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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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Wednesday, 03 December 14
SHIPPING MARKET INSIGHT - KONSTANTINOS KONTOMICHIS
The dry bulk market seems unable to turn sentiment round and is still looking for direction. The BCI's 887-point free fall last week had an obv ...
Wednesday, 03 December 14
CAPESIZE DRY BULK CARRIERS ENTER 2015 WITH MIXED FORTUNES, WITH A POSITIVE AND A NEGATIVE SCENARIO BOTH EMERGING - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
The future of the Capesize dry bulk market appears to be engulfed from mixed “feelings” among analysts and market participants, despite ...
Tuesday, 02 December 14
KEY PLAYERS SHED NEW PERSPECTIVES ON COAL MARKETS
Press Release: Singapore’s ONLY and longest established Coal Trade event. Whilst Coal prices remain challenging, there is widespread consensu ...
Tuesday, 02 December 14
KOMIPO INVITES BIDS FOR 585,000 METRIC TONS OF COAL FOR Q1'15
COALspot.com - Korea Midland Power Co. Ltd. (KOMIPO) is inviting bids for the supply of 585,000 Metric Tons of coal. According to invitation, 5700 ...
Tuesday, 02 December 14
U.S WEEKLY COAL PRODUCTION FELL 1.4% WEEK ON WEEK - EIA
COALspot.com – United States the world's one of the largest coal producers, produced approximately 18.6 million short tons (mmst) o ...
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- Sojitz Corporation - Japan
- TNB Fuel Sdn Bhd - Malaysia
- Indo Tambangraya Megah - Indonesia
- ICICI Bank Limited - India
- Vizag Seaport Private Limited - India
- Electricity Generating Authority of Thailand
- CNBM International Corporation - China
- Holcim Trading Pte Ltd - Singapore
- Eastern Energy - Thailand
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- VISA Power Limited - India
- Carbofer General Trading SA - India
- Bukit Baiduri Energy - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- MS Steel International - UAE
- Jaiprakash Power Ventures ltd
- Grasim Industreis Ltd - India
- Riau Bara Harum - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Savvy Resources Ltd - HongKong
- Bhushan Steel Limited - India
- Star Paper Mills Limited - India
- AsiaOL BioFuels Corp., Philippines
- Timah Investasi Mineral - Indoneisa
- Sakthi Sugars Limited - India
- Sinarmas Energy and Mining - Indonesia
- Cement Manufacturers Association - India
- Parliament of New Zealand
- Neyveli Lignite Corporation Ltd, - India
- PTC India Limited - India
- Australian Coal Association
- Interocean Group of Companies - India
- Metalloyd Limited - United Kingdom
- Alfred C Toepfer International GmbH - Germany
- CIMB Investment Bank - Malaysia
- Mercator Lines Limited - India
- Power Finance Corporation Ltd., India
- Thiess Contractors Indonesia
- Salva Resources Pvt Ltd - India
- Jorong Barutama Greston.PT - Indonesia
- Uttam Galva Steels Limited - India
- Agrawal Coal Company - India
- Minerals Council of Australia
- London Commodity Brokers - England
- Wilmar Investment Holdings
- Ceylon Electricity Board - Sri Lanka
- Bukit Asam (Persero) Tbk - Indonesia
- Gujarat Sidhee Cement - India
- Eastern Coal Council - USA
- Semirara Mining Corp, Philippines
- Electricity Authority, New Zealand
- Antam Resourcindo - Indonesia
- Wood Mackenzie - Singapore
- Thai Mozambique Logistica
- South Luzon Thermal Energy Corporation
- Kepco SPC Power Corporation, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Intertek Mineral Services - Indonesia
- India Bulls Power Limited - India
- Renaissance Capital - South Africa
- Dalmia Cement Bharat India
- Port Waratah Coal Services - Australia
- Merrill Lynch Commodities Europe
- GVK Power & Infra Limited - India
- Meralco Power Generation, Philippines
- Bhoruka Overseas - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Global Green Power PLC Corporation, Philippines
- GAC Shipping (India) Pvt Ltd
- Vijayanagar Sugar Pvt Ltd - India
- San Jose City I Power Corp, Philippines
- McConnell Dowell - Australia
- Sindya Power Generating Company Private Ltd
- Essar Steel Hazira Ltd - India
- Larsen & Toubro Limited - India
- The Treasury - Australian Government
- Simpson Spence & Young - Indonesia
- Petron Corporation, Philippines
- Madhucon Powers Ltd - India
- Central Electricity Authority - India
- Medco Energi Mining Internasional
- Bank of Tokyo Mitsubishi UFJ Ltd
- Bahari Cakrawala Sebuku - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Malabar Cements Ltd - India
- LBH Netherlands Bv - Netherlands
- Maheswari Brothers Coal Limited - India
- Indogreen Group - Indonesia
- Planning Commission, India
- Kumho Petrochemical, South Korea
- Tata Chemicals Ltd - India
- Heidelberg Cement - Germany
- Latin American Coal - Colombia
- Independent Power Producers Association of India
- Parry Sugars Refinery, India
- Manunggal Multi Energi - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- SMG Consultants - Indonesia
- Aditya Birla Group - India
- Directorate General of MIneral and Coal - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Lanco Infratech Ltd - India
- Bhatia International Limited - India
- Coalindo Energy - Indonesia
- Oldendorff Carriers - Singapore
- Jindal Steel & Power Ltd - India
- Semirara Mining and Power Corporation, Philippines
- New Zealand Coal & Carbon
- Edison Trading Spa - Italy
- Central Java Power - Indonesia
- Global Business Power Corporation, Philippines
- European Bulk Services B.V. - Netherlands
- Billiton Holdings Pty Ltd - Australia
- Posco Energy - South Korea
- Kaltim Prima Coal - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Barasentosa Lestari - Indonesia
- PowerSource Philippines DevCo
- Bayan Resources Tbk. - Indonesia
- Chamber of Mines of South Africa
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- The State Trading Corporation of India Ltd
- Coastal Gujarat Power Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Anglo American - United Kingdom
- Marubeni Corporation - India
- Therma Luzon, Inc, Philippines
- Mjunction Services Limited - India
- Romanian Commodities Exchange
- Kideco Jaya Agung - Indonesia
- Orica Australia Pty. Ltd.
- Indian Oil Corporation Limited
- Sarangani Energy Corporation, Philippines
- Deloitte Consulting - India
- Rio Tinto Coal - Australia
- Kartika Selabumi Mining - Indonesia
- Pendopo Energi Batubara - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Formosa Plastics Group - Taiwan
- IEA Clean Coal Centre - UK
- Trasteel International SA, Italy
- Bulk Trading Sa - Switzerland
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Baramulti Group, Indonesia
- Singapore Mercantile Exchange
- Ministry of Transport, Egypt
- Orica Mining Services - Indonesia
- Tamil Nadu electricity Board
- Georgia Ports Authority, United States
- GMR Energy Limited - India
- Australian Commodity Traders Exchange
- Attock Cement Pakistan Limited
- Africa Commodities Group - South Africa
- Borneo Indobara - Indonesia
- Makarim & Taira - Indonesia
- Altura Mining Limited, Indonesia
- The University of Queensland
- Banpu Public Company Limited - Thailand
- Samtan Co., Ltd - South Korea
- Videocon Industries ltd - India
- SMC Global Power, Philippines
- Goldman Sachs - Singapore
- Mercuria Energy - Indonesia
- Mintek Dendrill Indonesia
- Sical Logistics Limited - India
- IHS Mccloskey Coal Group - USA
- Sree Jayajothi Cements Limited - India
- SN Aboitiz Power Inc, Philippines
- PNOC Exploration Corporation - Philippines
- Economic Council, Georgia
- Siam City Cement PLC, Thailand
- OPG Power Generation Pvt Ltd - India
- Karaikal Port Pvt Ltd - India
- Indonesian Coal Mining Association
- Toyota Tsusho Corporation, Japan
- Siam City Cement - Thailand
- Maharashtra Electricity Regulatory Commission - India
- Bangladesh Power Developement Board
- Global Coal Blending Company Limited - Australia
- Standard Chartered Bank - UAE
- Meenaskhi Energy Private Limited - India
- Xindia Steels Limited - India
- Indian Energy Exchange, India
- Vedanta Resources Plc - India
- Leighton Contractors Pty Ltd - Australia
- Directorate Of Revenue Intelligence - India
- White Energy Company Limited
- Chettinad Cement Corporation Ltd - India
- Kapuas Tunggal Persada - Indonesia
- Kobexindo Tractors - Indoneisa
- International Coal Ventures Pvt Ltd - India
- Energy Development Corp, Philippines
- Gujarat Electricity Regulatory Commission - India
- Ambuja Cements Ltd - India
- TeaM Sual Corporation - Philippines
- Ind-Barath Power Infra Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Binh Thuan Hamico - Vietnam
- Petrochimia International Co. Ltd.- Taiwan
- Commonwealth Bank - Australia
- Bukit Makmur.PT - Indonesia
- Ministry of Mines - Canada
- Offshore Bulk Terminal Pte Ltd, Singapore
- Globalindo Alam Lestari - Indonesia
- Rashtriya Ispat Nigam Limited - India
- ASAPP Information Group - India
- Indika Energy - Indonesia
- Bharathi Cement Corporation - India
- Ministry of Finance - Indonesia
- Straits Asia Resources Limited - Singapore
- Iligan Light & Power Inc, Philippines
- Coal and Oil Company - UAE
- Price Waterhouse Coopers - Russia
- Aboitiz Power Corporation - Philippines
- Energy Link Ltd, New Zealand
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