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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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Sunday, 15 February 15
BALTIC DRY INDEX CONTINUALLY DIPPED IN RED
COALspot.com: The Baltic Dry Index continues its decline and fell 5.18 pct to 530 points week on week due to falling commodity prices and declining ...
Saturday, 14 February 15
SHALE GAS AND TIGHT OIL ARE COMMERCIALLY PRODUCED IN JUST FOUR COUNTRIES - EIA
KNOWLEDGE TO ELEVATE
The United States, Canada, China, and Argentina are currently the only four countries in the world that are producing com ...
Friday, 13 February 15
U.S. WEEKLY COAL PRODUCTION SHOWS 10% DECLINE
COALspot.com – United States the world's one of the largest coal producers, produced approximately 18.1 million short tons (mmst) of coal ...
Friday, 13 February 15
SMALL AND MEDIUM-SIZED SHIP OWNERS SQUEEZED OUT OF THE MARKET ON CRASHING DRY BULK MARKET AND EUROZONE CRISIS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
Financing issues have started to tighten the noose in the throats of small and medium-size ship owners, who were already facing problems over the p ...
Thursday, 12 February 15
CAPESIZE: THE BEST DESCRIPTION FOR THE MARKET IS, FLAT - FEARNRESEARCH
Handy
The handy and supra market is also being affected by the marginal volume of activity in the commodity sales. We see a small upturn in the T ...
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- Indogreen Group - Indonesia
- SN Aboitiz Power Inc, Philippines
- South Luzon Thermal Energy Corporation
- Kalimantan Lumbung Energi - Indonesia
- SMG Consultants - Indonesia
- Indian Oil Corporation Limited
- Carbofer General Trading SA - India
- Antam Resourcindo - Indonesia
- Wilmar Investment Holdings
- Timah Investasi Mineral - Indoneisa
- Bhushan Steel Limited - India
- TNB Fuel Sdn Bhd - Malaysia
- Formosa Plastics Group - Taiwan
- Indian Energy Exchange, India
- PNOC Exploration Corporation - Philippines
- IEA Clean Coal Centre - UK
- Indo Tambangraya Megah - Indonesia
- PowerSource Philippines DevCo
- Gujarat Sidhee Cement - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- Essar Steel Hazira Ltd - India
- Kartika Selabumi Mining - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Kapuas Tunggal Persada - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Sojitz Corporation - Japan
- Pipit Mutiara Jaya. PT, Indonesia
- Samtan Co., Ltd - South Korea
- Sindya Power Generating Company Private Ltd
- Medco Energi Mining Internasional
- Lanco Infratech Ltd - India
- Maheswari Brothers Coal Limited - India
- Sarangani Energy Corporation, Philippines
- Sree Jayajothi Cements Limited - India
- Petron Corporation, Philippines
- Rio Tinto Coal - Australia
- Bhatia International Limited - India
- TeaM Sual Corporation - Philippines
- Mintek Dendrill Indonesia
- Central Electricity Authority - India
- Star Paper Mills Limited - India
- Romanian Commodities Exchange
- Georgia Ports Authority, United States
- Barasentosa Lestari - Indonesia
- Bukit Makmur.PT - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Economic Council, Georgia
- Thai Mozambique Logistica
- Mercuria Energy - Indonesia
- Heidelberg Cement - Germany
- Karaikal Port Pvt Ltd - India
- Kepco SPC Power Corporation, Philippines
- Semirara Mining and Power Corporation, Philippines
- Kobexindo Tractors - Indoneisa
- Videocon Industries ltd - India
- PTC India Limited - India
- Ambuja Cements Ltd - India
- Merrill Lynch Commodities Europe
- CIMB Investment Bank - Malaysia
- Global Green Power PLC Corporation, Philippines
- Sakthi Sugars Limited - India
- Alfred C Toepfer International GmbH - Germany
- Ministry of Finance - Indonesia
- Goldman Sachs - Singapore
- Vedanta Resources Plc - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- AsiaOL BioFuels Corp., Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Coal and Oil Company - UAE
- India Bulls Power Limited - India
- Leighton Contractors Pty Ltd - Australia
- LBH Netherlands Bv - Netherlands
- Vijayanagar Sugar Pvt Ltd - India
- Savvy Resources Ltd - HongKong
- VISA Power Limited - India
- Simpson Spence & Young - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Riau Bara Harum - Indonesia
- Meenaskhi Energy Private Limited - India
- Bayan Resources Tbk. - Indonesia
- Bulk Trading Sa - Switzerland
- Trasteel International SA, Italy
- Edison Trading Spa - Italy
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Uttam Galva Steels Limited - India
- Commonwealth Bank - Australia
- Anglo American - United Kingdom
- Straits Asia Resources Limited - Singapore
- Asmin Koalindo Tuhup - Indonesia
- Coalindo Energy - Indonesia
- Thiess Contractors Indonesia
- Salva Resources Pvt Ltd - India
- Aboitiz Power Corporation - Philippines
- ICICI Bank Limited - India
- Orica Mining Services - Indonesia
- New Zealand Coal & Carbon
- Ceylon Electricity Board - Sri Lanka
- Electricity Generating Authority of Thailand
- Kaltim Prima Coal - Indonesia
- GMR Energy Limited - India
- Semirara Mining Corp, Philippines
- Interocean Group of Companies - India
- Planning Commission, India
- Altura Mining Limited, Indonesia
- Parry Sugars Refinery, India
- GVK Power & Infra Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Dalmia Cement Bharat India
- McConnell Dowell - Australia
- Global Coal Blending Company Limited - Australia
- Krishnapatnam Port Company Ltd. - India
- GN Power Mariveles Coal Plant, Philippines
- GAC Shipping (India) Pvt Ltd
- Standard Chartered Bank - UAE
- Tamil Nadu electricity Board
- Kideco Jaya Agung - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Intertek Mineral Services - Indonesia
- Deloitte Consulting - India
- Banpu Public Company Limited - Thailand
- Malabar Cements Ltd - India
- Africa Commodities Group - South Africa
- CNBM International Corporation - China
- Sical Logistics Limited - India
- Indonesian Coal Mining Association
- Aditya Birla Group - India
- Meralco Power Generation, Philippines
- Wood Mackenzie - Singapore
- Ind-Barath Power Infra Limited - India
- London Commodity Brokers - England
- Oldendorff Carriers - Singapore
- Miang Besar Coal Terminal - Indonesia
- Xindia Steels Limited - India
- Bukit Baiduri Energy - Indonesia
- Jaiprakash Power Ventures ltd
- Petrochimia International Co. Ltd.- Taiwan
- Posco Energy - South Korea
- Binh Thuan Hamico - Vietnam
- Neyveli Lignite Corporation Ltd, - India
- Australian Coal Association
- Eastern Coal Council - USA
- Metalloyd Limited - United Kingdom
- The Treasury - Australian Government
- Manunggal Multi Energi - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Borneo Indobara - Indonesia
- Cement Manufacturers Association - India
- Parliament of New Zealand
- Tata Chemicals Ltd - India
- Energy Link Ltd, New Zealand
- International Coal Ventures Pvt Ltd - India
- ASAPP Information Group - India
- Toyota Tsusho Corporation, Japan
- Kumho Petrochemical, South Korea
- San Jose City I Power Corp, Philippines
- Coastal Gujarat Power Limited - India
- Global Business Power Corporation, Philippines
- Ministry of Mines - Canada
- Power Finance Corporation Ltd., India
- Ministry of Transport, Egypt
- Karbindo Abesyapradhi - Indoneisa
- OPG Power Generation Pvt Ltd - India
- European Bulk Services B.V. - Netherlands
- Larsen & Toubro Limited - India
- Gujarat Electricity Regulatory Commission - India
- Iligan Light & Power Inc, Philippines
- Grasim Industreis Ltd - India
- Electricity Authority, New Zealand
- Minerals Council of Australia
- Siam City Cement - Thailand
- Marubeni Corporation - India
- Chettinad Cement Corporation Ltd - India
- Makarim & Taira - Indonesia
- Chamber of Mines of South Africa
- Attock Cement Pakistan Limited
- Bangladesh Power Developement Board
- Therma Luzon, Inc, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Kohat Cement Company Ltd. - Pakistan
- Port Waratah Coal Services - Australia
- Australian Commodity Traders Exchange
- IHS Mccloskey Coal Group - USA
- White Energy Company Limited
- MS Steel International - UAE
- Eastern Energy - Thailand
- Renaissance Capital - South Africa
- Bukit Asam (Persero) Tbk - Indonesia
- Independent Power Producers Association of India
- Central Java Power - Indonesia
- Latin American Coal - Colombia
- Singapore Mercantile Exchange
- Jindal Steel & Power Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Globalindo Alam Lestari - Indonesia
- Energy Development Corp, Philippines
- Pendopo Energi Batubara - Indonesia
- Bhoruka Overseas - Indonesia
- Mercator Lines Limited - India
- Madhucon Powers Ltd - India
- Cigading International Bulk Terminal - Indonesia
- The University of Queensland
- Indika Energy - Indonesia
- Vizag Seaport Private Limited - India
- Mjunction Services Limited - India
- Price Waterhouse Coopers - Russia
- Bharathi Cement Corporation - India
- Siam City Cement PLC, Thailand
- Directorate Of Revenue Intelligence - India
- Agrawal Coal Company - India
- Maharashtra Electricity Regulatory Commission - India
- The State Trading Corporation of India Ltd
- Baramulti Group, Indonesia
- Orica Australia Pty. Ltd.
- SMC Global Power, Philippines
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