A Customer S Perspective on Bunker Purchases What Do Shipowners Expect?

SIBCON – 2002

26-27 September 2002

Singapore

A Customer’s perspective on Bunker purchases – What do shipowners expect?

By

John C. Fawcett-Ellis, INTERTANKO

Regional Manager for Asia-Pacific

Introduction

Good morning honoured guests and distinguished delegates.

Firstly may I say how grateful INTERTANKO is for being given this opportunity to address this well established forum. I am personally honoured to have the opportunity to present a paper to this distinguished gathering.

May I introduce myself, . I am INTERTANKO’s newly appointed Regional Manager for Asia-Pacific and I am also the Association’s Legal Counsel. I am currently in the process of relocating to Singapore and I am looking forward to taking up my duties in this region. My colleague Dragos Rauta, our technical director was initially asked to make this presentation and I have prepared this paper in consultation with him. I am a solicitor by profession therefore please forgive me if my technical knowledge of bunkering issues is not up to your own.. Any questions of a particularly technical nature I may have to dodge and seek assistance from my colleagues before replying

Before I deal with the title I have been asked to address I would like to take a couple of minutes to introduce INTERTANKO, as it may be that not everyone here is aware of the work of the Association.

INTERTANKO is the International Association of Independent Tanker Owners. Our members are drawn from the ranks of independent owners. Owners who are either oil company or state controlled do not qualify for full membership but would fall into the category of associate members.

We currently have 236 members in 45 countries operating a fleet of some 2028 vessels.

We have some 279 companies that are associate members. They comprise oil companies, ship agents, brokers and others connected with the tanker business including Singapore’s MPA.

The Association is at the heart of the tanker business and seeks to protect and lobby for the interests of the independent tanker operator. The importance of Asia is recognised by our presence here in Singapore and by the INTERTANKO Asian Regional Panel of members, chaired by Mr KH Koo of the TCC Group. This panel seeks to focus on local issues that are affecting our members as well as ensuring greater involvement of these members in matters of policy and other issues that the Association is working on.

INTERTANKO is a strong advocate for the views of the independent operators. A good illustration of this was our perseverance in our litigation against the state of Washington. Our case was that certain onerous and costly crewing and operational requirements were in contradiction of Federal and international law. In the first instance we were not successful. In the Court of Appeals we succeeded in part and finally the Supreme Court ruled unanimously in our favour. At the other end of the spectrum one could give the example of assistance being given to an individual member with regard to an outstanding demurrage claim or a freight invoice that has not been paid timely.

One of our current issues is the revisions to the CLC and Fund conventions which form the regime for liability and compensation for oil spills. Post Erika changes have been made, rates have been increased and the limits for small ships is set to increase yet there are those that would argue that owners should take on more liability. The present regime achieves a compromise, owners accept strict liability but have the right to limit. The debate continues and INTERTANKO is working in concert with other ship owner organisations to ensure that the balanced is maintained between owners and oil companies liability for oil spills.

The work done by the Association is carried out by our professional and dedicated secretariat based in offices in Oslo, London, Washington and here in Singapore as I mentioned. This is combined with many senior executives from our members working on our executive and specialist committees. We have a committee on bunkers chaired by Mr Hamish Cubbitt from Anglo-Eastern Shipmanagement. The committee is there to consider the current issues concerning bunkers, such as the sulphur content of fuels, marine safety data sheets, bunker sampling and Annex VI of MARPOL.

I hope these opening remarks have given you a flavour of the work done by INTERTANKO. I now turn to the question:

Why are owners concerned about the quality of the bunkers they buy?

Let’s take an example.

The well known case of the Braer, the Liberian tanker that grounded south of the Shetland Islands, north of Scotland on 5 January 1993. In terrible weather conditions the vessel broke up and both cargo and bunkers were spilled into the sea. This resulted in some 2,000 claims for compensation, totalling some USD 80m. This was despite relatively minimal clean up costs, as due to the prevailing severe weather, most of the spilt oil dispersed naturally and the impact on the shoreline was limited. The UK Government imposed a fishing exclusion zone covering an area along the west coast of Shetland which was affected by the oil, prohibiting the capture, harvest and sale of all fish and shellfish species from within the zone. On top of these losses there was the value of the cargo and of course the vessel itself, which amounted to a further USD 27m, so the total losses were in excess of USD 100m. Thankfully no lives were lost.

So what was the cause of this disaster? It is accepted that the primary cause was the ingress of sea water into a damaged vent pipe which contaminated the bunkers. This caused a black-out and loss of power which in turn caused the main engine to fail. With loss of propulsion in such severe weather it was inevitable that disaster would strike.

What would the loss have been if the bunkers had been contaminated when they had been supplied to the vessel? The answer is that probably the loss could have been same. I make this point to illustrate how great the potential loss and damage can be if bunkers are not supplied of the correct quality. It may be an extreme example but such disasters do occur and should always be borne in mind. It goes some way to explaining why owners are so touchy when it comes to the quality of the bunkers they purchase as they are conscious of what can happen if it affects the seaworthiness of their vessel.

The search for quality

We live in a supposedly “quality” era, companies are required to have quality management systems, there is ISO and ISM, logo’s certifying quality adorning nearly every company’s letterhead. The bunker industry is no exception to this. However, it appears that the quality of bunker fuels is improving but bad bunkers are still with us and will remain so until quality control standards within the bunker industry are at the same level as the rest of the oil industry e,g, in the supply of Petrol, and Jet fuel.

In broad terms of the fuels tested about 90% are within the required specification and the remaining 10% are off-specification. Of those that are off-spec perhaps half are technically off-spec but do not really cause a problem that is not manageable by a ship operator. It is the other half of the off-spec claims where the real problems occur. Here the fuel can be off-spec due to the presence of catalysts, contamination by used automotive lub oils, presence of acids both organic and inorganic, polypropylenes and for other reasons. While it may only seem a small percentage of fuels that are significantly off-spec, nevertheless serious problems may occur. For example, the recent incident involving an oil company vessel disabled due to contaminated bunkers, when spares had to be taken from a sister ship under construction in Japan. The losses sustained were significant.

One of INTERTANKO’s current concerns about the quality of bunker fuels is the presence of Hydrogen Sulphide. The two main operational impacts associated with this gas are:

-Threat to the safety of the crew

-Explosion due to the generation of Pyrophoric Iron Sulphide in reduced oxygen environments

-Corrosion to the bunker tanks and pipelines

The European Union have recently stated that in the event that the Hydrogen Sulphide level exceeds 5 ppm then closed environment systems are required to contain the escape of this gas. We understand that some tanker operators have specified in their safety code that if bunker fuels contain H2S exceeding 100 ppm then the stem should be rejected, however if they were stricter and only accepted 10 ppm as a maximum it is estimated that they would have to reject 90% of bunker stems.

To return to the effects of H2S in bunkers. The vents for bunker tanks are usually located close to the accommodation block, it is conceivable that this gas could enter the air conditioning system and put at risk the health of the crew. Corrosion is a major effect of high concentration levels of his gas. The bunker tanks can become severely corroded due to the presence of H2S. As a result of the reaction in reduced oxygen environments to create iron sulphide. This process will release some free hydrogen during the reaction whereas he remainder will create water. The free or released hydrogen will create a corrosion problem, known as hydrogen induced cracking, particularly in humid tank environments. The reaction creating iron sulphide is exothermic producing incandescent particles on a tank wall. The heat produced from this reaction is sufficient to create an explosion when in the presents of a flammable gas mixture.

What steps has INTERTANKO taken to address this problem?

1. The Association has published a method for onboard use to determine the levels of H2S in bunker fuels and crude oils;
2. INTERTANKO together with OCIMF have prepared a paper for submission to the IMO to make it mandatory for vessels to be given a Marine Safety Data Sheet for MARPOL Annex I cargoes and bunker fuels prior to commencement of loading. Some national regulations require the supply of this vital information, but on the rare occasions that it is supplied most MSDS provided for crude oils or products are in a generic format that gives little real information or help to the vessel’s crew in ascertaining risks specific to that substance actually loaded.

CP60

I turn now to another bunker issue that INTERTANKO is involved with, this is the current discussion concerning the revisions of CP60. INTERTANKO is a member of the technical committee that is charged with this review process. The areas of concern to us are as follows:

Blending of Products

INTERTANKO has proposed that Clause 18 of CP 60 should be amended so that blending on a barge is not permitted whatever the reasoning. In the absolute necessity that blending has to be undertaken on a barge due to logistics then the barge should not be allowed to deliver the blended bunker to a ship without a valid certified laboratory analysis of a tank /barge sample of the final blended product. Further if the fuel for delivery to the ship is a barge blended commodity then this should be stated as being the case in both the contract of sale and the bunker delivery note to the Chief Engineer. Verification of such procedures will be difficult to police but if a subsequent delivery of bunkers is found to be non homogeneous or the blend becomes unstable then the burden must be on the bunker barge to show that it did not undertake barge blending or, if it did, the necessary declarations were made and accepted by Owners/Chief Engineer and supported by the certificate of analysis of the delivered blended product from a recognised laboratory (recognised by MPA).

The present circumstances of barge blending does not meet the requirements of MARPOL Annex VI (when it comes into force) andAppendix V certification and lacks the vision of quality control for all bunker fuels.

Air-blowing of lines

Last year, INTERTANKO proposed to delete the requirement for the “air blowing” procedure from CP60 and rely solely upon the “drain back” procedure as stipulated in the Standard. MPA have intimated to us that they agree with this but that the amendments would have to go through the formalities with the Singapore Productivity Standard Board (PSB).

The reasons we had put forward were:

(1)The procedure of “air blowing” of the bunker delivery hose could cause premature evaporation of volatile hydrocarbon components into the vapour phase within the bunker tank mixed together with air from the “hose blowing” which, in turn, could create an explosive/flammable mixture above the bunker fuel. The safety regime in a bunker tank relies heavily upon the flash point of the content of the tank. However, the Flash Point of a substance is distinctly different from the flammability of evolved vapours from the substance in the presence of the correct proportions of oxygen.

Clearly, with regard to alternative safety regulations within the International SOLAS Regulations, every effort has been made to require the avoidance of the ingress of air/oxygen into cargo tanks carrying similar substances in order to prevent such circumstances occurring which could culminate in an unsafe environment being present in a tank with the associated risk of explosion. Such a risk of occurrence in a bunker tank from a deliberate procedure for the introduction of air/oxygen is both unsafe for vessel personnel and the marine environment that could be confronted with a significant bunker fuel spill from a ruptured bunker tank

(2)Although this procedure is currently allowed in the CP60 Standard for bunkering practice in Singapore, it results in significant errors in quantification of delivered bunkers caused by foam appearing on the surface of bunkers thereby impacting accurate measurement onboard the receiving vessel. Such errors only become apparent some time after bunkering is completed and results typically in an overstatement of the delivered quantity by about 100 tons when loading 1000 tons of bunker fuel. This is an unacceptable commercial loss to vessel operators.

Other proposed changes to CP 60 that INTERTANKO supports:

-Making it mandatory that an MSDS is delivered with the bunker supply that relates specifically to the bunkers supplied and not one in a generic format

-Key meeting – an agreed standard checklist should be produced and be signed by both the supply and receiving vessels

-When barges are equipped with flow meters for the quantification of the delivered volume or tonnage, the flow meter is to be proved/calibrated at least once during each delivery with an MPA certified prover loop as the practice with oil cargoes.

-The cargo officer shall appoint a crew member to oversee the sampling process on the receiving vessel jointly with the Chief engineer at all times during the bunkering operation. With regard to sampling and the required location, it was an INTERTANKO initiative at IMO that caused the regulatory guidelines for the obtaining of the Annex VI retain sample to be aligned with the procedures and location required in CP 60.

Apart from problems with quality what other problems do owners face?

-Suppliers dispute liability which leads to buyers having to resort to legal action

-Time charters – time charter trips – charterers failing to pay for the bunkers – supplier arresting the vessel as security for their claim – if suppliers exercised stricter credit controls owners would not be faced with this problem

-Quantity – short delivery – inaccurate gauges

-Sulphur content of fuels – regional regulations

Policing of bunker suppliers

MARPOL Annex VI includes a provision whereby local authorities have to regulate the suppliers of bunkers. Suppliers have to deliver up bunker delivery notes and samples of fuel supplied. INTERTANKO welcomes the licensing of bunker suppliers; any system which marginalizes the sub-standard bunker supplier is good news for vessel operators. INTERTANKO welcomes the steps taken by MPA to in effect “police” bunker suppliers and when appropriate revoke such licences.

Bunker supply contracts

The aim with all standard contracts is to produce a set of balanced terms and leave it to the parties to negotiate the commercially sensitive items.

BIMCO in November 2001 published its Standard Bunker Contract, this was developed in cooperation with IBIA (International Bunker Industry Association). This form’s predecessor was FUELCON, which did not a achieve a wide acceptance in the industry. The new contract has been designed so that it can be used on it’s own or as a frame agreement with amendments plus additions made by the parties. Key elements of the form are:

- Quality – The Sellers warrant that the marine fuels shall be of a homogeneous and stable nature, shall comply with the grades nominated by the buyers and be of satisfactory quality. Unless otherwise agreed in the confirmation note, the marine fuels shall be in all respects comply with ISO Standard 8217:1996 or any subsequent amendments thereof.

-Sampling – “the sellers shall arrange for a representative sample of each grade of marine fuels to be drawn throughout the bunker operation and the sample shall be thoroughly mixed and carefully divided into four identical samples…The sample shall be drawn at a point, to be mutually agreed between the sellers and the buyers or their respective representatives, closest to the receiving vessel’s bunker manifold..”