UK: Oil Price Volatility - Risks And Opportunities In 2015 - Update 5

Last Updated: 5 March 2015
Article by Tracey Chippendale-Holmes

Update 5 – Offshore oil storage - legal implications

Tanker owners are happy. VLCCs and Suezmaxes are generating strong cash flows and charterers are rushing to procure tonnage in an increasingly tight market. Commentators estimate that 40-50 older VLCCs have been commissioned on long-term charters to store crude. Are there any legal concerns with tankers being used for floating storage? Tanker owners see less risk in their tankers sitting stationary than sailing the high seas, but need to ask where they will anchor, for how long and whether this changes the applicable regulatory regime. If a 'storage tanker' is actually a floating storage unit (FSU), there is increased permitting required and a reduced ability to limit liability under the International Convention on Civil Liability for Oil Pollution Damage. While the Convention imposes strict liability for pollution damage on the Owner, it does allow for this liability to be limited, absent actual fault of the Owner. This reduction in liability does not apply to FSUs though.

Owners will need to know up front where the tanker will sit. This is for maintenance and staff planning even if it is not a concern to the insurers. There are obligations under Flag and Class for the Owner to fulfil, plus the requirements of the Hague or Hague-Visby Rules and the law of the relevant coastal states.

Looking through the Tankers Fixtures List of the Lloyd's List on the day of writing, 25 VLCCs and Suezmaxes were chartered, with two thirds of the VLCCs taken by Unipec for China with Reliance, oil majors and traders accounting for the next. At the recent Marine Money, London Ship Finance Forum, it was reported that Chinese shippers were shopping for several VLCCs on 2 year charters after concluding an agreement with Russian sellers desperate for cash as the sanctions take hold.

Where in the World...?

For the sovereign charterers, it makes sense to anchor close to home. The three big risks facing tankers in parts of Asia are piracy, weather and terrorism. Owners have the technology and systems to look out for all three but may face reduced control so far from port. Good intelligence is given by the live IMB Piracy and Armed Robbery Map and there may be metocean data available for the area. It is this which will inform the tanker requirements, from global strength of the hull to structural design of both hull and topsides to withstand fatigue cracks. If there is a disaster, the Owner will be fully liable for a vessel failure which results from the strain of standing too long at sea. Of concern is not only the financial liability, but also the environmental damage that will ensue and the potential for loss of life.

Wherever located, the tankers will need space to move in strong winds and currents. With almost all tankers being double-hulled now, they are not as stable in strong currents. Movement of the crude in ballast and cargo tanks can cause the tanker to sway suddenly and, in addition, there may be leakage from the inner layer.

Other seas are off limits as they are Special Areas listed in MARPOL Annex 1 or are part of the seven main transit 'chokepoints' for crude oil. These are obvious targets for pirates and terrorists, as well as the risk of collisions and spills.

Some charterers choose much quieter locations as we saw from recent attempts to work around Iranian sanctions. The 'storage tankers' were well hidden in the South China Sea. Not to the extent of the United Kalavryta which disappeared from radar in the Gulf of Mexico for three days in Summer 2014 when the transponder was turned off (to help it hide from a legal arrest). It sat completely invisible with a million barrels of crude even from informed Texan coastguards.

The Charter allocation of duties

So are Owners using their negotiating strength to pass the additional vessel and environmental risks to the charterers? This still leaves the Owner with the scheduling burden of dry docking, SIRE inspections and Class surveys. Modification to the vessel and additional legal documentation may be required to ensure the vessel is in every way fit for long term storage and MARPOL compliant.

Charter forms have not yet evolved to reflect the different consequences of a long anchorage at sea. Clause 4 of Shelltime 4 does not require a charterer to indicate how many voyages the tanker will undertake or whether it will be stationary. Relevant charter considerations remain:

  • The continuing duty to employ the tanker at safe ports and within trading limits. The Owner may object to instructions which take the vessel beyond trading limits and expose the vessel to increased risks. The liability for this will sit with the charterer even if the additional insurance premiums are borne by them, because of the safe port obligation.
  • The Owners will usually define the capacity of the tanker to perform as contracted in 'good weather'. It must still be capable of satisfying the Vessel requirements set out in the charter and be in every way fit for the service contracted.
  • The nature and extent of the Owner's obligation to maintain depends on the exact wording agreed by the parties to the charter. Additional attention is required if the tanker is to sit in warm seas as the marine growth will undermine performance of the vessel.
  • Due diligence and reasonable care in cleaning the hold and tanks will be both an express and implied obligation of the Owner. The Shoko Maru explosion was caused by a crew member cleaning paint off the deck when a little crude was remaining.
  • Responsibility for cargo stowage frequently sits with the Owner but the charterer may accept this liability to obtain its choice of vessel and location. The Oil Majors (led by Shell) who are seen chartering the most VLCCs, perhaps for storage, are more amenable to this.

Worst case

If the tanker becomes damaged or new regulations are adopted which impact on the ability of the tanker to continue as a 'storage tanker', this may be a 'frustrating' event (under English law) and may mean that any advance hire paid will be repayable by the Owner. A claim to the insurer for 'lay-up' will not be possible because the tanker has been carrying crude.

And if there is an explosion, the Owner will look first to the insurance taken out in accordance with the International Convention on Civil Liability for Oil Pollution Damage. This is an amount equal to the Owner's total prescribed liability according to the tanker's gross tonnage. Even the amount applicable to VLCCs of up to 320,000 GT will pale in comparison with the likely third party claims though.

In the haste to sign up another charterer and dust off another underutilized VLCC, Owners will be asking where and for how long the tanker will be a storage unit and how the Owner will reconcile that with its international legal and environmental obligations.

This update is the fifth in our series on the impact of oil price volatility. To read the previous updates, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Tracey Chippendale-Holmes
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.