UK-based classification society Lloyd’s Register (LR) on Monday (11 May) published an article on the current oil market turbulence creating a spike in floating storage, and how LR can assist in allaying some technical issues that may arise from the situation:

Negative oil prices and off-the-scale volatility in crude markets are positive for floating storage, as the next chapter of the Covid-19 pandemic energy crisis plays out on the world’s fleet of tankers.

Beyond the turbulence, record-breaking volumes of oil and refined products being stored on tankers at sea are presenting owners and operators not only with sky-high earnings but numerous technical and practical considerations.

The vessel’s flag state, age, size, cargo being stored, as well as the storage duration and location, whether surveys are due and when all need to be explored.

Most shoreside tanks in key hubs of Singapore, northwest Europe and the US Gulf are already full or leased, as global crude demand collapses by a third, or some 30 million barrels per day (bpd). Volumes deployed to floating storage as the surplus overwhelms commercial storage is estimated to exceed 400 million bbls (barrels) by the end of June, based on assessments from shipbrokers. That’s enough to meet all of the US oil needs for 20 days. Drawdowns aren’t expected until late 2020 at the earliest as and when the oil market rebalances.

There are now 163 million bbls of crude in floating storage based on Lloyd’s List Intelligence data, the most in records going back to 2009. Between 40 million bbls and 65 million barrels of clean products such as gasoline, jet fuel, diesel and gasoil are being stored on tankers, according to research provided from two shipbrokers.

That encompasses 500 tankers worldwide, from very large crude carriers through to smaller, medium-range and handysize ships. More than 110 vessels are the smaller tankers never before designated for this purpose and at anchor in locations where floating storage isn’t regularly seen.

The data captures these smaller tankers because of changed methodology that defines floating storage as vessels at anchor for seven days or longer, rather than the normal 20-day period. This change was made to include unsold or surplus cargoes on tankers awaiting discharge at ports. These tankers are expected to end up in floating storage because the delays reflect difficulties securing land-based storage.

As much as eight percent of the clean tanker fleet is currently being used for floating storage based on this methodology. An estimated 10 percent of all clean product loadings and eight percent of crude loadings over April will end up in floating storage, reports from energy commodities analysts conclude.

Technically, permanent or semi-permanent floating storage tankers are defined as ‘moored oil storage units’ or ‘moored oil storage tankers’, using their own anchor and operated at a fixed location. Survey frequency is considered on a case-by-case basis. The Lloyd’s Machinery Certificate (LMC) that encompasses propelling and essential auxiliary machinery covered in special surveys is withdrawn for storage units and can be maintained or suspended for moored oil storage tankers.

Most of the older tankers used for floating storage, particularly off Malaysia and Singapore, supplement tank farms and are defined as moored oil storage tankers. They are frequently linked to oil traders and mainly conduct ship-to-ship transfers to other bunker units or smaller tankers. Numbers in Singapore rose over the last quarter of 2019, as oil traders and shipowners sought to secure extra supplies with floating storage of IMO 2020-compliant low-sulphur marine fuels.

Tankers used for storing crude and products on a shorter-term basis gain little from changing their Class status to a moored oil tanker, based on recommendations from LR. Unless floating storage is a longer-term option, repurposing is generally unnecessary unless docking, intermediate, renewal and special surveys undertaken by classification societies need to be accommodated in which case this needs to be discussed at the earliest opportunity with Class.

Even if class and statutory requirements remain unchanged, operators are still encouraged to discuss their vessel’s floating storage deployment with LR, as well as flag states, to check for any new requirements or changed inspection regimes.

“We need to understand where owners intend to park this piece of floating steelwork and for how long,” said Tony Field, Vice President of Marine and Offshore, Middle East & Africa. “We partner with our clients assisting them to look at the risks, then manage or mitigate them and reach the most effective solutions.”

If the owners do wish to change the Class status to a Moored Oil Tanker/Unit then the survey regime can potentially be reduced, provided the flag state agrees. Any reduction is based on best practice, the age of the ship and considered on a case-by-case basis. The tanker’s survey history and the sea conditions where it will be anchored at a fixed location are also taken into account.

Typically, an intermediate survey could be reduced in scope, and the renewal special survey fully maintained even if dry-docking can be waived and an in-water survey accepted by Class and Flag in lieu.

Remote surveys, which are typically used for postponement surveys, minor damages and potentially some outstanding issues after a physical survey, are proving to be a useful alternative if access to the ship is difficult while travel restrictions remain in place in some countries during this pandemic.

Who pays for hull or propeller cleaning and how it will be monitored – especially if storage wasn’t envisaged at the time of signing the original contract – will depend on the charter party. Hull fouling is expected if vessels are stationary for any period of time and can lead to increased fuel consumption, so whether responsibilities and liabilities lie with the owner or charter need to be agreed.

Degradation of refined products stored on tankers is a well-documented issue that needs monitoring and specialised quality management to ensure best practice, said Douglas Raitt, LR’s Singapore-based Advisory Services Manager.

“There’s a need to spread the message that this is not a simple, straightforward matter of storing products for six to seven weeks and then sell it and hope the product quality remains the same,” said Raitt.

“With lighter products such as naphtha and gasoline you may find that over time the composition changes, with evaporation of the lighter ends. For jet fuels and distillates oxidation stability could impact product quality and suitability for eventual end use. Bacterial growth is also a real threat to clean products. Tanks need to be regularly drained of water condensation to prevent ingress, with regular testing as necessary and dependent on ambient storage temperatures and storage conditions to check for bacterial growth. How long the product is stored, different tank coatings and their condition can also impact product degradation and cargo values.”

“With regards to VLSFOs it should be noted that these may be prone to instability over time so a regular health check through testing is required if fuel is to be stored onboard for longer periods of time.”

Unlike 2014 and 2015, when floating storage was last at significant levels, most tankers aren’t being used for contango plays. When the spot price is higher than the future price oil traders can buy oil on the physical market, take out a futures contract and store and later sell the oil at a profit.

Although anecdotal research suggests that a number of crude and product tankers are being used for this purpose, most storage is enforced as a result of the demand collapse and surplus now flooding the market. Discharge delays and bottlenecks at the port of Singapore were running to three weeks, rather than the normal three days at the end of April.

Based on latest forecasts between 30 and 114 Aframax tankers alone will be needed to accommodate accelerating clean floating storage demand until early June, an extraordinary number that will further push rates to fresh records if realised. The largest product tankers are securing spot charter rates that equate to earnings above $170,000 daily, nearly three times levels seen at the beginning of April, before the size and scale of the surplus emerged. Meanwhile VLCCs are averaging $150,000 daily, well above breakeven levels of around $25,000 daily for a modern ship of this size.

Photo credit: Shaah Shahidh
Published: 12 May, 2020