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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, 05 January 15
FIVE ENERGY SURPRISES FOR 2015: THE POSSIBLE AND THE IMPROBABLE - KURT COBB
The coming year is likely to be as full of surprises in the field of energy as 2014 was. We just don't know which surprises! I am not predictin ...
Monday, 05 January 15
THE SHIPPING MARKET IN 2014 AND LOOKING FORWARD - BIMCO
2014 started with plenty of optimism for a considerably better global economy and an improved shipping market. Things turned out somewhat different ...
Monday, 05 January 15
API 5 FOB NEWCASTLE COAL SWAP FOR Q1'15 DELIVERY CLOSED US$ 0.45 HIGHER COMPARED TO Q2'15 CLOSING
COALspot.com: API 5 FOB Newcastle Coal swap for Q1’ 2015 delivery lost US$ 0.60 per MT (-1.15%) month over month and gained US$ 0.02 (+0.04%) ...
Sunday, 04 January 15
BALTIC DRY INDEX CONTINUES ITS DECLINE IN 2015
Wish you all a very Happy New Year 2015. The last report was dated 19th Dec 2014 and due to Christmas and new year holidays no reports were publish ...
Saturday, 03 January 15
U.S WEEKLY COAL PRODUCTION FELL 11.2% TO 17.6 MMST WEEK OVER WEEK - EIA
COALspot.com – United States the world's one of the largest coal producers, produced approximately 17.6 million short tons (mmst) of coal ...
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- SMG Consultants - Indonesia
- Bharathi Cement Corporation - India
- Simpson Spence & Young - Indonesia
- Bangladesh Power Developement Board
- Sojitz Corporation - Japan
- Kartika Selabumi Mining - Indonesia
- Thiess Contractors Indonesia
- MS Steel International - UAE
- Kobexindo Tractors - Indoneisa
- Ministry of Finance - Indonesia
- IEA Clean Coal Centre - UK
- The Treasury - Australian Government
- Altura Mining Limited, Indonesia
- Bhushan Steel Limited - India
- TeaM Sual Corporation - Philippines
- Directorate Of Revenue Intelligence - India
- Standard Chartered Bank - UAE
- Makarim & Taira - Indonesia
- Coal and Oil Company - UAE
- McConnell Dowell - Australia
- Leighton Contractors Pty Ltd - Australia
- Tamil Nadu electricity Board
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Coalindo Energy - Indonesia
- Pendopo Energi Batubara - Indonesia
- Central Java Power - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Singapore Mercantile Exchange
- Rashtriya Ispat Nigam Limited - India
- VISA Power Limited - India
- Gujarat Electricity Regulatory Commission - India
- Sarangani Energy Corporation, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Ministry of Transport, Egypt
- Power Finance Corporation Ltd., India
- Kohat Cement Company Ltd. - Pakistan
- Orica Mining Services - Indonesia
- CIMB Investment Bank - Malaysia
- Riau Bara Harum - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Interocean Group of Companies - India
- Commonwealth Bank - Australia
- Metalloyd Limited - United Kingdom
- Globalindo Alam Lestari - Indonesia
- Formosa Plastics Group - Taiwan
- Medco Energi Mining Internasional
- Kapuas Tunggal Persada - Indonesia
- Australian Coal Association
- Eastern Coal Council - USA
- Ambuja Cements Ltd - India
- Indo Tambangraya Megah - Indonesia
- Posco Energy - South Korea
- Agrawal Coal Company - India
- Indika Energy - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Barasentosa Lestari - Indonesia
- Kumho Petrochemical, South Korea
- Deloitte Consulting - India
- Holcim Trading Pte Ltd - Singapore
- ASAPP Information Group - India
- Iligan Light & Power Inc, Philippines
- Merrill Lynch Commodities Europe
- Dalmia Cement Bharat India
- Eastern Energy - Thailand
- Semirara Mining Corp, Philippines
- PNOC Exploration Corporation - Philippines
- International Coal Ventures Pvt Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Manunggal Multi Energi - Indonesia
- Straits Asia Resources Limited - Singapore
- Bhatia International Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Indian Energy Exchange, India
- Jindal Steel & Power Ltd - India
- Star Paper Mills Limited - India
- Aditya Birla Group - India
- Salva Resources Pvt Ltd - India
- Krishnapatnam Port Company Ltd. - India
- Maharashtra Electricity Regulatory Commission - India
- Romanian Commodities Exchange
- Indogreen Group - Indonesia
- Latin American Coal - Colombia
- Baramulti Group, Indonesia
- Anglo American - United Kingdom
- Wood Mackenzie - Singapore
- Port Waratah Coal Services - Australia
- Ceylon Electricity Board - Sri Lanka
- Wilmar Investment Holdings
- Karbindo Abesyapradhi - Indoneisa
- Electricity Authority, New Zealand
- Coastal Gujarat Power Limited - India
- Ind-Barath Power Infra Limited - India
- Antam Resourcindo - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Bhoruka Overseas - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Mintek Dendrill Indonesia
- Sindya Power Generating Company Private Ltd
- Directorate General of MIneral and Coal - Indonesia
- Thai Mozambique Logistica
- Miang Besar Coal Terminal - Indonesia
- Intertek Mineral Services - Indonesia
- GVK Power & Infra Limited - India
- SN Aboitiz Power Inc, Philippines
- Independent Power Producers Association of India
- Chettinad Cement Corporation Ltd - India
- The State Trading Corporation of India Ltd
- CNBM International Corporation - China
- Energy Link Ltd, New Zealand
- Heidelberg Cement - Germany
- Meenaskhi Energy Private Limited - India
- Malabar Cements Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Georgia Ports Authority, United States
- Mercator Lines Limited - India
- Chamber of Mines of South Africa
- Marubeni Corporation - India
- Therma Luzon, Inc, Philippines
- LBH Netherlands Bv - Netherlands
- Bukit Makmur.PT - Indonesia
- Economic Council, Georgia
- Bulk Trading Sa - Switzerland
- Global Business Power Corporation, Philippines
- Indian Oil Corporation Limited
- Siam City Cement PLC, Thailand
- The University of Queensland
- Rio Tinto Coal - Australia
- Trasteel International SA, Italy
- PowerSource Philippines DevCo
- Madhucon Powers Ltd - India
- Karaikal Port Pvt Ltd - India
- Global Green Power PLC Corporation, Philippines
- Lanco Infratech Ltd - India
- Essar Steel Hazira Ltd - India
- Parry Sugars Refinery, India
- Videocon Industries ltd - India
- Petron Corporation, Philippines
- Africa Commodities Group - South Africa
- India Bulls Power Limited - India
- ICICI Bank Limited - India
- Meralco Power Generation, Philippines
- Maheswari Brothers Coal Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Samtan Co., Ltd - South Korea
- Vedanta Resources Plc - India
- Bayan Resources Tbk. - Indonesia
- Electricity Generating Authority of Thailand
- PTC India Limited - India
- Sical Logistics Limited - India
- GAC Shipping (India) Pvt Ltd
- Jorong Barutama Greston.PT - Indonesia
- Australian Commodity Traders Exchange
- Borneo Indobara - Indonesia
- Edison Trading Spa - Italy
- Savvy Resources Ltd - HongKong
- Grasim Industreis Ltd - India
- Oldendorff Carriers - Singapore
- IHS Mccloskey Coal Group - USA
- Central Electricity Authority - India
- Kideco Jaya Agung - Indonesia
- GMR Energy Limited - India
- Jaiprakash Power Ventures ltd
- Renaissance Capital - South Africa
- Bukit Asam (Persero) Tbk - Indonesia
- European Bulk Services B.V. - Netherlands
- Parliament of New Zealand
- Energy Development Corp, Philippines
- South Luzon Thermal Energy Corporation
- New Zealand Coal & Carbon
- Gujarat Sidhee Cement - India
- Ministry of Mines - Canada
- Kaltim Prima Coal - Indonesia
- Mjunction Services Limited - India
- Timah Investasi Mineral - Indoneisa
- Carbofer General Trading SA - India
- Siam City Cement - Thailand
- Global Coal Blending Company Limited - Australia
- OPG Power Generation Pvt Ltd - India
- San Jose City I Power Corp, Philippines
- Asmin Koalindo Tuhup - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Banpu Public Company Limited - Thailand
- Attock Cement Pakistan Limited
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Sree Jayajothi Cements Limited - India
- Vizag Seaport Private Limited - India
- SMC Global Power, Philippines
- White Energy Company Limited
- Larsen & Toubro Limited - India
- London Commodity Brokers - England
- Indonesian Coal Mining Association
- Uttam Galva Steels Limited - India
- Goldman Sachs - Singapore
- Semirara Mining and Power Corporation, Philippines
- Binh Thuan Hamico - Vietnam
- AsiaOL BioFuels Corp., Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Billiton Holdings Pty Ltd - Australia
- Kepco SPC Power Corporation, Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Price Waterhouse Coopers - Russia
- Tata Chemicals Ltd - India
- Orica Australia Pty. Ltd.
- Mercuria Energy - Indonesia
- Cement Manufacturers Association - India
- Xindia Steels Limited - India
- TNB Fuel Sdn Bhd - Malaysia
- Aboitiz Power Corporation - Philippines
- Sinarmas Energy and Mining - Indonesia
- Bukit Baiduri Energy - Indonesia
- Planning Commission, India
- Minerals Council of Australia
- Bahari Cakrawala Sebuku - Indonesia
- Sakthi Sugars Limited - India
- Toyota Tsusho Corporation, Japan
- Gujarat Mineral Development Corp Ltd - India
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