Grant Hunter, Head of Contracts and Clauses at BIMCO, on Thursday (2 April) published a guide to floating storage clauses and key issues to note when negotiating contracts for storage purposes:
The practice of charterers using oil tankers for floating storage is certainly not a new concept. What’s different with the current demand for storage is the huge number of ships being time chartered for floating storage purposes due to the collapse in oil prices, partly as a result of COVID-19. Therefore, BIMCO is receiving enquiries about “floating storage” clauses and questions about what additional wording owners should consider adding to their time charters.
Under a time charter party, owners place the ship at the disposal of charterers who can then give orders and directions for the employment of the ship, provided those orders are lawful. Within the limits agreed in the charter party, charterers can decide what cargoes are to be loaded and where they are to be loaded and discharged – but they can also instruct the ship to wait, pending further orders.
So, a time charter party can easily be “re-purposed” to enable charterers to use the ship for floating storage. Under time charters, an indemnity by charterers will generally be implied against the consequences of owners complying with charterers’ orders. Some tanker time charter parties include a “storage clause”, but these are often very brief provisions simply conferring an option to use the ship as storage, which they could most likely do anyway without the need for additional wording.
An example of a storage clause is Clause 21 from BPTIME 3 which was jointly developed by BIMCO and BP:
“Charterers shall have the option of using the Vessel for floating storage, but charterers undertake not to use the Vessel for floating storage in areas where additional premiums for War Risks Insurance are charged by the Vessel’s War Risks Insurance underwriters.”
Like most tanker storage clauses, the provision largely relies on other clauses in the time charter to govern the consequences, responsibilities and liabilities of the ship being used for floating storage. However, most storage clauses were not written with long term storage in mind, and the implications for owners could therefore be far reaching. In the present scenario we may be looking at potentially very long periods during which ships will be used to store oil when anchored or drifting.
From an owners’ perspective this gives rise to some important considerations:
Who pays for hull cleaning?
The first is the consequence of marine growth on the hull and other underwater parts while the ship is stationary or drifting. This will have an impact on the ship’s performance and a cost element in terms of cleaning the hull. The usual position under a time charter is that the owners are responsible for maintaining the condition of the hull. However, if fouling occurs as a direct result of charterers’ orders for the ship to wait, then they should be responsible for the consequences – which include a suspension of owners’ performance warranties until the hull is clean, and the obligation to pay for hull cleaning. To address this situation, BIMCO recommends that the BIMCO’s Hull Fouling Clause 2019 is incorporated into the time charter.
Where to wait? Is it safe?
The second is the agreed location for the ship to wait or drift when used as floating storage. It must of course be a safe place for the ship and crew and so we recommend that owners include BIMCO’s War Risks Clause for Time Charter Parties 2013 (CONWARTIME 2013) and BIMCO’s Piracy Clause for Time Charter Parties 2013. These clauses permit owners to require charterers to operate the ship only in areas where there is no actual or threatened war risks and to avoid areas where a threat of piracy exists (recognising that a drifting or anchored ship is exposed to a greater threat of attack than a ship underway).
Caring for the stored cargo
The third consideration is the duration of storage and the impact that extended storage may have on the condition of the cargo and the ship’s tanks, valves and pipework, etc. Proper insurance is an important aspect and both parties should check with their respective insurers (cargo, P&I, pollution, etc) if additional insurance premiums may be required and which party should bear the cost. Owners are contractually obliged to care for the stored cargo, so it is important that the characteristics of the cargo are taken into account and the condition of the cargo closely monitored, bearing in mind that oil products may degrade over time. In addition, there may be an impact on tank coatings and cargo-related equipment due to prolonged idleness which normally fall under owners’ maintenance obligations.
Supplying the crew with necessary provisions
The fourth consideration relates to crew. If the ship is located in a remote area, it may not be possible to obtain provisions and fresh water or to do crew changes (although that is a challenge worldwide at present). Owners may wish to consider a right to deviate the ship to the nearest location where these things can be done and how the costs should be allocated between the parties. BIMCO’s Liberty and Deviation Clause 2010 can be easily adapted for time charters.
Will floating storage impact the engines?
The fifth consideration is that if the ship is to be “re-purposed” as a floating storage unit under the time charter agreement, owners should review the ship’s time charter description in relation to the potential technical impact of the low use of the ship’s engines.
Negotiating a rate of hire for additional days
The sixth and final point for consideration is the rate of hire and duration of the charter. If you fix on a trip charter or short period charter, it could help avoid disputes if owners and charterers agree on what happens in case the charter period is exceeded because there is no suitable market for the oil cargo. A rate of hire for additional days or optional periods could be negotiated up front.
In summary, we recommend the following for tankers being used as floating storage to address the potential additional risks and costs:
- Performance and hull fouling – Incorporate BIMCO’s Hull Fouling Clause 2019 for time charter parties.
- War and Piracy Risks – Incorporate BIMCO’s War Risks Clause for Time Charter Parties 2013 (CONWARTIME 2013) and BIMCO’s Piracy Clause for Time Charter Parties 2013
- Cargo – be aware of risk of cargo degrading over time. Consult with insurers and allocate the cost of any additional premiums.
- Crew – making sure the crew obtain provisions – this may require the ship to deviate to a nearest port or place where provisions and other facilities are available. Allocation of costs for deviation. See BIMCO’s Liberty and Deviation Clause 2010
- Ship’s description – owners should look at the time charter description of the ship in the context of the ship being re-purposed for floating storage.
- Hire – agree optional periods or rates of hire for days used beyond the agreed charter redelivery date.
Photo credit and source: BIMCO
Published: 29 April, 2020
