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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, 08 December 14
GOVERMENT TO WITHDRAW CNC STATUS OVER SUSPECTED FLAWS - THE JAKARTA POST
The Energy and Mineral Resources Ministry’s directorate general for mineral and coal plans to review the clean and clear (CnC) status held by ...
Monday, 08 December 14
FOB NEWCASTLE COAL SWAPS SLIP W-O-W AND M-O-M
COALspot.com: API 5 FOB Newcastle Coal swap for Q1’ 2015 delivery closed at US$ 52.10 on 5 December after losing US$ 0.55 (-1.04%) month over ...
Sunday, 07 December 14
SUPRAMAX S8 ROUTE SLIGHTLY INCREASED WEEK ON WEEK
COALspot.com: The BDI continued its fall as cape index fell heavily week on week.
The BDI lost around14.83 pct within last five working day an ...
Saturday, 06 December 14
TANKER FLOATING STORAGE PLAYS COULD COME INTO PLAY IF VLCC RATES STAY AT CURRENT LEVEL - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
Contango: A phenomenon in commodities futures price curves where the delivery price of a futures contract is greater than the current price. With t ...
Saturday, 06 December 14
MUNDRA PORT MAKES HISTORY BY HANDLING THE LARGEST BULK CARRIER TO CALL ON WEST COAST OF INDIA
COALspot.com: Adani Ports & SEZ Ltd, India’s largest port developer and part of Adani Group, yesterday said its Mundra Port successf ...
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- Bukit Asam (Persero) Tbk - Indonesia
- Petron Corporation, Philippines
- GN Power Mariveles Coal Plant, Philippines
- PetroVietnam Power Coal Import and Supply Company
- Ind-Barath Power Infra Limited - India
- Videocon Industries ltd - India
- PowerSource Philippines DevCo
- Vedanta Resources Plc - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- VISA Power Limited - India
- Tamil Nadu electricity Board
- Electricity Authority, New Zealand
- Goldman Sachs - Singapore
- Carbofer General Trading SA - India
- Uttam Galva Steels Limited - India
- Toyota Tsusho Corporation, Japan
- Bukit Makmur.PT - Indonesia
- Oldendorff Carriers - Singapore
- TeaM Sual Corporation - Philippines
- Bhushan Steel Limited - India
- Indogreen Group - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Parliament of New Zealand
- Bahari Cakrawala Sebuku - Indonesia
- Essar Steel Hazira Ltd - India
- Vizag Seaport Private Limited - India
- Bangladesh Power Developement Board
- Eastern Coal Council - USA
- Latin American Coal - Colombia
- Aboitiz Power Corporation - Philippines
- Binh Thuan Hamico - Vietnam
- Chamber of Mines of South Africa
- Mintek Dendrill Indonesia
- Bayan Resources Tbk. - Indonesia
- Orica Mining Services - Indonesia
- Sical Logistics Limited - India
- IEA Clean Coal Centre - UK
- Jindal Steel & Power Ltd - India
- Grasim Industreis Ltd - India
- CIMB Investment Bank - Malaysia
- The University of Queensland
- IHS Mccloskey Coal Group - USA
- Bharathi Cement Corporation - India
- Deloitte Consulting - India
- Mercator Lines Limited - India
- Indo Tambangraya Megah - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- London Commodity Brokers - England
- Miang Besar Coal Terminal - Indonesia
- Independent Power Producers Association of India
- Metalloyd Limited - United Kingdom
- Thai Mozambique Logistica
- Edison Trading Spa - Italy
- Semirara Mining Corp, Philippines
- Cigading International Bulk Terminal - Indonesia
- Dalmia Cement Bharat India
- Kartika Selabumi Mining - Indonesia
- Sree Jayajothi Cements Limited - India
- Indian Oil Corporation Limited
- Mercuria Energy - Indonesia
- Indika Energy - Indonesia
- White Energy Company Limited
- Ceylon Electricity Board - Sri Lanka
- Electricity Generating Authority of Thailand
- Holcim Trading Pte Ltd - Singapore
- Siam City Cement - Thailand
- Neyveli Lignite Corporation Ltd, - India
- Coal and Oil Company - UAE
- Bhatia International Limited - India
- Eastern Energy - Thailand
- Marubeni Corporation - India
- Larsen & Toubro Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Jaiprakash Power Ventures ltd
- Sinarmas Energy and Mining - Indonesia
- Africa Commodities Group - South Africa
- Interocean Group of Companies - India
- TNB Fuel Sdn Bhd - Malaysia
- Central Electricity Authority - India
- OPG Power Generation Pvt Ltd - India
- Attock Cement Pakistan Limited
- Heidelberg Cement - Germany
- Singapore Mercantile Exchange
- Ministry of Mines - Canada
- Makarim & Taira - Indonesia
- Borneo Indobara - Indonesia
- GMR Energy Limited - India
- Planning Commission, India
- Sarangani Energy Corporation, Philippines
- San Jose City I Power Corp, Philippines
- Chettinad Cement Corporation Ltd - India
- Baramulti Group, Indonesia
- Cement Manufacturers Association - India
- Intertek Mineral Services - Indonesia
- Siam City Cement PLC, Thailand
- Ministry of Finance - Indonesia
- Parry Sugars Refinery, India
- Barasentosa Lestari - Indonesia
- Economic Council, Georgia
- Maheswari Brothers Coal Limited - India
- ICICI Bank Limited - India
- Energy Link Ltd, New Zealand
- Trasteel International SA, Italy
- The State Trading Corporation of India Ltd
- Timah Investasi Mineral - Indoneisa
- Kaltim Prima Coal - Indonesia
- Gujarat Electricity Regulatory Commission - India
- McConnell Dowell - Australia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- CNBM International Corporation - China
- Australian Coal Association
- Pipit Mutiara Jaya. PT, Indonesia
- Orica Australia Pty. Ltd.
- Tata Chemicals Ltd - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Savvy Resources Ltd - HongKong
- Power Finance Corporation Ltd., India
- Sojitz Corporation - Japan
- Posco Energy - South Korea
- Krishnapatnam Port Company Ltd. - India
- Kumho Petrochemical, South Korea
- Gujarat Sidhee Cement - India
- Formosa Plastics Group - Taiwan
- SN Aboitiz Power Inc, Philippines
- Samtan Co., Ltd - South Korea
- Global Coal Blending Company Limited - Australia
- Medco Energi Mining Internasional
- Lanco Infratech Ltd - India
- Romanian Commodities Exchange
- Global Business Power Corporation, Philippines
- Wood Mackenzie - Singapore
- Offshore Bulk Terminal Pte Ltd, Singapore
- Malabar Cements Ltd - India
- Sakthi Sugars Limited - India
- Billiton Holdings Pty Ltd - Australia
- Riau Bara Harum - Indonesia
- Globalindo Alam Lestari - Indonesia
- SMG Consultants - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Therma Luzon, Inc, Philippines
- Gujarat Mineral Development Corp Ltd - India
- Bukit Baiduri Energy - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- India Bulls Power Limited - India
- PTC India Limited - India
- Ambuja Cements Ltd - India
- MS Steel International - UAE
- Altura Mining Limited, Indonesia
- Kideco Jaya Agung - Indonesia
- Standard Chartered Bank - UAE
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Renaissance Capital - South Africa
- Antam Resourcindo - Indonesia
- Port Waratah Coal Services - Australia
- Semirara Mining and Power Corporation, Philippines
- Rashtriya Ispat Nigam Limited - India
- The Treasury - Australian Government
- Agrawal Coal Company - India
- Meralco Power Generation, Philippines
- AsiaOL BioFuels Corp., Philippines
- Commonwealth Bank - Australia
- Madhucon Powers Ltd - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Sindya Power Generating Company Private Ltd
- Global Green Power PLC Corporation, Philippines
- Price Waterhouse Coopers - Russia
- Mjunction Services Limited - India
- Minerals Council of Australia
- Star Paper Mills Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Kepco SPC Power Corporation, Philippines
- Kalimantan Lumbung Energi - Indonesia
- Energy Development Corp, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Xindia Steels Limited - India
- International Coal Ventures Pvt Ltd - India
- Simpson Spence & Young - Indonesia
- Meenaskhi Energy Private Limited - India
- Merrill Lynch Commodities Europe
- Australian Commodity Traders Exchange
- Iligan Light & Power Inc, Philippines
- Coastal Gujarat Power Limited - India
- Straits Asia Resources Limited - Singapore
- Ministry of Transport, Egypt
- GAC Shipping (India) Pvt Ltd
- Kapuas Tunggal Persada - Indonesia
- Salva Resources Pvt Ltd - India
- SMC Global Power, Philippines
- Central Java Power - Indonesia
- Karaikal Port Pvt Ltd - India
- GVK Power & Infra Limited - India
- Indian Energy Exchange, India
- Coalindo Energy - Indonesia
- Rio Tinto Coal - Australia
- New Zealand Coal & Carbon
- PNOC Exploration Corporation - Philippines
- Directorate Of Revenue Intelligence - India
- Georgia Ports Authority, United States
- South Luzon Thermal Energy Corporation
- Anglo American - United Kingdom
- LBH Netherlands Bv - Netherlands
- Indonesian Coal Mining Association
- Pendopo Energi Batubara - Indonesia
- Banpu Public Company Limited - Thailand
- European Bulk Services B.V. - Netherlands
- Thiess Contractors Indonesia
- Aditya Birla Group - India
- Petrochimia International Co. Ltd.- Taiwan
- ASAPP Information Group - India
- Bulk Trading Sa - Switzerland
- Manunggal Multi Energi - Indonesia
- Wilmar Investment Holdings
- Directorate General of MIneral and Coal - Indonesia
- Kobexindo Tractors - Indoneisa
- Bhoruka Overseas - Indonesia
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