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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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Saturday, 22 November 14
THE FALL IN BUNKER PRICES REDUCE FUEL COSTS SIGNIFICANTLY - BIMCO, PETER SAND
For a ship that burns 24 tonnes of fuel per day while steaming, fuel costs are reduced by as much as USD 1 million a year if current price level st ...
Saturday, 22 November 14
DRY BULKERS NEWBUILDING DELIVERIES REACHED 11.8 MILLION DWT DURING THIRD QUARTER, NET FLEET GROWTH FOR 2014 TO REACH 5% - HELLENIC SHIPPING NEWS
The dry bulk market has rebounded since its less than impressive performance since the start of the year, but overall, third quarter figures could ...
Friday, 21 November 14
BUMI ENTERS INTO CONDITIONAL SALE & PURCHASE AGREEMENT TO SELL FBS STAKE
COALspot.com: PT Bumi Resources Tbk, one of the Indonesia's largest coal producers confirms that it has executed a Conditional Sale and Purchas ...
Friday, 21 November 14
U.S LAST WEEK'S COAL PRODUCTION STAYS FLAT W-O-W
COALspot.com – United States the world's one of the largest coal producers, produced approximately 18.9 million short tons (mmst) of coal ...
Thursday, 20 November 14
MOST MAJOR ASIAN ECONOMIES TO BENEFIT FROM LOWER OIL - FITCH
COALspot.com: The 25% drop in the price of oil since July is likely to lift economic growth prospects, improve terms of trade, and have a pot ...
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- ICICI Bank Limited - India
- Billiton Holdings Pty Ltd - Australia
- Bayan Resources Tbk. - Indonesia
- Global Business Power Corporation, Philippines
- Asmin Koalindo Tuhup - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Malabar Cements Ltd - India
- Chamber of Mines of South Africa
- Deloitte Consulting - India
- Mjunction Services Limited - India
- Africa Commodities Group - South Africa
- Metalloyd Limited - United Kingdom
- Indika Energy - Indonesia
- Siam City Cement - Thailand
- Toyota Tsusho Corporation, Japan
- Port Waratah Coal Services - Australia
- European Bulk Services B.V. - Netherlands
- Central Electricity Authority - India
- Semirara Mining Corp, Philippines
- Ministry of Finance - Indonesia
- Attock Cement Pakistan Limited
- Jorong Barutama Greston.PT - Indonesia
- Indian Oil Corporation Limited
- Dalmia Cement Bharat India
- Sical Logistics Limited - India
- Ministry of Mines - Canada
- Marubeni Corporation - India
- Savvy Resources Ltd - HongKong
- Samtan Co., Ltd - South Korea
- Star Paper Mills Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Gujarat Sidhee Cement - India
- Gujarat Mineral Development Corp Ltd - India
- Kobexindo Tractors - Indoneisa
- Goldman Sachs - Singapore
- South Luzon Thermal Energy Corporation
- SN Aboitiz Power Inc, Philippines
- Indian Energy Exchange, India
- Bukit Baiduri Energy - Indonesia
- Banpu Public Company Limited - Thailand
- Vijayanagar Sugar Pvt Ltd - India
- Chettinad Cement Corporation Ltd - India
- SMC Global Power, Philippines
- Cigading International Bulk Terminal - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Altura Mining Limited, Indonesia
- Bangladesh Power Developement Board
- MS Steel International - UAE
- Indogreen Group - Indonesia
- Standard Chartered Bank - UAE
- Jaiprakash Power Ventures ltd
- Bank of Tokyo Mitsubishi UFJ Ltd
- Kumho Petrochemical, South Korea
- PetroVietnam Power Coal Import and Supply Company
- Kartika Selabumi Mining - Indonesia
- Australian Coal Association
- Parliament of New Zealand
- Power Finance Corporation Ltd., India
- Bukit Makmur.PT - Indonesia
- Ceylon Electricity Board - Sri Lanka
- GAC Shipping (India) Pvt Ltd
- Kaltim Prima Coal - Indonesia
- CNBM International Corporation - China
- Binh Thuan Hamico - Vietnam
- PTC India Limited - India
- Georgia Ports Authority, United States
- Thiess Contractors Indonesia
- Tata Chemicals Ltd - India
- Holcim Trading Pte Ltd - Singapore
- Maheswari Brothers Coal Limited - India
- Ambuja Cements Ltd - India
- GN Power Mariveles Coal Plant, Philippines
- Bhoruka Overseas - Indonesia
- SMG Consultants - Indonesia
- Electricity Authority, New Zealand
- Simpson Spence & Young - Indonesia
- Riau Bara Harum - Indonesia
- Essar Steel Hazira Ltd - India
- Posco Energy - South Korea
- Orica Mining Services - Indonesia
- Australian Commodity Traders Exchange
- Bukit Asam (Persero) Tbk - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- VISA Power Limited - India
- Sarangani Energy Corporation, Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Coastal Gujarat Power Limited - India
- Intertek Mineral Services - Indonesia
- Bhatia International Limited - India
- Baramulti Group, Indonesia
- CIMB Investment Bank - Malaysia
- Alfred C Toepfer International GmbH - Germany
- Siam City Cement PLC, Thailand
- Indo Tambangraya Megah - Indonesia
- Heidelberg Cement - Germany
- Carbofer General Trading SA - India
- Leighton Contractors Pty Ltd - Australia
- Meenaskhi Energy Private Limited - India
- Merrill Lynch Commodities Europe
- Vedanta Resources Plc - India
- Central Java Power - Indonesia
- Orica Australia Pty. Ltd.
- Bahari Cakrawala Sebuku - Indonesia
- Thai Mozambique Logistica
- Madhucon Powers Ltd - India
- Latin American Coal - Colombia
- Mercator Lines Limited - India
- Larsen & Toubro Limited - India
- The Treasury - Australian Government
- Timah Investasi Mineral - Indoneisa
- Price Waterhouse Coopers - Russia
- San Jose City I Power Corp, Philippines
- Barasentosa Lestari - Indonesia
- Sindya Power Generating Company Private Ltd
- Grasim Industreis Ltd - India
- Medco Energi Mining Internasional
- Independent Power Producers Association of India
- Petrochimia International Co. Ltd.- Taiwan
- Formosa Plastics Group - Taiwan
- Bhushan Steel Limited - India
- Coal and Oil Company - UAE
- Vizag Seaport Private Limited - India
- Rashtriya Ispat Nigam Limited - India
- Mintek Dendrill Indonesia
- Edison Trading Spa - Italy
- Indonesian Coal Mining Association
- Trasteel International SA, Italy
- TNB Fuel Sdn Bhd - Malaysia
- ASAPP Information Group - India
- White Energy Company Limited
- Xindia Steels Limited - India
- Renaissance Capital - South Africa
- PNOC Exploration Corporation - Philippines
- Cement Manufacturers Association - India
- Sinarmas Energy and Mining - Indonesia
- The University of Queensland
- Sojitz Corporation - Japan
- IHS Mccloskey Coal Group - USA
- Coalindo Energy - Indonesia
- Planning Commission, India
- Antam Resourcindo - Indonesia
- Anglo American - United Kingdom
- The State Trading Corporation of India Ltd
- Oldendorff Carriers - Singapore
- Gujarat Electricity Regulatory Commission - India
- Meralco Power Generation, Philippines
- Agrawal Coal Company - India
- OPG Power Generation Pvt Ltd - India
- International Coal Ventures Pvt Ltd - India
- Kideco Jaya Agung - Indonesia
- Salva Resources Pvt Ltd - India
- Parry Sugars Refinery, India
- Petron Corporation, Philippines
- Pendopo Energi Batubara - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Videocon Industries ltd - India
- Energy Development Corp, Philippines
- Global Coal Blending Company Limited - Australia
- Krishnapatnam Port Company Ltd. - India
- London Commodity Brokers - England
- Aboitiz Power Corporation - Philippines
- Directorate General of MIneral and Coal - Indonesia
- Mercuria Energy - Indonesia
- LBH Netherlands Bv - Netherlands
- Global Green Power PLC Corporation, Philippines
- Bulk Trading Sa - Switzerland
- Kepco SPC Power Corporation, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Singapore Mercantile Exchange
- Kalimantan Lumbung Energi - Indonesia
- Romanian Commodities Exchange
- Iligan Light & Power Inc, Philippines
- Manunggal Multi Energi - Indonesia
- Uttam Galva Steels Limited - India
- GVK Power & Infra Limited - India
- Therma Luzon, Inc, Philippines
- Electricity Generating Authority of Thailand
- Globalindo Alam Lestari - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Bharathi Cement Corporation - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Karaikal Port Pvt Ltd - India
- Directorate Of Revenue Intelligence - India
- Interocean Group of Companies - India
- GMR Energy Limited - India
- Energy Link Ltd, New Zealand
- Aditya Birla Group - India
- Wood Mackenzie - Singapore
- Eastern Energy - Thailand
- Rio Tinto Coal - Australia
- New Zealand Coal & Carbon
- Borneo Indobara - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Commonwealth Bank - Australia
- Lanco Infratech Ltd - India
- Neyveli Lignite Corporation Ltd, - India
- McConnell Dowell - Australia
- Eastern Coal Council - USA
- Jindal Steel & Power Ltd - India
- PowerSource Philippines DevCo
- Kapuas Tunggal Persada - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Minerals Council of Australia
- Sakthi Sugars Limited - India
- Ministry of Transport, Egypt
- India Bulls Power Limited - India
- IEA Clean Coal Centre - UK
- Semirara Mining and Power Corporation, Philippines
- Tamil Nadu electricity Board
- Straits Asia Resources Limited - Singapore
- Sree Jayajothi Cements Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Ind-Barath Power Infra Limited - India
- Wilmar Investment Holdings
- Economic Council, Georgia
- Makarim & Taira - Indonesia
- TeaM Sual Corporation - Philippines
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