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Is a tanker vessel used as a floating storage problematic?

Posted: 06/07/2020

On 4 June 2020, market sources reported that spot rates in LR product tankers had fallen sharply due to lower naphtha flows and reduced floating storage demands over tonnage oversupply. This followed a period during which VLCC rates have reportedly been pushed from averages closer to $100,000 to more than $300,000 a day. Brokers suggested that the heavy spot rate falls can be attributed to a build-up of tonnage as more vessels enter trading amid a slow oil-demand recovery.

As most charterparties do not contain storage clauses, this article addresses the legal implications and key issues for owners that may arise in charterparty and bill of lading contracts when they accept charterers’ requests to employ their tankers as floating storages rather than as trading vessels.

Time charterparties

Time charterparties such as BPTIME 3 (clause 21- Storage) contain a floating storage clause that expressly gives charterers a right to order a vessel to be used for floating storage. However, additional clauses will be required to deal with the range of issues arising from such storage.

The position can be complicated and may amount to an unlawful order by charterers for charterparties, especially when compounded by the issue of a bill of lading that does not contain an express right for the vessel to be used for floating storage.

Voyage charterparties

The position with voyage charterparties is even more problematic.

Most charterparties define load/discharge ports and contain an express term stating that: “the vessel shall perform her service with utmost despatch and shall proceed to such berths as Charterers may specify…or so near thereunto as she may safely get…load the cargo…proceed as ordered on signed bills of lading…and there…discharge the cargo” (SHELLVOY 6).

Therefore, an order from charterers to stop the vessel for the purposes of floating storage might be a breach of the owner’s “utmost despatch” obligation and a specific bill of lading terms which restrict deviations may lead to prejudicing the owners’ insurance cover. If the provision is not expressed, it may be possible that an utmost despatch term is implied but, as such an indemnity is hard to acquire, owners would be advised to refuse such orders.

BPVOY 5 (clause 24 Revised Voyage Orders) provides that: “Charterers may issue revised Voyage Orders and instruct the Vessel to stop and await orders and/or proceed to an alternative loading or discharge port within the Charter Ranges”. This provision has not been tested in the courts in relation to floating storage and whether it extends to permitting charterers to use the vessel for floating storage.

BPVOY 4 (clause 22) provides that charterers have a right to cause the vessel to “await orders at one or more locations”.

BPVOY 4 (clause 22.3) provides that if, after loading, the vessel is instructed to stop and wait at the charterer’s request, then all time spent by the vessel awaiting orders shall count as laytime or, if the vessel is on demurrage, as demurrage. Whether “await orders” time shall count as a laytime or if the vessel is on demurrage, as demurrage, it is to be interpreted within the orbit of clause 22. In the event that floating storage is not time spent “awaiting orders”, demurrage will be replaced with damages for detention which, unless defined, could be higher or lower than demurrage.

Finally, as the doctrine of frustration only arises when an event occurs that is both unexpected and beyond the control of the shipowner and the charterer, and renders it physically or commercially impossible to fulfil the charterparty, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the charterparty, it is a question of fact and law whether any delay of the vessel instructed to stop could trigger an alleged frustration of the charterparty.

Given the current position of terminal and tank farm capacity, such lack of capacity would not provide many opportunities for it to be considered as an unexpected event that could lead to frustration.

Issues to consider before fixing a tanker charterparty contract:

Cargo issues

  • The vessel may engage in multiple STS operations if cargo is sold off in parcels. This could lead to shortages given that sea conditions can make exact ullages difficult or, if the cargo on board is bunker fuel, there may be requests for blending on board to achieve specifications. This may specifically be in breach of SOLAS.
  • The origin of the cargo needs to be carefully checked as, in some places in the world, there have been smuggling incidents and sanctions breaches.
  • Cargo quality may be affected by long term storage at sea. Therefore, a full understanding of the cargo specifications and the cargo properties is vital. Cargo may become unstable, produce sediment or have significant microbial activity. There may also be settlement of contaminants and sludge, separation of water content, or deterioration over time.
  • In particular, sludge and/or wax formation from both organic and inorganic materials could cause significant pumping and ROB issues.

Any of the above listed incidents may lead to cargo claims by the cargo receivers who are third parties. Owners should be reminded that ICC Clauses are not drafted for floating storage situations and they should therefore seek to rely on the Hague/ Hague Visby Rules exceptions (ie inherent defect) or the implied indemnity to defeat a cargo claim or agree a specific clause to deal with quality issues or excess risks arising from the extended storage of cargo.

Owners may also consider the INTERTANK STS Operation Clause to deal with the STS risks and liabilities.

Prolonged storage and tank dangers

  • Tank coatings, pumps, lines and valves may be affected if cargo becomes unstable, separates or, on loading, contains a significant amount of aggressive materials, including any prolonged contact with hydrogen sulphide (H2S).
  • Tank cleaning - long term storage of crude is likely to mean that the tanks will need more than a usual COW wash and a full tank cleaning may be necessary. Routine tank vapour management may become an issue as venting may not be possible in all locations.
  • Temperature fluctuations can cause venting during the day that may be followed by a drop in pressure at night. This would necessitate the running of the top up generator (TUG) to avoid air being sucked into the tanks and the risk of the atmosphere reaching the explosive zone.

In this respect, a comprehensive risk assessment of the vessel’s structural and operational fitness is necessary prior to the fixture stage or before voyage orders are received. Owners are recommended to obtain an indemnity from charterers for any structural or coating damage caused by prolonged storage of cargo in the vessel’s tanks as well for any cargo claim by a third party for any liabilities or losses within specific parameters.

Hull fouling/ hull cleaning issues and performance

  • If the vessel will be at anchorage, suitable preparation and maintenance of the main engine and auxiliaries will be necessary. The vessel's class and flag will need to be identified for the undertaking of periodic surveys and maintenance of certificates.
  • The hull may become fouled if the vessel stays at any location for a significant amount of time. This could occur during drifting as well as short voyages followed by lengthy stays at anchorage or drifting.

It is inevitable that, by employing a vessel as floating storage at a fixed location for an extended period, hull fouling and performance issues will arise under a time charterparty.

Unless specific wording excluding the performance warranty in respect of the prolonged stay of the vessel post storage is agreed, the owners will likely have to bear the hull cleaning and associated speed and performance claims arising from the storage.

The same can be agreed in a voyage charter in which additional provisions such as steaming in the vicinity at regular intervals and minimising the hull fouling could also be introduced.

Safe storage place

It is of crucial importance to establish whether the location at which charterers instruct the vessel to wait or drift is “safe” within the meaning as usually defined in the charterparty.

Although the SHELLTIME charterparty clause requires charterers to “use due diligence to ensure the vessel is only employed between and in safe places...”, the BPTIME 3, clause 21 is silent on this point.

Port or place considerations include the holding ground, busy port, switching of anchors in the event of chain fouling or fatigue, piracy and armed robbery, short steaming (could this constitute a voyage and trigger any ballast change requirement?), strong winds or heavy weather conditions.

These all need careful consideration before being agreed given that safety, security and extra insurance risks are covered. Remember that a “safe port” is a question of law but safety is a question of fact.

Extra issues to consider

  • Manning will be important, including compliance with SOLAS, SCTW and the MLC, as well as arrangements for appropriate crew rotations and shore leave.
  • Periods of minimum or maximum storage periods should be included in the charterparty including termination provisions and the fluctuations in payment rates.
  • Vessels drifting or at outer anchorages need to maintain safe levels of fuel, water and provisions.
  • Tax liabilities on the vessel and the cargo in certain jurisdictions should be considered. The starting point is the charterer’s responsibility because of owners’ compliance with charterers’ orders.
  • What additional insurance policies such as H&M, P&I, K&R, War etc may be required and who bears the additional cost?

As is obvious from the above, there are many and complex issues to resolve when fixing a tanker vessel as a floating storage facility.

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Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority.

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