As well as producing horrendous human suffering, the COVID-19 pandemic has led to sharply lower demand for crude oil and petroleum products and worldwide recessionary economic conditions. Some estimates put global oil demand at an average of 10 million barrels per day lower for the whole of 2020 compared with 2019. The return to pre-crisis levels is expected to be gradual, with predictions of growth of only 1 million barrels per day year on year.
At the same time, oil producing countries have carried on producing, with the US, Brazil, Guyana, Iraq, the UAE and Canada all expected to continue adding significant supply capacity. The result is well known: oil prices plunging, with the OPEC basket price down by 80% between January and April this year. The world's tank farms are full, and tanker owners are turning from carriage to storage as the best available business. Some reports have put VLCC hire rates at more than US$300,000 per day. At these prices, 10 to 15 year-old VLCCs will earn 100% of their capital values in less than a year.
Employing vessels for floating storage requires careful consideration of the contracts involved. Some time charter forms expressly give charterers liberty to give orders for storage rather than carriage of cargo. An example is BPTIME3 (clause 21). Other forms do not contain this liberty, and are limited to the purpose of going between load and discharge ports, so an order for employment as floating storage is likely to be illegitimate.
A voyage charter is not usually suitable as a contract for anything other than carriage between ports with utmost despatch. In the case of both time and voyage charters, if there is a bill of lading for a cargo already on board then the duties to the bill of lading holder must be considered, including the duty not to deviate. For an existing cargo to be stored afloat, a new contract involving all parties with contractual rights against owners is likely to be necessary. Owners will also need to consider their insurance policies.
Even where a charterparty contains a floating storage clause, it is unlikely to be sufficient to allocate all the potential risks. The contract should cover the termination or subsistence of rights and duties under any existing contract, geographical limits, safety of the storage location(s), rights to terminate storage, hull fouling and other potential damage to the vessel, costs such as extra insurance premiums, and duties regarding care of the cargo: circulation, heating and chemical treatment. The contract should also deal with force majeure for pandemic related issues.
An important operational consideration is the suitability of the vessel and its equipment for long-term storage of crude, or clean or dirty petroleum products. Basic issues such as evaporation and settling out of solids, and more complex issues such as chemical instability and bacterial growth, may need to be considered. There is the potential for damage to cargo tanks and zinc or organic epoxy coatings, and contamination of the cargo from the tanks and coatings themselves. The risks should be allocated by the contract: who will pay for removing unpumpable cargo, or restoring the tanks and pumps? At US$300,000 per day, owners might be prepared to accept some of the risks.
Whichever party accepts the particular risks of using a tanker for floating storage, careful allocation will give savings on legal costs.
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