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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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Thursday, 12 February 15
DRY BULK OWNERS SCRAP MORE VESSELS, AS MARKET REACHES HISTORICAL LOWS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market has reached historical lows this week, with the Baltic Dry Index (BDI) now trading at levels below operating expense levels for ...
Thursday, 12 February 15
INDONESIAN COAL PRICE REFERENCE INCHED DOWN 1.44% IN FEBRUARY
COALspot.com - The Ministry of Energy & Mineral Resources of Indonesia revised down Indonesian coal bench mark price this month to US$ 62.92 pe ...
Thursday, 12 February 15
NEWBUILDING ORDERING ACTIVITY DRAGS ON, AS OWNERS ARE LOOKING FOR LOWER PRICES - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
Ship owners appear to be waiting for lower prices in their dealings with Asian shipyards, as the dry bulk market is at historical lows. According t ...
Wednesday, 11 February 15
DRY BULK MARKET REMAINED UNDER PRESSURE : STABILIZING CAPE MARKET HARDLY HELPED SENTIMENT
COALspot.com: The Dry Bulk market remained under pressure last week, while the stabilizing Cape market hardly helped sentiment.
Greece based s ...
Wednesday, 11 February 15
BDI HITTING THE ALL-TIME LOW; FFA MARKETS NOT SHOWING ANY POSITIVE SIGNS
With the BDI hitting the all-time low and with FFA markets not showing any positive signs for a possible recovery in the near future, pessimism is ...
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- Kapuas Tunggal Persada - Indonesia
- Ambuja Cements Ltd - India
- Indian Energy Exchange, India
- Petrochimia International Co. Ltd.- Taiwan
- Krishnapatnam Port Company Ltd. - India
- Central Electricity Authority - India
- Maharashtra Electricity Regulatory Commission - India
- Coalindo Energy - Indonesia
- Malabar Cements Ltd - India
- Global Coal Blending Company Limited - Australia
- Kideco Jaya Agung - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Globalindo Alam Lestari - Indonesia
- Manunggal Multi Energi - Indonesia
- Bhatia International Limited - India
- Bayan Resources Tbk. - Indonesia
- Mjunction Services Limited - India
- Siam City Cement - Thailand
- CIMB Investment Bank - Malaysia
- Leighton Contractors Pty Ltd - Australia
- Parry Sugars Refinery, India
- Savvy Resources Ltd - HongKong
- Thiess Contractors Indonesia
- Straits Asia Resources Limited - Singapore
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- The State Trading Corporation of India Ltd
- Bangladesh Power Developement Board
- Medco Energi Mining Internasional
- Carbofer General Trading SA - India
- Riau Bara Harum - Indonesia
- Timah Investasi Mineral - Indoneisa
- Deloitte Consulting - India
- Pendopo Energi Batubara - Indonesia
- Romanian Commodities Exchange
- Simpson Spence & Young - Indonesia
- Agrawal Coal Company - India
- Aditya Birla Group - India
- Jaiprakash Power Ventures ltd
- Power Finance Corporation Ltd., India
- Marubeni Corporation - India
- Sojitz Corporation - Japan
- Karbindo Abesyapradhi - Indoneisa
- Pipit Mutiara Jaya. PT, Indonesia
- ICICI Bank Limited - India
- PNOC Exploration Corporation - Philippines
- Rashtriya Ispat Nigam Limited - India
- Coal and Oil Company - UAE
- Price Waterhouse Coopers - Russia
- GMR Energy Limited - India
- Electricity Generating Authority of Thailand
- Commonwealth Bank - Australia
- Bukit Makmur.PT - Indonesia
- Chamber of Mines of South Africa
- GVK Power & Infra Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Essar Steel Hazira Ltd - India
- Australian Coal Association
- Energy Development Corp, Philippines
- Sree Jayajothi Cements Limited - India
- Oldendorff Carriers - Singapore
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- SMC Global Power, Philippines
- Toyota Tsusho Corporation, Japan
- Sarangani Energy Corporation, Philippines
- International Coal Ventures Pvt Ltd - India
- Altura Mining Limited, Indonesia
- Grasim Industreis Ltd - India
- Banpu Public Company Limited - Thailand
- New Zealand Coal & Carbon
- Indogreen Group - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Mercuria Energy - Indonesia
- Kobexindo Tractors - Indoneisa
- SMG Consultants - Indonesia
- Kumho Petrochemical, South Korea
- Mercator Lines Limited - India
- Indian Oil Corporation Limited
- LBH Netherlands Bv - Netherlands
- Lanco Infratech Ltd - India
- Independent Power Producers Association of India
- Port Waratah Coal Services - Australia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Metalloyd Limited - United Kingdom
- Semirara Mining Corp, Philippines
- White Energy Company Limited
- TNB Fuel Sdn Bhd - Malaysia
- Bulk Trading Sa - Switzerland
- Kepco SPC Power Corporation, Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Australian Commodity Traders Exchange
- South Luzon Thermal Energy Corporation
- London Commodity Brokers - England
- Gujarat Electricity Regulatory Commission - India
- Orica Mining Services - Indonesia
- Iligan Light & Power Inc, Philippines
- Bhoruka Overseas - Indonesia
- Meenaskhi Energy Private Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Vizag Seaport Private Limited - India
- CNBM International Corporation - China
- Ministry of Finance - Indonesia
- Tamil Nadu electricity Board
- Neyveli Lignite Corporation Ltd, - India
- Kaltim Prima Coal - Indonesia
- Gujarat Sidhee Cement - India
- Sical Logistics Limited - India
- Petron Corporation, Philippines
- IEA Clean Coal Centre - UK
- Eastern Coal Council - USA
- TeaM Sual Corporation - Philippines
- Siam City Cement PLC, Thailand
- Bahari Cakrawala Sebuku - Indonesia
- IHS Mccloskey Coal Group - USA
- Orica Australia Pty. Ltd.
- Trasteel International SA, Italy
- Wood Mackenzie - Singapore
- The Treasury - Australian Government
- European Bulk Services B.V. - Netherlands
- Bukit Asam (Persero) Tbk - Indonesia
- Xindia Steels Limited - India
- Indo Tambangraya Megah - Indonesia
- Planning Commission, India
- Jindal Steel & Power Ltd - India
- Merrill Lynch Commodities Europe
- Cement Manufacturers Association - India
- Bukit Baiduri Energy - Indonesia
- Posco Energy - South Korea
- Indonesian Coal Mining Association
- Coastal Gujarat Power Limited - India
- Ministry of Mines - Canada
- Heidelberg Cement - Germany
- Global Business Power Corporation, Philippines
- Maheswari Brothers Coal Limited - India
- Uttam Galva Steels Limited - India
- Renaissance Capital - South Africa
- Semirara Mining and Power Corporation, Philippines
- Electricity Authority, New Zealand
- San Jose City I Power Corp, Philippines
- Bharathi Cement Corporation - India
- Karaikal Port Pvt Ltd - India
- Borneo Indobara - Indonesia
- Billiton Holdings Pty Ltd - Australia
- OPG Power Generation Pvt Ltd - India
- Salva Resources Pvt Ltd - India
- Indika Energy - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- PowerSource Philippines DevCo
- Cigading International Bulk Terminal - Indonesia
- Directorate Of Revenue Intelligence - India
- Latin American Coal - Colombia
- Global Green Power PLC Corporation, Philippines
- Vedanta Resources Plc - India
- Parliament of New Zealand
- Madhucon Powers Ltd - India
- Rio Tinto Coal - Australia
- Binh Thuan Hamico - Vietnam
- Economic Council, Georgia
- Singapore Mercantile Exchange
- Central Java Power - Indonesia
- Makarim & Taira - Indonesia
- The University of Queensland
- Mintek Dendrill Indonesia
- ASAPP Information Group - India
- Goldman Sachs - Singapore
- Chettinad Cement Corporation Ltd - India
- Dalmia Cement Bharat India
- Holcim Trading Pte Ltd - Singapore
- Baramulti Group, Indonesia
- Sakthi Sugars Limited - India
- Therma Luzon, Inc, Philippines
- Wilmar Investment Holdings
- Sindya Power Generating Company Private Ltd
- Intertek Mineral Services - Indonesia
- Attock Cement Pakistan Limited
- Ministry of Transport, Egypt
- Videocon Industries ltd - India
- Samtan Co., Ltd - South Korea
- Georgia Ports Authority, United States
- Larsen & Toubro Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Aboitiz Power Corporation - Philippines
- Ind-Barath Power Infra Limited - India
- Eastern Energy - Thailand
- Tata Chemicals Ltd - India
- Standard Chartered Bank - UAE
- India Bulls Power Limited - India
- MS Steel International - UAE
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Asmin Koalindo Tuhup - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Africa Commodities Group - South Africa
- Thai Mozambique Logistica
- Anglo American - United Kingdom
- Antam Resourcindo - Indonesia
- Sinarmas Energy and Mining - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Energy Link Ltd, New Zealand
- Star Paper Mills Limited - India
- Bhushan Steel Limited - India
- Minerals Council of Australia
- Kartika Selabumi Mining - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Alfred C Toepfer International GmbH - Germany
- Ceylon Electricity Board - Sri Lanka
- Edison Trading Spa - Italy
- Miang Besar Coal Terminal - Indonesia
- McConnell Dowell - Australia
- Meralco Power Generation, Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Formosa Plastics Group - Taiwan
- SN Aboitiz Power Inc, Philippines
- Barasentosa Lestari - Indonesia
- VISA Power Limited - India
- PTC India Limited - India
- Interocean Group of Companies - India
- GAC Shipping (India) Pvt Ltd
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