Sky-high daily charter rates might be appealing, but switching to long term storage on ships is not without its challenges
A slump in oil demand on the back of Covid-19-enforced global lockdowns has sent the crude and tanker trades into a tailspin.
With the world effectively awash with surplus oil and crude prices at historically low levels, commodity traders have been climbing over each other to secure floating storage in very large crude carriers.
According to reports a record 160m barrels of oil is currently being stored in VLCCs – the last time that floating storage was anywhere near this level was in 2009, when more than 100m barrels were stored at sea before being sold at a profit when the economy picked up. It’s rich pickings for tanker owners, who otherwise face the pain riding out the slump in oil trade. Charter rates of up to $350,000 a day have been reported for the 60 tankers already chartered for storage, with rumours that the number of ships could triple in the coming months.
The attraction of ships as storage vessels is twofold: they are significantly more mobile and more flexible than landside storage facilities. They can easily be directed to proceed or lay at anchor and, once the market recovers, they can be ordered to proceed to a discharge port to deliver the cargo to a buyer. Added to which, ship storage charterers will likely avoid significant customs duty and tax implications for storing cargo on land.
But while the temptation to cash in on storage gains is hard to resist, one lawyer is cautioning against rushing in.
Beware the risks
Carol Holness, a senior associate at Hill Dickinson, warns that while storage charters may be an attractive option, both owners and charterers “must be aware that using vessels as floating storage has practical and legal implications”.
Most charterparties are geared towards the transportation of cargo from one place to another rather than for storage, she says. They have been developed and evolved to deal with known or anticipated risks and to allocate these between charterers and owners. Therefore, parties need to plan for and deal with the issues that may arise by changing the intended use of a vessel.
“Voyage charterparties are, generally speaking, aimed at carrying cargo from one place to another as quickly as possible. They do not cater for a laden vessel under charter sitting in one place for several weeks or months,” she said.
While some voyage charterparties may have incorporated terms that allow a charterer to elect to order a vessel to wait for orders – effectively turning the vessel into storage – the charterparty will often provide for a substantially higher demurrage rate if the vessel is used for storage. “In those circumstances, owners may be happy for charterers to instruct the vessel to wait as they know that they will be compensated well for the lost time. However, the charterparty (and the parties) must be absolutely clear about what demurrage regime will apply,” Ms Holness says.
She gives the example of the Zaliv Baikal where the charterparty provided that if the charterer ordered the vessel to stop and wait for further orders then a significantly higher demurrage rate would apply. The charterer did not provide any orders and the vessel sat for several days. The owner claimed the higher rate of demurrage, but the charterer was only willing to pay the standard demurrage rate.
“The court interpreted the demurrage clause to only impose the higher demurrage rate if an express order to stop and wait was given,” says Ms Holness. “The court refused to read into the charterparty an implied term that a failure to give an order amounted to a stop and wait order which would have incurred the higher demurrage rate.” This cautionary case stresses the importance of a charterparty being clear about what rate the parties intend to apply if the vessel is used for storage.
Time charter support?
Time charterparties are better suited to storage use because charterers charter the vessel for a set period of time and are generally free to order the vessel to proceed to any destination or to wait subject to any agreed trading or cargo limitations. Indeed, some charterparties expressly provide that a vessel can be used for storage, however this is often a “throwaway clause” included without much thought as to the implications of using the vessel for long-term storage, says Ms Holness.
Consideration will need to be given to how long the vessel will need to chartered for as if the period is too short, the owner may refuse the extension and if the oil price has not risen sufficiently, the charterer will be stuck with a non-profitable cargo.
There is also the wear and tear on the vessel to take into account. “Most vessels are not designed to sit in one place for too long. A vessel that sits in one place will likely experience hull fouling and marine growth which may require ongoing maintenance and for the vessel to be drydocked at the end of the charter. Who will foot the bill?” asks Ms Holness.
There will likely also be regulatory, maintenance and safety concerns to address. For example, some countries may restrict or prohibit a fully laden VLCC or ULCC from anchoring within a country’s territorial waters for several months. Additionally, long-term floating storage may be subject to weather, piracy and political risks.
Furthermore, the Covid-19 pandemic has led to restrictions on cargo handling, port calls, crew changeover and more. “If a crew member becomes ill or is otherwise not able or willing to work, and owners are not able to put new crew on board, then a vessel may not comply with safe manning requirements, rendering the vessel unseaworthy,” explains Ms Holness.
There are also cargo risks to consider. It is the owner’s responsibility to provide a seaworthy vessel that can safely store and carry cargo. For a tanker to switch to long term storage, charterers and owners must be sure that the cargo and/or the ship will not be damaged by the sitting cargo.
On the insurance front, both parties will need to notify their insurers about the change in circumstances and it is likely that additional premiums will be applicable. “For example, cargo owners need to be aware that the ICC clauses (which are the standard cargo insurance clauses) are not designed for long-term storage. Vessel owners and charterers need to consider whether they have increased exposure to liability for pollution or cargo damage,” says Ms Holness.
In conclusion, while Ms Holness recognises that the option of chartering vessels for floating storage will be “highly appealing” to both owners and charterers, both parties must ensure that they “appreciate and plan for the risks associated with doing so”.