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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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Friday, 19 December 14
U.S WEEKLY COAL PRODUCTION REACHED APPROXIMATELY 19.8 MMST; UP 1.0% WOW
COALspot.com – United States the world's one of the largest coal producers, produced approximately 19.8 million short tons (mmst) of coal ...
Friday, 19 December 14
HANDY: SOFTER TONE; PANAMAX: QUIET WEEK; CAPESIZE; PAINFUL WEEK
Handy
A softer tone for rates and volumes for the Supras, perhaps less apparent in the Pacific the last week before the season holidays and good ...
Thursday, 18 December 14
INDONESIA TO REVISE UP COAL OUTPUT TARGET TO 460 MILLION TONS IN 2015
COALspot.com: Indonesian government has revised up its next year coal output forecast to 460 million tons from its previous forecast of 421 million ...
Wednesday, 17 December 14
CAPES RATES SLIPPED BELOW $5,600/DAY, FELL 84% YOY
COALspot.com: In the very rare occurrence when the BCI stands below the BDI, words to describe market sentiment are probably poor, said Intermodal ...
Wednesday, 17 December 14
MARKET INSIGHT - INTERMODAL SHANGHAI, SNP TEAM
As the end of the fourth quarter is approaching, we are all witness to the second hand market prices softening day by day. Any new deal surfacing t ...
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- PTC India Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Tamil Nadu electricity Board
- AsiaOL BioFuels Corp., Philippines
- Global Business Power Corporation, Philippines
- Baramulti Group, Indonesia
- Port Waratah Coal Services - Australia
- Carbofer General Trading SA - India
- Kepco SPC Power Corporation, Philippines
- Kartika Selabumi Mining - Indonesia
- Sical Logistics Limited - India
- Agrawal Coal Company - India
- Medco Energi Mining Internasional
- Karaikal Port Pvt Ltd - India
- Coalindo Energy - Indonesia
- Sindya Power Generating Company Private Ltd
- Intertek Mineral Services - Indonesia
- Formosa Plastics Group - Taiwan
- GN Power Mariveles Coal Plant, Philippines
- Meralco Power Generation, Philippines
- Commonwealth Bank - Australia
- Electricity Authority, New Zealand
- Oldendorff Carriers - Singapore
- Star Paper Mills Limited - India
- Altura Mining Limited, Indonesia
- ICICI Bank Limited - India
- Trasteel International SA, Italy
- Videocon Industries ltd - India
- Indika Energy - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Bharathi Cement Corporation - India
- Thiess Contractors Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Kapuas Tunggal Persada - Indonesia
- Banpu Public Company Limited - Thailand
- Gujarat Electricity Regulatory Commission - India
- New Zealand Coal & Carbon
- GAC Shipping (India) Pvt Ltd
- Timah Investasi Mineral - Indoneisa
- San Jose City I Power Corp, Philippines
- The State Trading Corporation of India Ltd
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Metalloyd Limited - United Kingdom
- Georgia Ports Authority, United States
- Sojitz Corporation - Japan
- Borneo Indobara - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Kalimantan Lumbung Energi - Indonesia
- India Bulls Power Limited - India
- Gujarat Sidhee Cement - India
- Straits Asia Resources Limited - Singapore
- Cigading International Bulk Terminal - Indonesia
- Essar Steel Hazira Ltd - India
- South Luzon Thermal Energy Corporation
- Eastern Energy - Thailand
- Asmin Koalindo Tuhup - Indonesia
- ASAPP Information Group - India
- Madhucon Powers Ltd - India
- Global Coal Blending Company Limited - Australia
- Ministry of Mines - Canada
- Parry Sugars Refinery, India
- Edison Trading Spa - Italy
- Makarim & Taira - Indonesia
- Coastal Gujarat Power Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Independent Power Producers Association of India
- Simpson Spence & Young - Indonesia
- Attock Cement Pakistan Limited
- PetroVietnam Power Coal Import and Supply Company
- Chettinad Cement Corporation Ltd - India
- Iligan Light & Power Inc, Philippines
- Petron Corporation, Philippines
- OPG Power Generation Pvt Ltd - India
- Pendopo Energi Batubara - Indonesia
- CIMB Investment Bank - Malaysia
- Ceylon Electricity Board - Sri Lanka
- Leighton Contractors Pty Ltd - Australia
- GMR Energy Limited - India
- Economic Council, Georgia
- The University of Queensland
- Ministry of Finance - Indonesia
- Bangladesh Power Developement Board
- The Treasury - Australian Government
- Bayan Resources Tbk. - Indonesia
- Therma Luzon, Inc, Philippines
- CNBM International Corporation - China
- Uttam Galva Steels Limited - India
- TNB Fuel Sdn Bhd - Malaysia
- Coal and Oil Company - UAE
- SMG Consultants - Indonesia
- Central Java Power - Indonesia
- Orica Australia Pty. Ltd.
- International Coal Ventures Pvt Ltd - India
- Posco Energy - South Korea
- Ambuja Cements Ltd - India
- Bukit Asam (Persero) Tbk - Indonesia
- Semirara Mining Corp, Philippines
- European Bulk Services B.V. - Netherlands
- Larsen & Toubro Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Tata Chemicals Ltd - India
- Cement Manufacturers Association - India
- Latin American Coal - Colombia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Orica Mining Services - Indonesia
- Minerals Council of Australia
- PNOC Exploration Corporation - Philippines
- Jindal Steel & Power Ltd - India
- Thai Mozambique Logistica
- London Commodity Brokers - England
- Aditya Birla Group - India
- Mintek Dendrill Indonesia
- Vizag Seaport Private Limited - India
- Rashtriya Ispat Nigam Limited - India
- Ind-Barath Power Infra Limited - India
- MS Steel International - UAE
- Samtan Co., Ltd - South Korea
- Energy Development Corp, Philippines
- Billiton Holdings Pty Ltd - Australia
- Kaltim Prima Coal - Indonesia
- Electricity Generating Authority of Thailand
- Siam City Cement PLC, Thailand
- Mercator Lines Limited - India
- Romanian Commodities Exchange
- VISA Power Limited - India
- Sakthi Sugars Limited - India
- TeaM Sual Corporation - Philippines
- Salva Resources Pvt Ltd - India
- Manunggal Multi Energi - Indonesia
- Malabar Cements Ltd - India
- Bukit Makmur.PT - Indonesia
- Goldman Sachs - Singapore
- Grasim Industreis Ltd - India
- Kideco Jaya Agung - Indonesia
- Savvy Resources Ltd - HongKong
- Price Waterhouse Coopers - Russia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- PowerSource Philippines DevCo
- Bhatia International Limited - India
- Heidelberg Cement - Germany
- Maharashtra Electricity Regulatory Commission - India
- Xindia Steels Limited - India
- Kobexindo Tractors - Indoneisa
- Jorong Barutama Greston.PT - Indonesia
- Deloitte Consulting - India
- Bahari Cakrawala Sebuku - Indonesia
- IEA Clean Coal Centre - UK
- Wilmar Investment Holdings
- Global Green Power PLC Corporation, Philippines
- Energy Link Ltd, New Zealand
- Wood Mackenzie - Singapore
- Directorate Of Revenue Intelligence - India
- Vedanta Resources Plc - India
- Directorate General of MIneral and Coal - Indonesia
- Planning Commission, India
- Bulk Trading Sa - Switzerland
- Anglo American - United Kingdom
- Eastern Coal Council - USA
- Mercuria Energy - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Indian Oil Corporation Limited
- Indogreen Group - Indonesia
- Australian Commodity Traders Exchange
- Krishnapatnam Port Company Ltd. - India
- Meenaskhi Energy Private Limited - India
- Alfred C Toepfer International GmbH - Germany
- Standard Chartered Bank - UAE
- LBH Netherlands Bv - Netherlands
- Dalmia Cement Bharat India
- SN Aboitiz Power Inc, Philippines
- Bhoruka Overseas - Indonesia
- Jaiprakash Power Ventures ltd
- Barasentosa Lestari - Indonesia
- Merrill Lynch Commodities Europe
- Miang Besar Coal Terminal - Indonesia
- Central Electricity Authority - India
- Indian Energy Exchange, India
- Vijayanagar Sugar Pvt Ltd - India
- IHS Mccloskey Coal Group - USA
- McConnell Dowell - Australia
- Bukit Baiduri Energy - Indonesia
- Antam Resourcindo - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Mjunction Services Limited - India
- Karbindo Abesyapradhi - Indoneisa
- Lanco Infratech Ltd - India
- Australian Coal Association
- Parliament of New Zealand
- SMC Global Power, Philippines
- Marubeni Corporation - India
- Globalindo Alam Lestari - Indonesia
- Sree Jayajothi Cements Limited - India
- White Energy Company Limited
- Interocean Group of Companies - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Renaissance Capital - South Africa
- Sinarmas Energy and Mining - Indonesia
- GVK Power & Infra Limited - India
- Indo Tambangraya Megah - Indonesia
- Africa Commodities Group - South Africa
- Indonesian Coal Mining Association
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Riau Bara Harum - Indonesia
- Chamber of Mines of South Africa
- Bhushan Steel Limited - India
- Power Finance Corporation Ltd., India
- Singapore Mercantile Exchange
- Kumho Petrochemical, South Korea
- Maheswari Brothers Coal Limited - India
- Siam City Cement - Thailand
- Binh Thuan Hamico - Vietnam
- Rio Tinto Coal - Australia
- Sarangani Energy Corporation, Philippines
- Aboitiz Power Corporation - Philippines
- Ministry of Transport, Egypt
- Holcim Trading Pte Ltd - Singapore
- Toyota Tsusho Corporation, Japan
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