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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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Monday, 09 February 15
Q2' CFR SOUTH CHINA COAL SWAP DECLINED 3.28% TO $ 56.92 W-O-W
COALspot.com: API 8 CFR South China Coal swap for Q2’ 2015 delivery declined US$ 1.93 (-3.28%) per MT month over month and US$ 0.10 (-0 ...
Sunday, 08 February 15
BDI FELL CONTINUOUSLY HIT A THREE DECADES LOW
COALspot.com: This week Baltic Exchange Dry Freight Index (BDI) fell continuously hit a three decades low.
The BDI continuously fell and was d ...
Friday, 06 February 15
WEEKLY U.S. COAL PRODUCTION UP AN ESTIMATED 1.1% FROM LAST WEEK - EIA
COALspot.com – United States the world's one of the largest coal producers, produced approximately 20.1 million short tons (mmst) of coal ...
Friday, 06 February 15
SHIP DAMAGED BY FIRE CAUSED BY PIRATES FOUND TO BE CONSTRUCTIVE TOTAL LOSS - TAYLOR WESSING
KNOWLEDGE TO ELEVATE
The High Court was asked to determine a number of preliminary issues, including whether a vessel was a constructive total ...
Thursday, 05 February 15
BDI HAS NOW FALLEN A LEVEL CLOSE TO THE INDEX'S HISTORIC LOW - INTERMODAL
They say a picture is worth a thousand words and in this instance just one look at the tables above is enough to understand the great pressure the ...
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- Australian Commodity Traders Exchange
- Electricity Authority, New Zealand
- IHS Mccloskey Coal Group - USA
- Kobexindo Tractors - Indoneisa
- Binh Thuan Hamico - Vietnam
- Edison Trading Spa - Italy
- Maharashtra Electricity Regulatory Commission - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Global Coal Blending Company Limited - Australia
- Heidelberg Cement - Germany
- Agrawal Coal Company - India
- Altura Mining Limited, Indonesia
- Trasteel International SA, Italy
- Vedanta Resources Plc - India
- London Commodity Brokers - England
- Planning Commission, India
- Savvy Resources Ltd - HongKong
- Rio Tinto Coal - Australia
- Georgia Ports Authority, United States
- Tata Chemicals Ltd - India
- CNBM International Corporation - China
- Thai Mozambique Logistica
- Therma Luzon, Inc, Philippines
- The University of Queensland
- Standard Chartered Bank - UAE
- TeaM Sual Corporation - Philippines
- Power Finance Corporation Ltd., India
- Independent Power Producers Association of India
- Jorong Barutama Greston.PT - Indonesia
- Directorate Of Revenue Intelligence - India
- San Jose City I Power Corp, Philippines
- Ministry of Transport, Egypt
- Pipit Mutiara Jaya. PT, Indonesia
- Sical Logistics Limited - India
- Coastal Gujarat Power Limited - India
- Kaltim Prima Coal - Indonesia
- IEA Clean Coal Centre - UK
- Bukit Baiduri Energy - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Aboitiz Power Corporation - Philippines
- Central Java Power - Indonesia
- Cement Manufacturers Association - India
- Indian Oil Corporation Limited
- Africa Commodities Group - South Africa
- Wood Mackenzie - Singapore
- Star Paper Mills Limited - India
- Samtan Co., Ltd - South Korea
- Energy Link Ltd, New Zealand
- Mercator Lines Limited - India
- Miang Besar Coal Terminal - Indonesia
- PowerSource Philippines DevCo
- Chettinad Cement Corporation Ltd - India
- PNOC Exploration Corporation - Philippines
- Jaiprakash Power Ventures ltd
- Gujarat Electricity Regulatory Commission - India
- Deloitte Consulting - India
- Timah Investasi Mineral - Indoneisa
- Mercuria Energy - Indonesia
- Ceylon Electricity Board - Sri Lanka
- OPG Power Generation Pvt Ltd - India
- Bulk Trading Sa - Switzerland
- Ministry of Finance - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Mjunction Services Limited - India
- VISA Power Limited - India
- Gujarat Sidhee Cement - India
- Posco Energy - South Korea
- Globalindo Alam Lestari - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Indika Energy - Indonesia
- Iligan Light & Power Inc, Philippines
- Karaikal Port Pvt Ltd - India
- Australian Coal Association
- Larsen & Toubro Limited - India
- Coalindo Energy - Indonesia
- Romanian Commodities Exchange
- Directorate General of MIneral and Coal - Indonesia
- Interocean Group of Companies - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Essar Steel Hazira Ltd - India
- Dalmia Cement Bharat India
- TNB Fuel Sdn Bhd - Malaysia
- GVK Power & Infra Limited - India
- Sojitz Corporation - Japan
- Siam City Cement - Thailand
- Meenaskhi Energy Private Limited - India
- Eastern Coal Council - USA
- AsiaOL BioFuels Corp., Philippines
- Singapore Mercantile Exchange
- LBH Netherlands Bv - Netherlands
- Meralco Power Generation, Philippines
- Tamil Nadu electricity Board
- Sinarmas Energy and Mining - Indonesia
- Eastern Energy - Thailand
- PetroVietnam Power Coal Import and Supply Company
- Xindia Steels Limited - India
- Simpson Spence & Young - Indonesia
- Barasentosa Lestari - Indonesia
- Antam Resourcindo - Indonesia
- Videocon Industries ltd - India
- Bukit Asam (Persero) Tbk - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Jindal Steel & Power Ltd - India
- Attock Cement Pakistan Limited
- Price Waterhouse Coopers - Russia
- Bahari Cakrawala Sebuku - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Makarim & Taira - Indonesia
- Kideco Jaya Agung - Indonesia
- Orica Australia Pty. Ltd.
- Siam City Cement PLC, Thailand
- Manunggal Multi Energi - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Marubeni Corporation - India
- Petron Corporation, Philippines
- Coal and Oil Company - UAE
- Grasim Industreis Ltd - India
- Bangladesh Power Developement Board
- Holcim Trading Pte Ltd - Singapore
- Economic Council, Georgia
- Kumho Petrochemical, South Korea
- Electricity Generating Authority of Thailand
- Bayan Resources Tbk. - Indonesia
- Intertek Mineral Services - Indonesia
- ASAPP Information Group - India
- Sakthi Sugars Limited - India
- Merrill Lynch Commodities Europe
- ICICI Bank Limited - India
- McConnell Dowell - Australia
- South Luzon Thermal Energy Corporation
- Pendopo Energi Batubara - Indonesia
- Banpu Public Company Limited - Thailand
- PTC India Limited - India
- Kepco SPC Power Corporation, Philippines
- Medco Energi Mining Internasional
- Offshore Bulk Terminal Pte Ltd, Singapore
- Latin American Coal - Colombia
- Bharathi Cement Corporation - India
- Ambuja Cements Ltd - India
- Port Waratah Coal Services - Australia
- Baramulti Group, Indonesia
- Semirara Mining and Power Corporation, Philippines
- Energy Development Corp, Philippines
- GMR Energy Limited - India
- India Bulls Power Limited - India
- European Bulk Services B.V. - Netherlands
- Indo Tambangraya Megah - Indonesia
- Formosa Plastics Group - Taiwan
- Madhucon Powers Ltd - India
- New Zealand Coal & Carbon
- Rashtriya Ispat Nigam Limited - India
- Chamber of Mines of South Africa
- Indonesian Coal Mining Association
- Lanco Infratech Ltd - India
- Kalimantan Lumbung Energi - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Cigading International Bulk Terminal - Indonesia
- Straits Asia Resources Limited - Singapore
- Riau Bara Harum - Indonesia
- White Energy Company Limited
- Parry Sugars Refinery, India
- Bhatia International Limited - India
- Malabar Cements Ltd - India
- Kartika Selabumi Mining - Indonesia
- International Coal Ventures Pvt Ltd - India
- Ministry of Mines - Canada
- Wilmar Investment Holdings
- Alfred C Toepfer International GmbH - Germany
- Sindya Power Generating Company Private Ltd
- Toyota Tsusho Corporation, Japan
- Orica Mining Services - Indonesia
- Bhoruka Overseas - Indonesia
- SN Aboitiz Power Inc, Philippines
- Bhushan Steel Limited - India
- Anglo American - United Kingdom
- Commonwealth Bank - Australia
- GAC Shipping (India) Pvt Ltd
- The State Trading Corporation of India Ltd
- Salva Resources Pvt Ltd - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Bukit Makmur.PT - Indonesia
- Minerals Council of Australia
- Semirara Mining Corp, Philippines
- Global Business Power Corporation, Philippines
- Renaissance Capital - South Africa
- Borneo Indobara - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- GN Power Mariveles Coal Plant, Philippines
- MS Steel International - UAE
- Uttam Galva Steels Limited - India
- Sree Jayajothi Cements Limited - India
- Krishnapatnam Port Company Ltd. - India
- Indogreen Group - Indonesia
- Metalloyd Limited - United Kingdom
- Oldendorff Carriers - Singapore
- Sarangani Energy Corporation, Philippines
- Ind-Barath Power Infra Limited - India
- Aditya Birla Group - India
- Goldman Sachs - Singapore
- Billiton Holdings Pty Ltd - Australia
- Carbofer General Trading SA - India
- Parliament of New Zealand
- Karbindo Abesyapradhi - Indoneisa
- Thiess Contractors Indonesia
- CIMB Investment Bank - Malaysia
- Central Electricity Authority - India
- Maheswari Brothers Coal Limited - India
- Mintek Dendrill Indonesia
- Indian Energy Exchange, India
- Vizag Seaport Private Limited - India
- SMG Consultants - Indonesia
- SMC Global Power, Philippines
- Global Green Power PLC Corporation, Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- The Treasury - Australian Government
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