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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, 24 November 14
CHOPPY WATERS IN DRY BULK - SGX
COALspot.com: Dry bulk freight rates have experienced a sharp rise in volatility in recent weeks as bulk commodity supply has ramped up, said SGX i ...
Monday, 24 November 14
Q1 2015 FOB NEWCASTLE COAL SWAP CLOSED AT $ 52.73
COALspot.com: API 5 FOB Newcastle Coal swap for Q1’ 2015 delivery closed at US$ 52.73 on 21 November after losing US$ 0.40 (-0.75%) month ove ...
Monday, 24 November 14
CFR SOUTH CHINA COAL: Q2' 15 COAL SWAPS CLOSED LOWER COMPARED TO Q1' 15 SWAPS
COALspot.com: API 8 CFR South China Coal swap for Q1’ 2015 delivery has decreased US$ 0.63 (-0.99%) month over month and US$ 0.12 (-0.19%) da ...
Sunday, 23 November 14
SPOT FREIGHT RATES IMPROVED SLIGHTLY OVER PREVIOUS WEEK
COALspot.com: The BDI was up 5.41 pct week on week and closed at 1,324 points on Friday. All the segments were up this week except Panamax index.&n ...
Sunday, 23 November 14
ITALY'S STEAM COAL IMPORTS TO DROP BY 11% IN 2014 - ASSOCARBONI
COALspot.com: Italy’s steam coal imports expected to drop to 16 million tons in 2014 (-11% compared to 2013); coking coal imports to plunge t ...
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- Heidelberg Cement - Germany
- Bhatia International Limited - India
- Banpu Public Company Limited - Thailand
- LBH Netherlands Bv - Netherlands
- Ministry of Transport, Egypt
- Videocon Industries ltd - India
- India Bulls Power Limited - India
- Iligan Light & Power Inc, Philippines
- TeaM Sual Corporation - Philippines
- GAC Shipping (India) Pvt Ltd
- South Luzon Thermal Energy Corporation
- Gujarat Sidhee Cement - India
- Vijayanagar Sugar Pvt Ltd - India
- Essar Steel Hazira Ltd - India
- Meenaskhi Energy Private Limited - India
- Indian Oil Corporation Limited
- Ambuja Cements Ltd - India
- Minerals Council of Australia
- Orica Australia Pty. Ltd.
- Kapuas Tunggal Persada - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Sarangani Energy Corporation, Philippines
- Mintek Dendrill Indonesia
- Antam Resourcindo - Indonesia
- Bhushan Steel Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Manunggal Multi Energi - Indonesia
- Commonwealth Bank - Australia
- Grasim Industreis Ltd - India
- New Zealand Coal & Carbon
- Toyota Tsusho Corporation, Japan
- Sojitz Corporation - Japan
- Baramulti Group, Indonesia
- Power Finance Corporation Ltd., India
- Miang Besar Coal Terminal - Indonesia
- Standard Chartered Bank - UAE
- Parliament of New Zealand
- Renaissance Capital - South Africa
- Bahari Cakrawala Sebuku - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Globalindo Alam Lestari - Indonesia
- Formosa Plastics Group - Taiwan
- Xindia Steels Limited - India
- Electricity Generating Authority of Thailand
- Bhoruka Overseas - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Central Java Power - Indonesia
- Orica Mining Services - Indonesia
- Vedanta Resources Plc - India
- Sinarmas Energy and Mining - Indonesia
- Savvy Resources Ltd - HongKong
- Mjunction Services Limited - India
- Kepco SPC Power Corporation, Philippines
- White Energy Company Limited
- Chamber of Mines of South Africa
- Pipit Mutiara Jaya. PT, Indonesia
- San Jose City I Power Corp, Philippines
- Romanian Commodities Exchange
- VISA Power Limited - India
- Anglo American - United Kingdom
- Energy Link Ltd, New Zealand
- Jindal Steel & Power Ltd - India
- Indian Energy Exchange, India
- Bayan Resources Tbk. - Indonesia
- Goldman Sachs - Singapore
- Neyveli Lignite Corporation Ltd, - India
- Planning Commission, India
- IEA Clean Coal Centre - UK
- Coalindo Energy - Indonesia
- Indogreen Group - Indonesia
- Siam City Cement PLC, Thailand
- Economic Council, Georgia
- Medco Energi Mining Internasional
- Leighton Contractors Pty Ltd - Australia
- Sakthi Sugars Limited - India
- Wilmar Investment Holdings
- Wood Mackenzie - Singapore
- Chettinad Cement Corporation Ltd - India
- Latin American Coal - Colombia
- Maheswari Brothers Coal Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Makarim & Taira - Indonesia
- Timah Investasi Mineral - Indoneisa
- Aboitiz Power Corporation - Philippines
- Kumho Petrochemical, South Korea
- Sindya Power Generating Company Private Ltd
- Simpson Spence & Young - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Mercuria Energy - Indonesia
- Kartika Selabumi Mining - Indonesia
- Jaiprakash Power Ventures ltd
- Gujarat Mineral Development Corp Ltd - India
- Barasentosa Lestari - Indonesia
- Kideco Jaya Agung - Indonesia
- International Coal Ventures Pvt Ltd - India
- Star Paper Mills Limited - India
- SMG Consultants - Indonesia
- Merrill Lynch Commodities Europe
- Price Waterhouse Coopers - Russia
- Thiess Contractors Indonesia
- Ministry of Finance - Indonesia
- Marubeni Corporation - India
- Billiton Holdings Pty Ltd - Australia
- Bulk Trading Sa - Switzerland
- Global Coal Blending Company Limited - Australia
- CIMB Investment Bank - Malaysia
- Cigading International Bulk Terminal - Indonesia
- Agrawal Coal Company - India
- Ministry of Mines - Canada
- Coastal Gujarat Power Limited - India
- Larsen & Toubro Limited - India
- Oldendorff Carriers - Singapore
- TNB Fuel Sdn Bhd - Malaysia
- Parry Sugars Refinery, India
- Independent Power Producers Association of India
- Lanco Infratech Ltd - India
- Tamil Nadu electricity Board
- ASAPP Information Group - India
- Eastern Coal Council - USA
- Vizag Seaport Private Limited - India
- GVK Power & Infra Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Deloitte Consulting - India
- Metalloyd Limited - United Kingdom
- Bharathi Cement Corporation - India
- Petrochimia International Co. Ltd.- Taiwan
- Energy Development Corp, Philippines
- Therma Luzon, Inc, Philippines
- CNBM International Corporation - China
- Samtan Co., Ltd - South Korea
- Karaikal Port Pvt Ltd - India
- Indika Energy - Indonesia
- Australian Commodity Traders Exchange
- Rashtriya Ispat Nigam Limited - India
- Petron Corporation, Philippines
- PNOC Exploration Corporation - Philippines
- Riau Bara Harum - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Kobexindo Tractors - Indoneisa
- Semirara Mining and Power Corporation, Philippines
- Posco Energy - South Korea
- Semirara Mining Corp, Philippines
- Siam City Cement - Thailand
- GMR Energy Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- AsiaOL BioFuels Corp., Philippines
- The State Trading Corporation of India Ltd
- ICICI Bank Limited - India
- Meralco Power Generation, Philippines
- Tata Chemicals Ltd - India
- Uttam Galva Steels Limited - India
- SN Aboitiz Power Inc, Philippines
- Intertek Mineral Services - Indonesia
- Rio Tinto Coal - Australia
- Trasteel International SA, Italy
- Edison Trading Spa - Italy
- Carbofer General Trading SA - India
- SMC Global Power, Philippines
- Georgia Ports Authority, United States
- Salva Resources Pvt Ltd - India
- Holcim Trading Pte Ltd - Singapore
- Singapore Mercantile Exchange
- PowerSource Philippines DevCo
- Global Green Power PLC Corporation, Philippines
- MS Steel International - UAE
- Central Electricity Authority - India
- Madhucon Powers Ltd - India
- Asmin Koalindo Tuhup - Indonesia
- Borneo Indobara - Indonesia
- The University of Queensland
- Cement Manufacturers Association - India
- Australian Coal Association
- Altura Mining Limited, Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Ceylon Electricity Board - Sri Lanka
- IHS Mccloskey Coal Group - USA
- Bangladesh Power Developement Board
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- PTC India Limited - India
- Thai Mozambique Logistica
- Karbindo Abesyapradhi - Indoneisa
- London Commodity Brokers - England
- Pendopo Energi Batubara - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Indo Tambangraya Megah - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Malabar Cements Ltd - India
- Directorate Of Revenue Intelligence - India
- Gujarat Electricity Regulatory Commission - India
- Port Waratah Coal Services - Australia
- Ind-Barath Power Infra Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Indonesian Coal Mining Association
- Africa Commodities Group - South Africa
- Straits Asia Resources Limited - Singapore
- Eastern Energy - Thailand
- Sical Logistics Limited - India
- Mercator Lines Limited - India
- Interocean Group of Companies - India
- Global Business Power Corporation, Philippines
- Electricity Authority, New Zealand
- PetroVietnam Power Coal Import and Supply Company
- Sree Jayajothi Cements Limited - India
- Kaltim Prima Coal - Indonesia
- Coal and Oil Company - UAE
- OPG Power Generation Pvt Ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Bukit Baiduri Energy - Indonesia
- Bukit Makmur.PT - Indonesia
- Binh Thuan Hamico - Vietnam
- McConnell Dowell - Australia
- Dalmia Cement Bharat India
- Aditya Birla Group - India
- Kohat Cement Company Ltd. - Pakistan
- European Bulk Services B.V. - Netherlands
- The Treasury - Australian Government
- Attock Cement Pakistan Limited
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