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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, 14 November 14
MORE NATURAL GAS FROM RUSSIA TO HELP STABILISE CHINA PRICES - FITCH RATINGS
COALspot.com: Fitch Ratings has said possible additional natural gas supplies from Russia's OAO Gazprom to China via the Altai pipeline would h ...
Thursday, 13 November 14
SLOWER AND LOWER HAS BEEN THE TREND OF THE PANAMAX IN BOTH HEMISPHERES - FEARNLEYS
Handy
We are experiencing an oversupply of tonnage in the Atlantic which is out numbering the amount of cargoes, Fearnleys broker says in its lat ...
Thursday, 13 November 14
DRY BULK MARKET'S REBOUND HINGES ON IRON ORE OVERSUPPLY ISSUES MOVING FORWARD - HELLENIC SHIPPING NEWS
“One man’s benefit, is another man’s demise” is a phrase which can be used to describe today’s situation in the dry b ...
Thursday, 13 November 14
COAL MINISTER WANTS INDIA TO STOP COAL IMPORTS IN TWO OR THREE YEARS
COALspot.com: India to ramp up coal production to a billion tonnes by 2019 from its current level of 490 million tones. According to Power and Coal ...
Thursday, 13 November 14
MODERN DRY BULK SHIPS' PRICES START FIRMING UP - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
While the main story of the past few weeks has been the rebound of the dry bulk market, which has been a result of increased Chinese iron ore impor ...
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- Kaltim Prima Coal - Indonesia
- Makarim & Taira - Indonesia
- Ministry of Finance - Indonesia
- Goldman Sachs - Singapore
- India Bulls Power Limited - India
- Maharashtra Electricity Regulatory Commission - India
- PNOC Exploration Corporation - Philippines
- Wood Mackenzie - Singapore
- Marubeni Corporation - India
- Coastal Gujarat Power Limited - India
- Mjunction Services Limited - India
- Jaiprakash Power Ventures ltd
- Singapore Mercantile Exchange
- Sinarmas Energy and Mining - Indonesia
- Medco Energi Mining Internasional
- Sarangani Energy Corporation, Philippines
- Larsen & Toubro Limited - India
- Ceylon Electricity Board - Sri Lanka
- SMG Consultants - Indonesia
- Power Finance Corporation Ltd., India
- Banpu Public Company Limited - Thailand
- SMC Global Power, Philippines
- Parry Sugars Refinery, India
- South Luzon Thermal Energy Corporation
- Bangladesh Power Developement Board
- The Treasury - Australian Government
- Trasteel International SA, Italy
- Deloitte Consulting - India
- Sical Logistics Limited - India
- Manunggal Multi Energi - Indonesia
- Dalmia Cement Bharat India
- Antam Resourcindo - Indonesia
- McConnell Dowell - Australia
- Krishnapatnam Port Company Ltd. - India
- Kohat Cement Company Ltd. - Pakistan
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Therma Luzon, Inc, Philippines
- Romanian Commodities Exchange
- Central Electricity Authority - India
- Madhucon Powers Ltd - India
- Meenaskhi Energy Private Limited - India
- PetroVietnam Power Coal Import and Supply Company
- Kideco Jaya Agung - Indonesia
- Bhoruka Overseas - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Grasim Industreis Ltd - India
- Jindal Steel & Power Ltd - India
- Posco Energy - South Korea
- Bharathi Cement Corporation - India
- Aboitiz Power Corporation - Philippines
- Cement Manufacturers Association - India
- Globalindo Alam Lestari - Indonesia
- Eastern Energy - Thailand
- Salva Resources Pvt Ltd - India
- Merrill Lynch Commodities Europe
- Global Business Power Corporation, Philippines
- VISA Power Limited - India
- Indian Oil Corporation Limited
- Semirara Mining and Power Corporation, Philippines
- Sindya Power Generating Company Private Ltd
- Sakthi Sugars Limited - India
- Directorate Of Revenue Intelligence - India
- Kartika Selabumi Mining - Indonesia
- CNBM International Corporation - China
- International Coal Ventures Pvt Ltd - India
- Port Waratah Coal Services - Australia
- Standard Chartered Bank - UAE
- Gujarat Electricity Regulatory Commission - India
- LBH Netherlands Bv - Netherlands
- Aditya Birla Group - India
- Vijayanagar Sugar Pvt Ltd - India
- Eastern Coal Council - USA
- Africa Commodities Group - South Africa
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Kalimantan Lumbung Energi - Indonesia
- London Commodity Brokers - England
- Pipit Mutiara Jaya. PT, Indonesia
- GAC Shipping (India) Pvt Ltd
- Indika Energy - Indonesia
- Independent Power Producers Association of India
- Mercator Lines Limited - India
- Iligan Light & Power Inc, Philippines
- Meralco Power Generation, Philippines
- Carbofer General Trading SA - India
- ICICI Bank Limited - India
- Edison Trading Spa - Italy
- GVK Power & Infra Limited - India
- Bukit Baiduri Energy - Indonesia
- Bhatia International Limited - India
- Miang Besar Coal Terminal - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Australian Coal Association
- Vedanta Resources Plc - India
- Pendopo Energi Batubara - Indonesia
- Indogreen Group - Indonesia
- Commonwealth Bank - Australia
- Thai Mozambique Logistica
- Essar Steel Hazira Ltd - India
- Leighton Contractors Pty Ltd - Australia
- The University of Queensland
- OPG Power Generation Pvt Ltd - India
- Electricity Authority, New Zealand
- Bukit Makmur.PT - Indonesia
- San Jose City I Power Corp, Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Orica Australia Pty. Ltd.
- Alfred C Toepfer International GmbH - Germany
- Gujarat Sidhee Cement - India
- Bulk Trading Sa - Switzerland
- ASAPP Information Group - India
- White Energy Company Limited
- Orica Mining Services - Indonesia
- Star Paper Mills Limited - India
- Karaikal Port Pvt Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- Timah Investasi Mineral - Indoneisa
- Wilmar Investment Holdings
- Malabar Cements Ltd - India
- Price Waterhouse Coopers - Russia
- Georgia Ports Authority, United States
- New Zealand Coal & Carbon
- Rio Tinto Coal - Australia
- Latin American Coal - Colombia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Chamber of Mines of South Africa
- Heidelberg Cement - Germany
- Energy Link Ltd, New Zealand
- Altura Mining Limited, Indonesia
- Thiess Contractors Indonesia
- Metalloyd Limited - United Kingdom
- Kobexindo Tractors - Indoneisa
- Ministry of Transport, Egypt
- Straits Asia Resources Limited - Singapore
- IEA Clean Coal Centre - UK
- Planning Commission, India
- Energy Development Corp, Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Ambuja Cements Ltd - India
- Sree Jayajothi Cements Limited - India
- Holcim Trading Pte Ltd - Singapore
- Global Green Power PLC Corporation, Philippines
- Mercuria Energy - Indonesia
- Lanco Infratech Ltd - India
- GMR Energy Limited - India
- SN Aboitiz Power Inc, Philippines
- CIMB Investment Bank - Malaysia
- Central Java Power - Indonesia
- Minerals Council of Australia
- Indo Tambangraya Megah - Indonesia
- Xindia Steels Limited - India
- Sojitz Corporation - Japan
- Petron Corporation, Philippines
- Coalindo Energy - Indonesia
- Indonesian Coal Mining Association
- Kumho Petrochemical, South Korea
- MS Steel International - UAE
- Agrawal Coal Company - India
- Indian Energy Exchange, India
- Uttam Galva Steels Limited - India
- Rashtriya Ispat Nigam Limited - India
- Vizag Seaport Private Limited - India
- IHS Mccloskey Coal Group - USA
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Savvy Resources Ltd - HongKong
- Baramulti Group, Indonesia
- Economic Council, Georgia
- Semirara Mining Corp, Philippines
- Riau Bara Harum - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Toyota Tsusho Corporation, Japan
- Maheswari Brothers Coal Limited - India
- Mintek Dendrill Indonesia
- PTC India Limited - India
- The State Trading Corporation of India Ltd
- Tata Chemicals Ltd - India
- Barasentosa Lestari - Indonesia
- Renaissance Capital - South Africa
- Anglo American - United Kingdom
- TeaM Sual Corporation - Philippines
- Ind-Barath Power Infra Limited - India
- Cigading International Bulk Terminal - Indonesia
- Australian Commodity Traders Exchange
- Electricity Generating Authority of Thailand
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Chettinad Cement Corporation Ltd - India
- Directorate General of MIneral and Coal - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Bayan Resources Tbk. - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Kapuas Tunggal Persada - Indonesia
- Simpson Spence & Young - Indonesia
- Borneo Indobara - Indonesia
- Videocon Industries ltd - India
- Parliament of New Zealand
- Kepco SPC Power Corporation, Philippines
- TNB Fuel Sdn Bhd - Malaysia
- AsiaOL BioFuels Corp., Philippines
- Formosa Plastics Group - Taiwan
- European Bulk Services B.V. - Netherlands
- Siam City Cement - Thailand
- Ministry of Mines - Canada
- Attock Cement Pakistan Limited
- Siam City Cement PLC, Thailand
- Oldendorff Carriers - Singapore
- Billiton Holdings Pty Ltd - Australia
- Binh Thuan Hamico - Vietnam
- Asmin Koalindo Tuhup - Indonesia
- Bhushan Steel Limited - India
- Global Coal Blending Company Limited - Australia
- Coal and Oil Company - UAE
- Intertek Mineral Services - Indonesia
- Tamil Nadu electricity Board
- Karbindo Abesyapradhi - Indoneisa
- Petrochimia International Co. Ltd.- Taiwan
- Interocean Group of Companies - India
- Samtan Co., Ltd - South Korea
- PowerSource Philippines DevCo
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