It is common for charterers to make claims or apply deductions based on ‘in-transit loss clauses’ in the crude oil trade. North P&I Club’s David Patterson, Loss Prevention Executive, and Simon Clarke, Senior Claims Executive, explain why it is in the shipowner’s best interests to avoid this type of clause.

In-transit cargo loss clauses generally define an in-transit loss as the difference between the vessel’s gross observed volume (GOV) on completion of loading and before unloading at the discharge port. While this may seem a simple comparison, it is a fundamentally flawed measurement, reflecting a ‘paper shortage’ rather than any physical loss.

One of the main problems with these clauses is that Owners may not have the defences that would otherwise be available for an alleged shortage if the claim had been assessed with reference to, for instance, the Hague/Hague-Visby Rules. In addition to putting owners in a difficult position when trying to defend claims made by charterers referencing these clauses, this may adversely impact upon the scope of club cover available in respect of the claim.

Paper shortages

During measurement, the GOV is established by subtracting any free water and sediment from the total volume of fluids in the tank, providing the quantity of oil at the given temperature upon loading.

On the voyage to the discharge port, two factors can result in changes to the gross observed volume: a decrease in cargo temperature and an increase in free water.

Cargo temperature decrease

Cargo is likely to cool during the voyage, increasing in density and therefore reducing in volume while its mass remains the same. Even when cargo heating is employed, it is unlikely that tank temperatures at the discharge port will be same as they were at the load port during the tank survey. When the two gross volumes are compared – as required by in-transit loss clauses – this reduction in cargo volume will indicate a paper shortage.

Free water increase

The crude oil production process consists of separating fluids from an oil well into crude oil, gas and water/sediment. While this can be a highly efficient process, crude oil cargoes usually contain a small amount of water and some solids –known as the cargo’s ‘base sediment and water content’ (BS&W).

To put this into context, if a vessel loads 1 million barrels of crude oil with a BS&W of 0.3%, 997,000 barrels of the cargo will be crude oil while 3,000 barrels will contain water and some sediment. Free water is the term used to describe any water that has separated from the crude oil at the bottom of the cargo tank.

This can result in a difference in the reported amount of free water detected upon completion of loading and arrival at the discharge port. Typically, the tank survey at the load port will commence as soon as is practicable after the completion of loading. There is therefore minimal time for any water in the cargo to separate out, and the survey may detect only trace amounts of free water. Consequently, the GOV will be calculated as the entire volume of the cargo tank contents, including any water and sediment.

During the voyage, water and sediment contained in the cargo will have time to separate out, meaning that free water can be detected more readily in the discharge survey. This is done by establishing the interface between the water and oil. While the amount of sediment is not accounted for directly, it is included in the free water figure as the sediment will settle below the water.

When the GOV is re-calculated, free water and sediment is subtracted from the total contents of the tank, with the difference between the volume of free water and sediment detected at the load and discharge ports indicating a paper shortage.

Performing correct calculations

To account for variations in cargo temperature at the load and discharge ports, the cargo must be compared at a standard temperature. This is achieved by applying a volume correction factor to calculate the quantity of cargo at 15^o C or 60^o F. The term ‘gross standard volume’ (GSV) is used when the GOV is calculated at a standard temperature.

To ensure that any free water and sediment is accurately accounted for during the tank surveys, the total calculated volume of the cargo should be established. This is achieved by adding free water and sediment calculations to the GSV.

Checking cargo documents

The cargo documentation should provide details of the total volume of water and sediment for the cargo. This can be established by subtracting the gross and net quantities listed on the bill of lading or by the BS&W as stated on the Certificate of Quality.

Loss prevention

For Owners, it is better to avoid any in-transit loss clauses that may override clauses incorporating the Hague/Hague-Visby Rules, such as a Clause Paramount.

The standard pre-printed charterparty clauses are preferable from an Owner’s perspective. For example, the widely used Asbatankvoy voyage charterparty has a Clause Paramount (clause 20(b)(i)) that incorporates the Hague/Hague-Visby Rules, as does BIMCO.

Find out more

Recommended clauses can be found on our website: North – Recommended Clauses (2021-2022)

North Members enjoy free access to our loss prevention guide: Shipboard Petroleum Surveys: A Guide to Good Practice

Published: 1 March, 2022