fouled if the vessel stays at any location for a significant amount of time, and that may occur during drifting as well as short voyages followed by lengthy stays at anchorage or drifting
- the vessel’s class will need to be consulted, at least for the arrangement of periodic surveys and maintenance of certificates
- manning will be important, including compliance with SOLAS, SCTW and the MLC, as well as arrangements for appropriate crew rotations and shore leave
- vessels drifting or at outer anchorages need to maintain safe levels of fuel, water and provisions
This is not meant to be an exhaustive list, but it should highlight some of the key issues that will need to be addressed if the planned operation as a floating storage facility is to be performed safely and successfully.
Physical and commercial loss prevention advice
Vessel suitability
The starting point for any long term storage will be an assessment of the vessel’s suitability for this purpose. An important factor will be whether the vessel will be at sea or anchorage or otherwise operating. The state of the tanks will also be key, as the long term storage of cargo may put strains on the coating and lead to deterioration and corrosion.
STS operations
There are a number of issues that must be considered with any STS operation, and a full exposition goes beyond the scope of this advisory, but ensuring that it can done safely is paramount (factors include weather, sea states, fendering, the compatibility between vessels, etc.).
If many STS operations are envisaged, with cargo being parcelled out then there is an added risk of shortage issues, as it may not be easy to ensure that ullages are accurate and that only the correct amount is transferred. Paying extra attention to this issue will be important.
Smuggling and sanction breaches
An additional factor is that in some locations it has been known that smuggling may occur or that sanctions breaching activities are undertaken. Members should at all times ensure that the cargo they are taking is legitimate and fully documented. More information can be found here: Origin of cargo and Iranian oil STS.
Blending
If members are asked to engage in blending of cargo, it is important to remember that this is not permitted under SOLAS for any time the vessel is on a sea voyage. Further information on this regulation can be found here: SOLAS and blending.
Blending can also be an issue for P&I cover, as a new product is created (as opposed to co-mingling the same cargo / grade from different sources), and may also pose bill of lading challenges.
It may be necessary to have a laboratory set up on the vessel with a suitable expert in attendance to ensure that repeat operations result in the desired outcome, or risk possible contamination claims.
Cargo quantity
Even if the vessel does not engage in frequent STS operations, it will be necessary to monitor the volume of the cargo on board with periodic dipping and ROB calculations.
If the cargo is of the kind that can lose significant volume over time then this must be understood as an on-going issue.
Cargo quality
While some cargo types are stable, and not easily affected by long term storage at sea, others may be very sensitive or otherwise suffer deterioration over time. The particular cargo to be laden and stored must be properly understood, as well as the time frame for the proposed storage.
Should storage exceed the safe “shelf life” of the cargo, then action may be necessary to ensure it does not deteriorate significantly or risk potentially dramatic claims from ultimate cargo receivers.
Contractual risk apportionment
Owners and charterers should ensure that before fixing, the parties work out the full range of risk scenarios that come with the use of the vessel as a floating storage facility and make sure these are addressed appropriately in the final fixed charterparty.
That includes apportionment of risks, extra costs, hull and tank cleaning as well as insurance coverage issues, which will need to be addressed. Otherwise these are likely to be fertile ground for disputes.
Failing to contract carefully can be financially devastating
Insurance implications
Using a vessel as a long term oil storage facility may impact insurance coverages, as this may not be the trade for which she is normally insured, and indeed this operation is not like a hot or cold lay-up situation. It would be prudent consult with underwriters about the potential impact before fixing the vessel for this purpose.
For vessel specific enquiries, members are asked to contact their usual Skuld business unit.
Source: SKULD | Hellenic Shipping
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Sunday, 15 February 15
BALTIC DRY INDEX CONTINUALLY DIPPED IN RED
COALspot.com: The Baltic Dry Index continues its decline and fell 5.18 pct to 530 points week on week due to falling commodity prices and declining ...
Saturday, 14 February 15
SHALE GAS AND TIGHT OIL ARE COMMERCIALLY PRODUCED IN JUST FOUR COUNTRIES - EIA
KNOWLEDGE TO ELEVATE
The United States, Canada, China, and Argentina are currently the only four countries in the world that are producing com ...
Friday, 13 February 15
U.S. WEEKLY COAL PRODUCTION SHOWS 10% DECLINE
COALspot.com – United States the world's one of the largest coal producers, produced approximately 18.1 million short tons (mmst) of coal ...
Friday, 13 February 15
SMALL AND MEDIUM-SIZED SHIP OWNERS SQUEEZED OUT OF THE MARKET ON CRASHING DRY BULK MARKET AND EUROZONE CRISIS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
Financing issues have started to tighten the noose in the throats of small and medium-size ship owners, who were already facing problems over the p ...
Thursday, 12 February 15
CAPESIZE: THE BEST DESCRIPTION FOR THE MARKET IS, FLAT - FEARNRESEARCH
Handy
The handy and supra market is also being affected by the marginal volume of activity in the commodity sales. We see a small upturn in the T ...
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- Heidelberg Cement - Germany
- Planning Commission, India
- Electricity Generating Authority of Thailand
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Savvy Resources Ltd - HongKong
- Krishnapatnam Port Company Ltd. - India
- Rio Tinto Coal - Australia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Trasteel International SA, Italy
- Directorate Of Revenue Intelligence - India
- Posco Energy - South Korea
- Tata Chemicals Ltd - India
- Jaiprakash Power Ventures ltd
- CIMB Investment Bank - Malaysia
- Gujarat Electricity Regulatory Commission - India
- Straits Asia Resources Limited - Singapore
- Essar Steel Hazira Ltd - India
- New Zealand Coal & Carbon
- SN Aboitiz Power Inc, Philippines
- Ministry of Transport, Egypt
- Wood Mackenzie - Singapore
- London Commodity Brokers - England
- Sarangani Energy Corporation, Philippines
- The University of Queensland
- Kepco SPC Power Corporation, Philippines
- Semirara Mining Corp, Philippines
- Anglo American - United Kingdom
- Kobexindo Tractors - Indoneisa
- Offshore Bulk Terminal Pte Ltd, Singapore
- Karaikal Port Pvt Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- LBH Netherlands Bv - Netherlands
- Sojitz Corporation - Japan
- Romanian Commodities Exchange
- SMG Consultants - Indonesia
- Merrill Lynch Commodities Europe
- Ministry of Finance - Indonesia
- Chettinad Cement Corporation Ltd - India
- Meenaskhi Energy Private Limited - India
- Oldendorff Carriers - Singapore
- Global Coal Blending Company Limited - Australia
- Indogreen Group - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Thai Mozambique Logistica
- Holcim Trading Pte Ltd - Singapore
- Borneo Indobara - Indonesia
- Commonwealth Bank - Australia
- Maharashtra Electricity Regulatory Commission - India
- Power Finance Corporation Ltd., India
- Medco Energi Mining Internasional
- Siam City Cement - Thailand
- Indonesian Coal Mining Association
- Petron Corporation, Philippines
- Vizag Seaport Private Limited - India
- Bukit Makmur.PT - Indonesia
- Economic Council, Georgia
- Marubeni Corporation - India
- San Jose City I Power Corp, Philippines
- Africa Commodities Group - South Africa
- Parliament of New Zealand
- Electricity Authority, New Zealand
- PNOC Exploration Corporation - Philippines
- Bukit Baiduri Energy - Indonesia
- Standard Chartered Bank - UAE
- Salva Resources Pvt Ltd - India
- ASAPP Information Group - India
- Sinarmas Energy and Mining - Indonesia
- Minerals Council of Australia
- Sree Jayajothi Cements Limited - India
- Kideco Jaya Agung - Indonesia
- Pendopo Energi Batubara - Indonesia
- Tamil Nadu electricity Board
- GAC Shipping (India) Pvt Ltd
- Coastal Gujarat Power Limited - India
- Indian Energy Exchange, India
- Binh Thuan Hamico - Vietnam
- Sindya Power Generating Company Private Ltd
- Miang Besar Coal Terminal - Indonesia
- Coal and Oil Company - UAE
- Antam Resourcindo - Indonesia
- Dalmia Cement Bharat India
- Wilmar Investment Holdings
- Asia Pacific Energy Resources Ventures Inc, Philippines
- CNBM International Corporation - China
- Jorong Barutama Greston.PT - Indonesia
- IEA Clean Coal Centre - UK
- Maheswari Brothers Coal Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Xindia Steels Limited - India
- Indian Oil Corporation Limited
- Lanco Infratech Ltd - India
- Kartika Selabumi Mining - Indonesia
- Ministry of Mines - Canada
- Alfred C Toepfer International GmbH - Germany
- Kalimantan Lumbung Energi - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Videocon Industries ltd - India
- Metalloyd Limited - United Kingdom
- Australian Coal Association
- GVK Power & Infra Limited - India
- Mercator Lines Limited - India
- TeaM Sual Corporation - Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- India Bulls Power Limited - India
- Vedanta Resources Plc - India
- International Coal Ventures Pvt Ltd - India
- Bharathi Cement Corporation - India
- Timah Investasi Mineral - Indoneisa
- Neyveli Lignite Corporation Ltd, - India
- PowerSource Philippines DevCo
- Baramulti Group, Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Eastern Energy - Thailand
- The Treasury - Australian Government
- Mercuria Energy - Indonesia
- Ind-Barath Power Infra Limited - India
- Indo Tambangraya Megah - Indonesia
- Bulk Trading Sa - Switzerland
- Indika Energy - Indonesia
- Global Business Power Corporation, Philippines
- Bhoruka Overseas - Indonesia
- Grasim Industreis Ltd - India
- Malabar Cements Ltd - India
- AsiaOL BioFuels Corp., Philippines
- Orica Australia Pty. Ltd.
- Simpson Spence & Young - Indonesia
- Kaltim Prima Coal - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Parry Sugars Refinery, India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- SMC Global Power, Philippines
- Directorate General of MIneral and Coal - Indonesia
- European Bulk Services B.V. - Netherlands
- Samtan Co., Ltd - South Korea
- Rashtriya Ispat Nigam Limited - India
- Australian Commodity Traders Exchange
- Asmin Koalindo Tuhup - Indonesia
- ICICI Bank Limited - India
- Latin American Coal - Colombia
- Edison Trading Spa - Italy
- Eastern Coal Council - USA
- Central Electricity Authority - India
- Renaissance Capital - South Africa
- Uttam Galva Steels Limited - India
- Interocean Group of Companies - India
- Kumho Petrochemical, South Korea
- The State Trading Corporation of India Ltd
- Larsen & Toubro Limited - India
- Madhucon Powers Ltd - India
- Chamber of Mines of South Africa
- Georgia Ports Authority, United States
- Attock Cement Pakistan Limited
- IHS Mccloskey Coal Group - USA
- MS Steel International - UAE
- Bhushan Steel Limited - India
- Meralco Power Generation, Philippines
- Carbofer General Trading SA - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Leighton Contractors Pty Ltd - Australia
- VISA Power Limited - India
- Therma Luzon, Inc, Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Gujarat Mineral Development Corp Ltd - India
- Manunggal Multi Energi - Indonesia
- Barasentosa Lestari - Indonesia
- White Energy Company Limited
- TNB Fuel Sdn Bhd - Malaysia
- Intertek Mineral Services - Indonesia
- Price Waterhouse Coopers - Russia
- Coalindo Energy - Indonesia
- Iligan Light & Power Inc, Philippines
- Altura Mining Limited, Indonesia
- Formosa Plastics Group - Taiwan
- McConnell Dowell - Australia
- Globalindo Alam Lestari - Indonesia
- Mintek Dendrill Indonesia
- Ambuja Cements Ltd - India
- Aboitiz Power Corporation - Philippines
- Deloitte Consulting - India
- Mjunction Services Limited - India
- OPG Power Generation Pvt Ltd - India
- Toyota Tsusho Corporation, Japan
- Jindal Steel & Power Ltd - India
- Aditya Birla Group - India
- Independent Power Producers Association of India
- Billiton Holdings Pty Ltd - Australia
- Sical Logistics Limited - India
- Bangladesh Power Developement Board
- Thiess Contractors Indonesia
- South Luzon Thermal Energy Corporation
- Energy Development Corp, Philippines
- GMR Energy Limited - India
- Semirara Mining and Power Corporation, Philippines
- Banpu Public Company Limited - Thailand
- Singapore Mercantile Exchange
- Cigading International Bulk Terminal - Indonesia
- Central Java Power - Indonesia
- Port Waratah Coal Services - Australia
- Agrawal Coal Company - India
- Bayan Resources Tbk. - Indonesia
- Siam City Cement PLC, Thailand
- Cement Manufacturers Association - India
- Bahari Cakrawala Sebuku - Indonesia
- Makarim & Taira - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Energy Link Ltd, New Zealand
- Gujarat Sidhee Cement - India
- Sakthi Sugars Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- Star Paper Mills Limited - India
- Riau Bara Harum - Indonesia
- Goldman Sachs - Singapore
- Bhatia International Limited - India
- Orica Mining Services - Indonesia
- Global Green Power PLC Corporation, Philippines
- PTC India Limited - India
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