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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, 30 January 15
CAN BULKER CONVERSIONS SPOIL THE TANKER MARKET'S PARTY? - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
Oversupply of tonnage has always been in the back of the head of ship owners when it comes to taking advantage of favorable market conditions. As s ...
Thursday, 29 January 15
CHINA ENERGY DEMAND MUST BE REVIEWED DUE TO FUNDAMENTAL ECONOMIC CHANGES - WOOD MACKENZIE
New patterns emerging as energy demand growth decoupled significantly from GDP growth for the first time in 2014
Wood Mackenzie says 2014 was ...
Thursday, 29 January 15
CAPE MARKET IS STILL STRUGGLING WITH LOW DEMAND AND LOW COMMODITY PRICES
Handy
Supramax rates are heading south with slipping rates all across the block. USG activity is slow with mid-week levels in the mid 8.000s, Fea ...
Wednesday, 28 January 15
MARKET INSIGHT - STELIOS KOLLINTZAS
With most traders having returned to action from year end festivities, we have already seen signs of activity in the specialized product markets. L ...
Wednesday, 28 January 15
CAPES CONTINUED THEIR UPWARD MOVEMENT LAST WEEK - INTERMODAL
COALspot.com: The Dry Bulk market displayed a mirror performance of that of the week prior, with the Capesize market correcting further upwards and ...
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- SN Aboitiz Power Inc, Philippines
- Simpson Spence & Young - Indonesia
- Medco Energi Mining Internasional
- Ambuja Cements Ltd - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Leighton Contractors Pty Ltd - Australia
- OPG Power Generation Pvt Ltd - India
- Samtan Co., Ltd - South Korea
- PetroVietnam Power Coal Import and Supply Company
- IEA Clean Coal Centre - UK
- Independent Power Producers Association of India
- Vedanta Resources Plc - India
- Energy Link Ltd, New Zealand
- Manunggal Multi Energi - Indonesia
- Banpu Public Company Limited - Thailand
- Bahari Cakrawala Sebuku - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- New Zealand Coal & Carbon
- Eastern Coal Council - USA
- Savvy Resources Ltd - HongKong
- Riau Bara Harum - Indonesia
- Goldman Sachs - Singapore
- Australian Commodity Traders Exchange
- Minerals Council of Australia
- Parry Sugars Refinery, India
- Barasentosa Lestari - Indonesia
- CIMB Investment Bank - Malaysia
- Australian Coal Association
- Attock Cement Pakistan Limited
- South Luzon Thermal Energy Corporation
- PTC India Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Lanco Infratech Ltd - India
- Therma Luzon, Inc, Philippines
- Antam Resourcindo - Indonesia
- Global Green Power PLC Corporation, Philippines
- SMG Consultants - Indonesia
- Oldendorff Carriers - Singapore
- IHS Mccloskey Coal Group - USA
- Larsen & Toubro Limited - India
- Maharashtra Electricity Regulatory Commission - India
- The University of Queensland
- AsiaOL BioFuels Corp., Philippines
- Sinarmas Energy and Mining - Indonesia
- Ministry of Transport, Egypt
- Meralco Power Generation, Philippines
- Jindal Steel & Power Ltd - India
- PNOC Exploration Corporation - Philippines
- Cigading International Bulk Terminal - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Global Coal Blending Company Limited - Australia
- Indian Energy Exchange, India
- Malabar Cements Ltd - India
- Cement Manufacturers Association - India
- Interocean Group of Companies - India
- San Jose City I Power Corp, Philippines
- Gujarat Sidhee Cement - India
- Bayan Resources Tbk. - Indonesia
- Indika Energy - Indonesia
- Vizag Seaport Private Limited - India
- Petron Corporation, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Binh Thuan Hamico - Vietnam
- Meenaskhi Energy Private Limited - India
- Karbindo Abesyapradhi - Indoneisa
- PowerSource Philippines DevCo
- Ceylon Electricity Board - Sri Lanka
- Straits Asia Resources Limited - Singapore
- Jaiprakash Power Ventures ltd
- Thai Mozambique Logistica
- Power Finance Corporation Ltd., India
- Jorong Barutama Greston.PT - Indonesia
- Economic Council, Georgia
- Wilmar Investment Holdings
- Parliament of New Zealand
- Semirara Mining and Power Corporation, Philippines
- GAC Shipping (India) Pvt Ltd
- Makarim & Taira - Indonesia
- Alfred C Toepfer International GmbH - Germany
- ASAPP Information Group - India
- Karaikal Port Pvt Ltd - India
- Kartika Selabumi Mining - Indonesia
- Bhoruka Overseas - Indonesia
- Anglo American - United Kingdom
- Posco Energy - South Korea
- Toyota Tsusho Corporation, Japan
- Grasim Industreis Ltd - India
- Electricity Authority, New Zealand
- Singapore Mercantile Exchange
- Agrawal Coal Company - India
- White Energy Company Limited
- Indo Tambangraya Megah - Indonesia
- Semirara Mining Corp, Philippines
- Bukit Baiduri Energy - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Kepco SPC Power Corporation, Philippines
- Merrill Lynch Commodities Europe
- Trasteel International SA, Italy
- Standard Chartered Bank - UAE
- Intertek Mineral Services - Indonesia
- Indogreen Group - Indonesia
- Sindya Power Generating Company Private Ltd
- Madhucon Powers Ltd - India
- Renaissance Capital - South Africa
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Borneo Indobara - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Chamber of Mines of South Africa
- Petrochimia International Co. Ltd.- Taiwan
- Pendopo Energi Batubara - Indonesia
- Deloitte Consulting - India
- LBH Netherlands Bv - Netherlands
- Kohat Cement Company Ltd. - Pakistan
- Ministry of Mines - Canada
- GVK Power & Infra Limited - India
- Indian Oil Corporation Limited
- Edison Trading Spa - Italy
- Videocon Industries ltd - India
- Tata Chemicals Ltd - India
- Georgia Ports Authority, United States
- Ministry of Finance - Indonesia
- Bharathi Cement Corporation - India
- Marubeni Corporation - India
- SMC Global Power, Philippines
- VISA Power Limited - India
- Directorate Of Revenue Intelligence - India
- Directorate General of MIneral and Coal - Indonesia
- Baramulti Group, Indonesia
- London Commodity Brokers - England
- Metalloyd Limited - United Kingdom
- Aboitiz Power Corporation - Philippines
- Bhatia International Limited - India
- CNBM International Corporation - China
- Price Waterhouse Coopers - Russia
- TNB Fuel Sdn Bhd - Malaysia
- Miang Besar Coal Terminal - Indonesia
- Dalmia Cement Bharat India
- Bukit Makmur.PT - Indonesia
- Sical Logistics Limited - India
- Global Business Power Corporation, Philippines
- MS Steel International - UAE
- TeaM Sual Corporation - Philippines
- International Coal Ventures Pvt Ltd - India
- Ind-Barath Power Infra Limited - India
- Port Waratah Coal Services - Australia
- Kalimantan Lumbung Energi - Indonesia
- Orica Mining Services - Indonesia
- Chettinad Cement Corporation Ltd - India
- Sakthi Sugars Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Orica Australia Pty. Ltd.
- India Bulls Power Limited - India
- Kideco Jaya Agung - Indonesia
- Mjunction Services Limited - India
- Kaltim Prima Coal - Indonesia
- Bangladesh Power Developement Board
- Kumho Petrochemical, South Korea
- Siam City Cement - Thailand
- Essar Steel Hazira Ltd - India
- The Treasury - Australian Government
- Tamil Nadu electricity Board
- Coal and Oil Company - UAE
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Central Electricity Authority - India
- The State Trading Corporation of India Ltd
- Formosa Plastics Group - Taiwan
- Indonesian Coal Mining Association
- Bukit Asam (Persero) Tbk - Indonesia
- Romanian Commodities Exchange
- Planning Commission, India
- Sojitz Corporation - Japan
- Energy Development Corp, Philippines
- Wood Mackenzie - Singapore
- Siam City Cement PLC, Thailand
- Xindia Steels Limited - India
- Thiess Contractors Indonesia
- Gujarat Electricity Regulatory Commission - India
- Timah Investasi Mineral - Indoneisa
- Heidelberg Cement - Germany
- McConnell Dowell - Australia
- Commonwealth Bank - Australia
- Billiton Holdings Pty Ltd - Australia
- Maheswari Brothers Coal Limited - India
- Bulk Trading Sa - Switzerland
- Sree Jayajothi Cements Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Aditya Birla Group - India
- Holcim Trading Pte Ltd - Singapore
- Coastal Gujarat Power Limited - India
- Mercuria Energy - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Sarangani Energy Corporation, Philippines
- Rashtriya Ispat Nigam Limited - India
- Uttam Galva Steels Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Mintek Dendrill Indonesia
- Kobexindo Tractors - Indoneisa
- Rio Tinto Coal - Australia
- Star Paper Mills Limited - India
- Eastern Energy - Thailand
- Electricity Generating Authority of Thailand
- Bhushan Steel Limited - India
- Latin American Coal - Colombia
- Globalindo Alam Lestari - Indonesia
- Salva Resources Pvt Ltd - India
- Central Java Power - Indonesia
- Iligan Light & Power Inc, Philippines
- GMR Energy Limited - India
- Coalindo Energy - Indonesia
- ICICI Bank Limited - India
- European Bulk Services B.V. - Netherlands
- Mercator Lines Limited - India
- Altura Mining Limited, Indonesia
- Carbofer General Trading SA - India
- Africa Commodities Group - South Africa
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