spotlight on russia: ready for growth?...bunkerspot december 2008 / january 2009 3 bunkerspot is an...

www.bunkerspot.com Volume 5 Number 6 December 2008 / January 2009

SPOTLIGHT ON RUSSIA:Ready for growth?

INDEPENDENT INTELLIGENCE FOR THE GLOBAL BUNKER INDUSTRY

bunkerspot December 2008 / January 2009 3www.bunkerspot.com

Bunkerspot is an integrated news and intelligence service for the international bunker industry. The bi-monthly magazine and 24/7 electronic news service, www.bunkerspot.com, both provide highly-specific information on all aspects of the marine fuels industry. Bunkerspot Magazine (published in February, April, June, August, October and December) annual subscription rate, including unlimited access to the website www.bunkerspot.com, is $430 / £225 / 315. ISSN 1741-6981. Copyright Petrospot Limited © 2008. All rights reserved. Published by Petrospot Limited, a dynamic independent publishing, training and events organisation, focused on providing information resources for the transportation, energy and maritime industries.

Disclaimer: Bunkerspot is an editorially independent magazine and electronic news information service. The information contained in the magazine and website is presented in good faith. Opinions expressed are not necessarily those of Petrospot Limited, which does not guarantee the accuracy of the information contained in Bunkerspot. Nor does Petrospot accept responsibility for errors or omissions or their consequences.

No part of Bunkerspot may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photographic, recorded or otherwise, without the prior written permission of the publisher. Designed by Matthew Stuart.

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Cover Photo:Courtesy of Transbunker

NEWSBunker Overview 4

Europe 8

Americas 12

Asia Pacific 16

Africa and Mideast 20

COMMERCIAL ISSUESSociété Générale’s Cécile Tibi-Rambal, Vice President-Sales, Commodity Markets, takes a look at how a sound hedging strategy might be used to ride out the current financial and price turbulence 22

Michael Wittner, Société Générale’s Global Head of Oil Research, offers a market outlook in which he considers the factors which may inf luence oil supply/demand and pricing in the near and longer term 23

Paul Millar of Lloyd’s MIU speaks exclusively to Bunkerspot about the economic and trading difficulties currently facing even the major players in the maritime sector 26

Duncan Jeffcock of Voyager Maritime Payment Systems explains how the current crisis in the financial markets and the lack of credit availability is affecting the bunker sector; and he offers a potential solution 28

BUNKERSPOT WORLD MAPGlobal prices and news at a glance 30

REGIONAL FOCUSBunkerspot reviews new developments in the Russian bunker market 32

SPOTLIGHT ON FUEL TESTINGTim Wilson of Lloyd’s Register and Ultan O’Raghallaigh of NanoNord maintain that automated onboard analysis is the new frontier for fuel oils and lubricants 38

Jon Watson of Razaghi International considers the ambiguities that surround fuel testing in the wake of the implementation of MARPOL 73/78 Annex VI 40

Geoff Jones of Lintec looks at the growing problem of chemicals being detected in marine bunker fuels 43

TECHNICAL ISSUESChrister Sjödoff looks at how GAC and the Swedish Meteorological and Hydrological Institute are working together to develop weather routing solutions that will help to lower ships’ bunker consumption 45

Jonathan Morley of Lloyds Register looks at the issue of fuel tank protection 48

Tommy Christensen of CBI Engineering looks at how companies involved in the bunker supply chain can maximise their profits through a thorough business reappraisal 50

OBITUARYClose friends and colleagues share their memories of Peter Newbery, who played a key part in the creation and development of the international quality standard for bunker fuels 52

EVENTSLlewellyn Bankes-Hughes predicts a change in emphasis in bunkering events scheduled to take place over the next few months 54

Events and training course diary 57

NETWORKINGBunker people on the move 58

Contents

4 December 2008 / January 2009 bunkerspotwww.bunkerspot.com

Bunker Overview

200

300

400

500

600

700

800Houston 380

Singapore 380

Fujairah 380

Rotterdam 380

D J F M A M J J A S O N

300

600

900

1200

1500Houston MDO

Singapore MDO

Fujairah MDO

Rotterdam MDO

D J F M A M J J A S O N

Oil prices, down; freight rates, down; cargo volumes, down. Recession has clearly come to the shipping industry. Already, well-known players like Industrial Carriers and Britannia Bulk Holdings have been caught up in the tangle of tightening credit lines. More shipping companies will go under before this recession ends, dragging bunker suppliers and other creditors with them.

In the Commercial Issues section of this Bunkerspot, we have invited expert contributors to consider what lies in store for the shipping, oil and bunker industries. Paul Millar, Director of Lloyd’s Marine Intelligence Unit (LMIU), is emphatic: ‘The storm has well and truly arrived now and it is frankly time to batten down the hatches.’ Duncan Jeffcock of Voyager Maritime Payment Systems, concurs: ‘According

to London’s Baltic Exchange, the dry bulk market has seen a drop of more than 80% in freight rates since June whilst the tanker market has fallen by 60%.’

For the oil industry, the collapse in crude prices not only squeezes profits; it will have major implications for future development exploration and production projects. As Michael Wittner, Global Head of Oil Research at Société Générale, points out on page 23: ‘With prices collapsing, the question is: when will prices be low enough to cause production to be lost or shut-in?’

When crude oil prices were nudging $150 a barrel in July, there were serious debates about how the world economy would be able to cope if the price of crude oil were to top the $200-a-barrel mark. Venezuela’s maverick President Hugo Chavez even went

so far as to suggest that the price of oil could hit $300 a barrel if ExxonMobil were to continue attempting to freeze Venezuelan assets in a dispute over a nationalised oil project. In the same televised interview, however, Chavez did warn that – leaving this localised contretemps aside – the price of oil could collapse if the ‘speculative bubble’ were to burst.

While Chavez was rattling his sabre at the United States, one of Bunkerspot’s regular contributors came for an editorial meeting at our Oxfordshire offices. Clearly, this event was not of such interest to the world’s media – but our contributor’s views were perhaps more percipient than the Venezuelan supremo’s. Ignoring all the $200-a-barrel brouhaha, he maintained that crude oil was heading for a fall, In fact, he went so

PR

ICE

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Bunkerspot prices are compiled from the reports of the four brokers whose market reports have consistently proved the most reliable and accurate: Cockett Marine Oil Limited, LQM-Gibson, Glander International Inc., and KPI Bridge Oil. Bunkerspot welcomes market reports from other sources for inclusion on its website www.bunkerspot.com.

GLANDER

Bunker Overview

far as to say it would drop to around $60 a barrel before the end of the year. Intrigued – if not wholly convinced – we urged him to present his case in the pages of Bunkerspot. Unfortunately, an inverse proportion of time and events conspired to spike the article. For the record, our soothsayer went on to predict that crude would regain lost ground by 2010 – probably hovering around the $100-a-barrel mark.

Interestingly, this is more or less in-line with Société Générale’s current thinking. To quote Michael Wittner again: ‘Assuming a modest economic recovery in 2010 and a return to more robust growth in 2011 and beyond, we forecast ICE Brent to average $96 in 2010, $101 in 2011, $103.50 in 2012, and $106 in 2013.’

Where crude leads, bunkers tend to follow. In Rotterdam, the delivered price of 380 centistoke (cst) fuel oil soared to almost $715 a tonne in early July, and it dropped to below $200 a tonne for a few days in November. If SocGen and the other experts have read the crude markets correctly, Rotterdam 380 cst prices are likely to stay below $250 in the near-term. Taking a longer view, a recovery is on the cards. When this recession ends, the underlying issues which drove up bunker prices in the first place – the advent of ‘peak oil’, the relatively shortage of low sulphur product, the expansion of the shipping industry to support globalised supply chains – will still be with us. On page 28 of this issue, Duncan Jeffcock of Voyager Maritime Payment Systems quotes industry pundit Robin Meech as saying ‘the underlying trend for bunker prices continues to be upwards with a reasonable expectation of reaching an average of $900 a tonne by 2025’. We would be loathe to put a precise figure as to what oil prices would be 15 years from now, but we certainly agree with Meech’s fundamental position. Despite the current difficulties, bunkering will move onwards and prices will – eventually – move upwards.

Oct-08 Nov-08 6-10 13-17 20-24 27-31 3-7 10-14 17-21 24-28

Rotterdam d 453 388 330 279 252 218 206 212Gibraltar d 517 447 386 341 298 253 239 247Piraeus d 487 397 353 302 277 224 217 219

Suez d 541 458 396 344 316 283 276 270Fujairah d 502 410 355 313 262 253 227 225Durban w n/a n/a n/a n/a n/a n/a n/a n/a

Tokyo d 537 443 395 413 343 361 251 258Busan d 543 465 417 387 334 276 217 231Hong Kong d 493 422 363 322 282 262 238 237Singapore d 487 411 345 296 261 247 225 224

Los Angeles w 522 421 408 370 332 267 229 213Houston w 508 412 351 299 284 244 220 221New York w 514 426 357 316 296 258 232 219

Panama w 540 443 378 337 342 292 252 242Santos d 548 488 458 394 347 295 271 277Buenos Aires d n/a n/a n/a n/a n/a n/a n/a n/a

380 IFO

Oct-08 Nov-08 6-10 13-17 20-24 27-31 3-7 10-14 17-21 24-28


Suez d 557 478 414 365 334 301 280 284Fujairah d 517 445 384 347 286 277 254 254Durban w 612 514 416 336 281 267 265 273



Panama w 643 531 460 414 416 367 333 298Santos d 596 536 496 430 383 361 337 343Buenos Aires d 634 617 554 501 459 390 323 305

180 IFO

Oct-08 Nov-08 6-10 13-17 20-24 27-31 3-7 10-14 17-21 24-28


Suez d 1364 1333 1275 1268 1263 1151 1210 1141Fujairah d 995 929 862 818 805 797 768 740Durban w 838 739 692 643 649 613 590 565



Panama w 1104 1025 960 878 864 838 818 798Santos d 883 760 711 651 659 633 587 559Buenos Aires d 1082 1027 897 803 752 720 691 664

MDO


Commercial Issues

The current environment of dropping oil prices and global recession makes it diff icult to envision a sound hedging programme with a high degree of confidence. With the recent move on Fuel 3.5% Rotterdam – from $667.46 per metric tonne (mt) in July 2008 down to the current spot price of $188 per mt – most managers might be tempted to simply drop the idea.

However, never forget that the oil markets are by nature unpredictable. Remember January 2003, when the Baltic froze and sent prices roaring (fuel became almost as expensive as crude oil!). It is also important to understand that in the current weak market, the financial structure will most likely remain in contango (forward prices above spot prices), and nothing can be done about it.

With that in mind, our suggestion would be to maintain a hedge ratio of 10%-25% of

the exposure (i.e. not taking into account the volume covered by bunker clauses), by using robust strategies. This would include a small portion of swaps (easy to handle) mixed with more f lexible strategies allowing you to benefit from lower prices, like call options or synthetic call options (upfront payment replaced by a f ixed amount at each maturity).

We also describe here an example of a strategy that gives a buffer of protection on the upside, with limited risk should the market keep dropping: we call it the ‘buffer’ strategy.

The current level for a buffer strategy would be for Calendar Year 2009: a swap at $235 per mt, protecting the shipping company against every dollar increase up to $300 per mt (above that, you get a fixed payment of $65 per mt); on the downside the swap has a stop-loss at $190 per mt (with a maximum opportunity loss for the shipping company limited to $45 per mt).

Société Générale is one of the largest financial services groups in the eurozone. The Group employs 151,000 people worldwide in three key businesses: Retail Banking and Financial Services; Global Investment Management and Services; and Corporate & Investment Banking

Contact: Société Générale17 Cours Valmy92987 Paris La Defense CedexFrance Web: www.sgcib.com

Given the current climate of oil price volatility, bunker industry players are looking towards 2009 and beyond with a good measure of trepidation. In the first of

two articles from Société Générale, Cécile Tibi-Rambal, Vice President-Sales, Commodity Markets, takes a look at how a sound hedging strategy might be used

to ride out the current financial and price turbulence


Commercial Issues

In the second feature from Société Générale, Michael

Wittner, Global Head of Oil Research, offers a

market outlook in which he considers the factors

which may influence oil supply/demand and pricing in the near and

longer term

Front-month New York Mercantile Exchange (NYMEX) West Texas Intermediate (WTI) crude oil and Intercontinental Exchange (ICE) Brent crude prices have fallen from around $100 at the beginning of October to the low-to-mid $50s six weeks later. While economic and oil fundamentals have been weakening and have contributed significantly to the price slump, non-fundamental factors have been even more important for prices. Commodities and oil have been caught up in broad-based deleveraging across asset classes, due to risk aversion and to investors asking for their money back. Asset managers and hedge funds have been reducing debt and liquidating positions, moving money into cash and short-term government securities.

As a measure of deleveraging and risk aversion, the interest rate on two-year US treasury notes is shown in Fig 1, along with WTI prices. The falling rate paid on these securities ref lects the higher level of demand for them; in other words, safety has been more important than the return. The liquidation of positions can be clearly seen in the NYMEX WTI total open interest chart (Fig 2). Open interest has fallen from over 1.4 million futures contracts in June 2008 to around 1.1 million contracts by mid-November.

We remain cautious and believe that the deleveraging process is not over yet; our assumption is that it will continue until the end of this year. This means that financial f lows will be bearish for oil prices through year-end. Our economic outlook for most

of the Organisation for Economic and Co-operation and Development (OECD) countries is for contraction or no growth through the first half of 2009, with the beginning of a modest recovery in the second half. In line with this, our view is that financial f lows will be neutral for the first half of 2009, but will turn cautiously bullish for oil prices in the second half of 2009. As key indicators for financial f lows into oil, we will continue to watch interest rates for short-term government securities and crude futures open interest.

FundamentalsOne key topic in the current oil market environment is the marginal cost of oil production. With prices collapsing, the question is: when will prices be low enough to cause production to be lost or shut-in, therefore ending the collapse? The answer depends on the time frame.

In the short-term (i.e., the next 6-12 months), only existing oil fields are relevant. For fields already in production, ‘marginal costs’ means operating costs or lifting costs (also known as cash costs). The fields with the highest operating costs in the world are Canadian oil sands projects, at $35 per barrel (current snapshot). When prices drop below cash costs and are expected to remain at those levels for some time, oil producers will shut-in oil fields, reducing supply. This is the market’s natural mechanism to halt price declines. However, with current prices $15-$20 per barrel above shut-in levels for the most expensive tier of production (with output of around 1 million barrels per day

Fig 1: Deleveraging/risk aversion – Nymex WTI v US 2Y Treasuries Fig 2: Nymex WTI futures open interest (million contracts)

Source: Bloomberg, SG Commodities Research


Commercial Issues

(b/d), the natural market mechanism is not expected to come into play. Instead, the Organization of the Petroleum Exporting Countries (OPEC) must act as the supply ‘circuit breaker’ to halt the price decline (Fig 3).

In the medium- to long-term, ‘marginal costs’ refer to the full-cycle costs of bringing a new oil field into production; this includes capital costs plus operating costs, or finding plus developing plus lifting costs. Here again, the Canadian oil sands projects have the highest full-cycle costs in the world, at $90 per barrel or even higher for some projects. New Angola deepwater fields have costs of up to $80 per barrel. The fact that prices have now dropped below these levels makes no difference whatsoever to short-term supply or to the short-term price outlook.

The medium- to long-term is a different matter. Every oil company that we have spoken to recently, from large integrated firms to small independents, still believes (as we do) that prices will return to $100. Despite the near-term economic and oil demand slowdown, the bullish medium- to long-term story remains unchanged: healthy Asian-led demand growth is bumping up against supply constraints. However, the same companies are becoming more cautious on spending in the near-term. While new field developments already underway (i.e. with significant sunk costs) are likely to remain on track, new projects where work has not yet begun are susceptible to postponements and delays.

In recent weeks, there have already been reports of Canadian oil sands projects or expansions being delayed, which will tighten

supply a few years down the road (2011-2012 and later). In addition, delays to some of the newly discovered Brazilian deepwater subsalt fields have been recently reported, though for Brazil the issue is the credit crunch, more than the price collapse. State oil company Petrobras reportedly needs hundreds of billions of dollars to develop all of their new large fields (with reserves in the billions of barrels).

The credit crunch has also negatively affected the spending plans of the major Russian oil companies, not only in the medium- to long-term, but for next year as well. The Russian companies are struggling, because they need to spend heavily to try to reverse already declining production. At the same time, with lower prices, they now cannot afford to service their high levels of debt. On top of this, the government tax burden is very high; in October, export duties were $50 per barrel, and producers were losing an estimated $20 per barrel. While we believe that government export duties will be slashed soon, the other issues will be more difficult to deal with. The government has lent several key producers $9 billion to help, but we have become more pessimistic about Russian production going forward.

DemandThe global GDP forecast underlies the oil demand forecast. Since early October (when the last quarterly SG Commodities Review was published), Société Générale’s (SG) global GDP growth forecast for next year has been cut significantly, from 3.5% to 2.6%. The new forecast includes 0.5% growth for the

OECD and 5.3% for non-OECD countries, including 7.5% for China (though there is upside from the recently announced stimulus package). From an oil market forecasting perspective, we now consider ourselves to be in a global recession.

The 2009 oil demand forecast has been revised down accordingly, from 0.8 million barrels a day (b/d) to 0.3 million b/d. We have increased the OECD contraction to 750,000 b/d, from 600,000 b/d previously. The downward revisions were focused on Japan and Europe. In both areas, the year-on-year contractions accelerated in 3Q08. In short, the economic situation worsened, and the recent oil demand data already seems to ref lect this; therefore, we carried forward weaker consumption patterns. In contrast, US demand has only been trimmed slightly below previously forecast levels, with a contraction of 420,000 b/d expected next year. Importantly, we continue to believe that most of the US demand destruction has already taken place. On a quarter-to-quarter basis, only slight further demand decreases are expected. This means that as we progress through 2009, the US year-on-year declines will moderate, averaging only 70,000 b/d for 4Q09.

We have also lowered the pace of non-OECD oil demand growth, from 1.3 million b/d to 1.05 million b/d. The reductions were broad-based, and in line with the downwardly revised economic forecasts. Chinese oil demand growth was trimmed from 360,000 b/d to 330,000 b/d, while Middle Eastern growth was adjusted from 330,000 b/d to 310,000 b/d.

Fig 3: Oil demand growth by region 2008-2009 (y-o-y) Fig 4: Non-OPEC vs. OPEC oil supply growth 2008-2009 (y-o-y)

Source: SG Commodities Research


Commercial Issues

Non-OPEC supplyThe non-OPEC supply forecast for 2009 was revised down from 0.6 million b/d to 0.4 million b/d. Most of the adjustment, roughly 150,000 b/d of the 200,000 b/d, was due to Russia. As discussed above, we no longer think that the Russian companies will be able to make the investments necessary to hold output steady, which was our previous assumption. Russian production fell by 75,000 b/d year-on-year in 3Q08, and we believe that the rate of decline will double to 150,000 b/d for 2009 as a whole. The combination of lower prices and the credit crunch will delay fields and cause lower production in other countries in the medium term (Canadian oil sands and Brazil); however, for next year, the impact is, at this point, limited to Russia.

OPEC supplyOur OPEC crude production forecast has also been cut for next year. We now expect 2009 output to be 1 million b/d lower than this year, in order to balance the market; previously we only expected a 700,000 b/d reduction. For next year, the -300,000 b/d revision to OPEC crude, along with the -200,000 b/d adjustment to non-OPEC supply, matches the -500,000 b/d revision to global demand growth.

As noted above, the natural market mechanism to cut supply will not work, because prices are still $15-$20 per barrel above the highest cash cost production. Therefore, it is up to OPEC to cut supply. They have been cutting crude output since the summer, and we fully expect this to continue

– and with greater urgency. If anything, OPEC slightly exceeded our expectations with the 1.5 million b/d quota cut agreed on 24 October. It must be remembered that even Saudi Arabia, with very low production costs, needs around $50 per barrel for its crude to balance its budget, according to the International Monetary Fund (IMF). We have already fallen below that level, with Dubai, a similar quality crude, currently trading in the mid-$40s. There is no lack of incentive for Saudi Arabia to lead the way for OPEC. On a quarter-to-quarter basis, we forecast OPEC crude supply to be cut by 1 million b/d in 4Q08 and another 0.75 million b/d in 1Q09. While we do not expect any concrete action to result from the informal meeting in Cairo on 29 November, we do believe that OPEC will cut quotas by a further 1 million b/d at the formal meeting in Algeria on 17 December. Continuing price weakness will assure that they make a second cut (see Fig 5). We assume compliance of around 70% with both sets of new quotas – not perfect, but then it doesn’t need to be.

Short-term outlook for pricesAs discussed above, we expect deleveraging and risk aversion to continue to put downward pressure on crude prices for the remainder of 4Q08. In addition, despite the OPEC cuts, there will not be a typical stockdraw in 4Q08; the physical markets will be roughly balanced. This will be bearish. Without a stockdraw, there will be little support for prices. Therefore, we expect ICE Brent to average $58 in November and

$53 in December. With a second OPEC cut causing a moderate 1Q09 stockdraw, and with f inancial f lows neutral, rather than bearish, in the first half of 2009, we forecast ICE Brent to average $58 in 1Q09 and $69 in 2Q09. A slow and tentative economic recovery is expected to begin in the second half of 2009, and with financial f lows forecast to be cautiously and modestly bullish, rather than neutral, ICE Brent is projected to average $76 in 3Q09 and $81 in 4Q09. On an annual average basis, we now forecast ICE Brent to average $99 in 2008 and $71 in 2009. A more pessimistic scenario for economic and oil demand growth would result in lower prices next year.

Long-term outlook for pricesAssuming a modest economic recovery in 2010 and a return to more robust growth in 2011 and beyond, we forecast ICE Brent to average $96 in 2010, $101 in 2011, $103.50 in 2012, and $106 in 2013. By 2010, we expect it to be clear to the oil markets that demand growth is picking up again. At the same time, project delays on the supply side, in Canadian oil sands, Brazil, Russia, and elsewhere, will be evident. While supply will not be constrained in 2010 and perhaps not even in 2011, the combination of recovering economic and oil demand growth with supply delays means that the market will once again start to anticipate tight future fundamentals, rather than focusing on adequate current fundamentals. This will drive up the long-dated part of the curve and this will help lead oil prices back towards $100.

Fig 5: SG Oil forecasts in millions of barrels a day (b/d)

Mb/d 2007 1Q-08 2Q-08 3Q-08e 4Q-08f 2008f 1Q-09f 2Q-09f 3Q-09f 4Q-09f 2009f

OECD demand 49.2 48.9 47.2 47.3 48.3 47.9 47.9 46.3 46.7 47.9 47.2

Non-OECD demand 36.9 37.9 38.4 38.5 38.2 38.3 39.0 39.5 39.5 39.5 39.4

World demand 86.1 86.8 85.7 85.9 86.5 86.2 86.9 85.8 86.1 87.4 86.5

*Non-OPEC supply 49.6 49.8 49.7 49.0 49.8 49.6 50.6 49.9 49.5 50.1 50.0

*OPEC NGLs 4.8 4.9 4.9 5.1 5.2 5.0 5.3 5.4 5.5 5.6 5.5

*OPEC crude 31.2 32.4 32.2 32.5 31.5 32.2 30.8 31.0 31.5 31.5 31.2

World supply 85.6 87.1 86.8 86.7 86.6 86.8 86.7 86.3 86.5 87.2 86.7

Stock change -0.5 0.3 1.1 0.9 0.1 0.6 -0.2 0.6 0.4 -0.2 0.1

WTI NYMEX ($/bbl) 72.24 97.82 123.80 118.22 64.66 101.12 60.00 70.00 78.33 81.67 72.50

Brent ICE ($/bbl) 72.61 96.31 121.07 117.15 62.26 99.20 58.00 69.00 76.33 80.67 71.00

Source: Historical data – IEA. Forecasts - SG Commodities Research. Note: IEA historical data is based on the monthly Oil Market Report dated 10 June 2008.*Angola joined OPEC in Jan 2007 and Ecuador re-joined OPEC in Dec 2007. In this table, both countries are included in OPEC supply from 2006, in order to facilitate historical comparisons. Non-OPEC supply includes processing gains and biofuels.


Commercial Issues

The leading marine credit agency Lloyd’s Marine Intelligence Unit (Lloyds MIU) is predicting serious diff iculties ahead, warning its customers that it is seeing an increasing number of companies getting into trouble very quickly. In the wake of the collapse of Ukraine’s Industrial Carriers, in October, and subsequent reports of further defaults, bunker suppliers are now bracing themselves to face a slew of bad debts and shipping industry bankruptcies. Many also anticipate a wave of bankruptcies to hit the bunker supply industry too.

Speaking exclusively to Bunkerspot, Paul Millar, Lloyd’s MIU Intelligence Director, says that: ‘The storm has well and truly arrived now and it is frankly time to batten down the hatches.’ He adds that ‘there are companies going bust or ceasing operations at rates not seen since the 1980s’.

‘According to the International Monetary Fund (IMF),’ says Millar, ‘the world financial system is on the brink of systemic meltdown. Over the past weeks you will have watched and read news stories relating to rates collapsing in many sectors in shipping or companies ceasing trading. There is a fear that the worst is yet to come. So, should we be surprised by what we are seeing in the markets at present?’

As far back as October 2007, Lloyd’s MIU spoke of the warning signs at the first Marine Credit Risk Assessment Seminar held in Oxford, organised by Petrospot Ltd. In May 2008, the same seminar was held in Miami, and by then the message had become abundantly clear. It stimulated one of the attendees to dub the impending liquidity issues, with over supply of tonnage and a falling demand due to economic slow-down, the ‘Perfect Storm’.

Lloyd’s MIU points out that what we are seeing is not entirely new. Those who have been around for some time will remember previous shipping market troughs, for example in 1987 due to economic recession, the Asian Crisis of 1997/1998, the 2000/2001 Turkish Shipping crisis, and so on. So why is the

current scenario so different? Looking back, one of the drivers towards the Asian Crisis was the collapse of the Thai Baht, de-pegging from the US Dollar after severe financial over-extension, in part real-estate driven and, as a consequence, stock markets devalued and asset prices tumbled with private debt rising. MiIlar asks ‘Does this sound familiar?’

Interestingly, the bottom of the 1987 Economic Crisis had seen some similar scenarios such as asset value falls, bank support withdrawal and distressed sales. So what is different today and why, with all the techniques available to us, did so many people miss the warning signs?

Speaking at the plenary session of Maritime Week Americas in May 2008, John Phillips, Lloyd’s MIU Operations Manager, warned those shipping executives present that the United States was already in a recession: ‘Perhaps not a legally defined one, but one that was real and was based upon a single major but critical fundamental’. The ‘Credit Crunch’ was damaging US investments, right back to the root of the factory worker in the Pacific North West reining in spending as his lumber business failed. The falling demand caused East-West Container trades to lower, and this combining with rising vessel operating costs, the volume of newbuildings and prospect of a general post-Olympics economic slow-down were creating a potential malaise environment that Phillips suggested could be ‘expected in last quarter 2008, first quarter 2009, with typical year-end spikes not being matched by post Chinese New Year adjustments and thus pushing the markets into a more modest position across most of 2009’.

One issue raised by Phillips was the drive

Contact:Paul MillarDirector, Lloyd’s Marine Intelligence UnitTel: +44 20 7017 5778Email: [email protected]

Paul Millar of Lloyd’s MIU speaks exclusively

to Bunkerspot about the economic and trading

difficulties currently facing even the major players in

the maritime sector

‘Ultimately, if you are going to offer open credit terms, go back to basics: the historical reputation

of a company is important but in the current climate, assets and cash are king’


Commercial Issues

towards courting f inancial institutions’ participation to add liquidity to Forward Freight Agreement (FFA) markets, and the concern that once the economic downturn started to bite, those non-core investments would be withdrawn, making the derivative market less attractive.

Lloyd’s MIU is the first to admit that the collapse in confidence, which until recently underpinned the growth in the shipping sector, fell much faster than it ever expected. According to Millar: ‘It seemed obvious to us that the downturn would start in the final quarter of 2008, but the speed at which rates, confidence and trust have fallen is unprecedented in my experience. And whilst we realised early on that the downturn in shipping was inevitable, what has also happened in the financial markets, I think, has taken everyone’s breath away.’

Since September 2008, some of the major finance markets institutional names such as Lehman Brothers, Morgan Stanley, AIG, HBOS, Fortis, and Dexia have suffered from either falls in value, collapse, rescue bids or mergers as stock markets have plummeted. This has accelerated the drying up of liquidity from the market place with inter-bank lending stalling and finance for projects all but evaporated.

On 23 September, Bertram Rickmers was quoted in Lloyd’s List as saying ‘the party is over’ and that ‘the whole shipping landscape has changed within 12 months and has changed even more dramatically in the last 10 days’, and in many respects this is true. And with Yung-Fa Chang of Evergreen adding his weight with ‘three years of tough times ahead’ now is the time to stop and take stock.

Lloyd’s MIU’s credit reporting arm is all too aware of the dangers that lie ahead in the maritime sector. Millar explains: ‘We are seeing an increasing number of companies getting into serious difficulty very quickly. There are companies going bust or ceasing operations at rates not seen since the 1980s. At the same time, suppliers (particularly in the bunker sector) have been granting credit at dangerously high levels in recent years – which was largely justif ied when both confidence and earnings were high. But this is not the case now. There will be some suppliers

out there who, if they are not careful, will be facing substantial bad debts. Some will inevitably go under’.

Millar admits that Lloyd’s MIU is taking a much tougher stance when it comes to approving open credit now. ‘In the past, we would have regarded many of our company credit ratings to be valid for up to 12 months. Well, not anymore! There is just too much uncertainty and volatility. The rate of change is frightening. Rumours are f lying thick and fast at present about the financial condition of customers and no matter how wild or fanciful they sound we have to follow them up. We are taking nothing for granted at present’.

John Phillips concurs, adding: ‘We are entering a new territory in credit assessment. Although Lloyd’s MIU has been through it before, this time it is different; volatile fuel prices have pushed potential exposures up and the invisible trades (in paper) have made reading business activity more complicated when assessing corporate and payment performance risk’. He adds that ‘Many in the market today have only seen the good times post 2002, and complacency has crept in. Some accounts that were seen as blue chip yesterday have lost their lustre and existing levels of unsecured credit may need an honest and urgent review’.

Whilst Lloyd’s MIU expects tough times ahead, it also recognises that there will be plenty of opportunities too for many players. It is noted that both asset values and share prices are plummeting. ‘For those owners who amassed huge cash reserves in the good times, they will pick up some bargains,’ says Millar. ‘Furthermore, in the marine supply sector, we will inevitably see some of the cash-strapped players go under which presents opportunities for their better financed competitors’.

Phillips gets the final word: ‘Those suppliers in the maritime sector who adopt strict credit control procedures will be fine. This will mean saying that they can no longer deal on open credit terms to some of their customers. This means some difficult conversations lie ahead. Ultimately, if you are going to offer open credit terms, go back to basics: the historical reputation of a company is important but in the current climate, assets and cash are king’.

‘What is different today and why, with all the

techniques available to us, did so many people miss

the warning signs?’


Commercial Issues

A staggering $14 trillion – or 90% – of international trade is handled on credit. That’s a remarkable statistic in light of the current turmoil in the financial markets and a general decline in credit availability. International trade has felt the bite of the credit crunch in recent months as graphically demonstrated by the catastrophic collapse of the freight markets. According to London’s Baltic Exchange, the dry bulk market has seen a drop of more than 80% in freight rates since June whilst the tanker market has fallen by 60%.

This is particularly relevant for the bunker industry, where fuel accounts for up to 70% of a vessel’s operating costs. As freight rates fall, so does the profitability of charters. When daily charter rates were $200,000 for a Capesize vessel and the bunker bill was a fraction of that, meeting the cost of the fuel caused no difficulty. Now charter rates have plummeted to $10,000 or less a day, the bunker bill – and the ship operator’s ability to pay – has become very significant.

Volatility and uncertainty over the cost of marine fuel has further exacerbated this problem. The recent fall in the crude oil price has, admittedly, been tracked by a lower bunker price, but the long term trend remains upward. Industry commentator Robin Meech of Marine and Energy Consulting Ltd believes that ‘we must not think short-term, the underlying trend for bunker prices continues to be upwards with a reasonable expectation of reaching an average of $900 a tonne by 2025. The requirement for lower sulphur emissions will force prices to rise, irrespective of the crude oil market’.

Higher bunker prices coupled with much lower freight rates have the potential to cripple the vessel operator. It is equally bad news for the fuel supplier who now runs the increasing risk of late or even non-payment. A credit survey recently conducted by Petrospot Ltd highlighted that the industry currently experiences bad debts approaching 18% and that is highly significant for an industry worth more than $130 billion (see Bunkerspot, October/November, page 26). Late payment squeezes profit margins, reduces return on capital and increases the resource that needs to be applied to chase outstanding payments.

Even the traditional risk management

option of buying credit insurance is becoming much more difficult to achieve. Already this year, a leading supplier of industrial credit insurance claims to have withdrawn from the marine market and it is rumoured that others are following suit. The Petrospot credit survey concluded that around 22% of suppliers were credit insured but that this figure was likely to rise in the future. Meech agrees and believes that demand will increase dramatically as suppliers begin to lose confidence in their customers’ ability to pay. But, he warns, in this climate adequate cover will be more scarce, premiums will rise rapidly and the conditions attached will be necessarily more onerous.

This volatile business environment makes it ever more important for vessel operators and fuel suppliers to identify new ways to manage costs, increase their available income and improve their access to capital.

Introducing a trusted and well-capitalised third-party into the bunker sector injects liquidity as well as reduces or eliminates the risks inherent in extending credit to facilitate a transaction. This may well be the solution suppliers and operators should be seeking. According to Greg Foust, Senior Vice President of Corporate Payment Systems Risk Management at US Bank: ‘By providing credit directly to operators, a third-party financier would protect a supplier’s credit portfolio and offer faster payment to the supplier. This would provide suppliers with additional liquidity allowing them to spend available funds on daily operations or to expand their business.’

A major Singapore-based supplier was quoted recently on Reuters newswire as saying: ‘The main problem for us is getting money to do our trades, it’s hard to get credit nowadays.’ Unlike the oil majors and larger national oil companies, mid-tier bunker suppliers (who account for around 46% of all delivered fuel) rely on available credit to enable them to operate their business. If such a third-party facility could also guarantee that the supplier gets paid within a reasonable time – say 14 days or less – then the supplier’s ability to attract and retain credit from its own financial backers would be more certain.

As credit becomes scarce, buyers too would benefit since they wouldn’t need to rely on their suppliers’ ability to extend them credit for their fuel transactions. With lending

Duncan Jeffcock of Voyager Maritime Payment

Systems explains how the current crisis in the

financial markets and the lack of credit availability

is affecting the bunker sector; and he offers a

potential solution

Captain Duncan Jeffcock is global marketing director for Voyager Maritime Payment Systems, with responsibility for promoting the Voyager solution to the global bunker industry whilst building an international network of regional marketing managers.

Duncan’s previous roles have included director of operations and commercial operations management within large shipping companies following a successful seagoing career spanning 28 years.

Contact:Duncan JeffcockVoyager Maritime Payment SystemsTel: +44 20 7790 0225Email: Duncan.jeffcock@

voyagermaritime.comWeb: www.voyagermaritime.com

Commercial Issues

criteria tightening up and evaluation reviews becoming more stringent, being able to offer generous credit terms is becoming more of a necessity than a luxury according to Michael Bandy, CEO of Chemoil Energy, who recently told Dow Jones: ‘Many small players could find tightening credit lines and volatile prices are the final straw.’ A lack of credit has the potential to place a ship operator in a very difficult place, particularly if low freight rates make cash-on-delivery arrangements impossible. Using a higher priced or lower quality supplier are not attractive alternatives but better than having no fuel at all.

Another advantage of using such an intermediary is that suppliers could extend credit terms to their customers whilst they themselves would be paid within a shorter period. For example, a supplier might be able to offer 36 or 40 days credit to a customer but take payment for the fuel they deliver within seven or 10 days. In an increasingly crowded and competitive market place that

could be an important differentiator. Those able to offer more f lexible terms are likely to win customers over those who have no option but to restrict their payment options. Petrospot’s credit survey revealed that 30 day credit terms continue to be the norm but that increasing prices might reduce those terms to assist with cash f low. With a continued long-term upward trend in bunker prices for the foreseeable future, it seems likely that we’ll see suppliers reduce their credit terms.

Introducing a third-party into the bunker transaction would also effectively remove the need for credit insurance to cover bunker fuel transactions. Aside from taking away the associated cost, the third-party system would eliminate the resources needed to handle these time-consuming activities. Risk management is often highlighted as a critical part of the business but managing risk and handling credit issues accounts for a significant portion of the working day for many in the industry – and that time could be better spent with

customers and on increasing sales.It is unfortunate that the bunker industry is

facing the double whammy of a credit freeze within a falling freight market. Without an available supply of credit offered on reasonable terms, many bunker buyers will soon find themselves unable to guarantee an adequate supply of fuel for their vessels. Similarly, suppliers who also rely on credit to run their businesses will face impossibly tough trading conditions. This will be exacerbated further when the f lood of new building deliveries create their own tonnage crisis in a few months time. Sadly, some will not survive.

Having a new and independent market participant that is both trusted and well-funded would be a welcome and much needed addition to the marketplace. Acting as a clearing house, this intermediary would take on the credit risk and pay suppliers quickly whilst giving generous terms to buyers. And in these uncertain times this level of certainty could be a life-saver.


Regional Focus

The Russian bunker market could well be on the brink of a revolution – in the best sense of the term. Some of the energy sector’s most important players are taking a more hands-on interest, and the independents are continuing to develop plans for improving the supply infrastructure and developing their industry association.

Unfortunately, 2008 has not been the best time to turn these plans into concrete and steel reality. The year started brightly enough for the maritime world: freight rates were riding high, tanker operators’ coffers were laden with petrodollars and shipyards were bustling with new orders. But then came the ‘credit crunch’. Earnings have slumped, the market has lost its swagger, and many shipping companies have had to put their f leet renewal plans on hold. Some are even struggling to keep their existing vessels in gainful employment.

Bunker suppliers and traders who built their business plans on the premise that the good times would keep rolling will have to revisit their spreadsheets in sombre mood. The coming year will be tough. Bunker demand will not be overf lowing, the collapse in oil prices will squeeze their margins. Most importantly, they will have to manage their credit lines with extreme care. There may be a few buccaneer bunkering companies who are prepared to take a risk on a dodgy shipping company because the margin is so tempting, or who are willing to extend extra credit to struggling client for old times’ sake – but the banks who lend money to them will not be so understanding.

‘Prudence’ is the new watchword and it is likely to set to tone for the rest of 2009.

Of course, none of this is specific to Russia. The gloom is global. However, it is important to understand that the current economic situation inevitably coloured quite a few of the interviews that Bunkerspot conducted for this update on the Russian bunker market. Under normal circumstances, wherever and whenever we conduct these profiles, we will f ind suppliers eager to ‘talk up’ their country’s bunker potential. They will argue that the imminent opening of new container terminals, tank farms or cruise centres is certain to herald a bunker boom. There was plenty of optimism in our

previous Russian profiles (see Bunkerspot, April/May 2007 page 36 and, most recently, Bunkerspot April/May 2008 page 30). Even in these uncertain times, some suppliers are still very confident that the future is bright. In fact, sources at the Russian Association of Marine and River Bunker Suppliers told Bunkerspot that the Russian bunker sales volumes for 2008 were likely to be around 10% up on the 2007 tally of 6 million metric tonnes (mt). The Association also told Bunkerspot that its inaugural Russian Bunker Forum, held in June in St Petersburg, attracted more than 120 delegates and was very successful. But this was before the credit crunch really hit the shipping industry. Even the projected higher sales figures for 2008 will have been significantly buoyed up by the good start to the year. The question now is – will the market continue to grow in 2009? In terms of total monetary revenue, the answer must clearly be no. The simple fact that oil prices have tumbled will see to that. But even when measured in terms of tonnes sold, 2009 might not be a bumper year. Suppliers will have to tough it out – and hope that the market’s long-term development comes back on track in 2010.

One country – three marketsRussia’s bunker industry is best understood as three separate markets. The Northwest includes St Petersburg and its satellite ports, as well as Kaliningrad to the west and Murmansk and Archangel to the north. In the Black Sea, the key ports include the oil-rich Novorossiysk and Tuapse. In Russia’s Far East, Vladivostock and Nakhodka are the biggest bunkering centres.

Northwest RussiaFounded by Peter the Great more than 300 years ago, St Petersburg is the Baltic Sea’s largest and most important bunkering centre. There are many independent local bunker suppliers as well as some international bunker traders, including O.W. Bunker and Bominf lot.

Lukoil – one of Russia’s kingpin oil companies – runs a f leet of barges in St Petersburg and it remains one of the key bunker players. However, sources report that it is now facing stiff competition from another energy giant, Gazprom.

Gazpromneft Marine Bunker was

Ian Taylor reviews new developments in the

Russian bunker market


Regional Focus

incorporated in October last year and started supplying bunkers in St Petersburg in December. The company has now extended its supply network to include not only St Petersburg and Primorsk in the Baltic Sea but also Murmansk, Kaliningrad, Novorossiysk, Nakhodka and Vladivostok.

The company generally sources its fuel from Gazprom Neft’s refineries in Moscow, Yaroslavl and Omsk. The Omsk plant is one of only two refineries in Russia which are geared to producing low sulphur products, and so it has been a good source of low sulphur fuel oil (LSFO) for Gazpromneft Marine Bunker.

Up to now, Gazpromneft Marine Bunker has been using chartered barges for its supply operations. However, company sources told Bunkerspot that it will be launching two double-hulled barges in Primorsk in December.

The two barges, which Gazpromneft Marine Bunker bought in August, both have capacity for about 2,400 metric tonnes (mt) of fuel and have previously been used as chemical tankers. Sources report that the Russian oil giant has plans for further bunkering expansion over the coming year. This is expected to mark the start of an ongoing programme of barge acquisitions. The company is also believed to be looking at the possibility of acquiring its own bunker terminals.

Lukoil and Gazprom are not the only heavyweights slugging it out in St Petersburg. Rosneft also entered the ring in 2007, and

has gone on record as saying that it hopes to be generating annual sales volumes of around 10 million mt by 2012. The company’s marine fuels subsidiary, RN-Bunkering, is supplying in St Petersburg, Archangel and Murmansk and is also active in the Far East.

RN-Bunkering currently uses third-party barge operators but it is rumoured that it has plans to set up its own f leet, which will include double-hulled vessels. Like Gazprom, Rosneft can rely on its own extensive network of refineries and terminals, so it will not lack for supplies of both high and low sulphur fuel oil, and marine distillates.

In the best traditions of all heavyweight contenders, Gazprom, Lukoil and Rosneft have all boasted of their plans for dominance – but for now St Petersburg’s independent bunkering sector remains as vibrant as ever. Some of the smaller players may have disappeared or at least appear only fitfully in the market, but the key players are still very active.

Baltic Bunkering Company (BBC) remains one of the leading players. As previously reported, BBC has a strategic alliance with St Petersburg Oil Terminal. There have some changes to the company’s bunker f leet since our last report. The 2,500 mt Viking is still on active service, but the company bought the 3,000 mt Viland in March 2008. The Viland is currently a single-hulled vessel – but BBC told Bunkerspot that it planned to send the Viland to a shipyard at the end of 2008 to be double-hulled. When the newly-double-hulled Viland returns to

the market, BBC plans to send the Viking for a similar upgrade.

Eco Phoenix is another independent which has been supplying bunkers for many years. The company told Bunkerspot that its f leet currently includes two self-propelled barges and five push barges.

SEB Company has a six-strong f leet of bunker barges, supplying both in St Petersburg and the neighbouring ports.

Nevsky Mazut has its own 45,000 mt capacity terminal in St Petersburg, which is equipped with a CBI FlexBlender capable of blending a full range of maritime grades to suit shipowners’ specificiations.

As Bunkerspot was going to press, sources within the well-established independent Transbunker Group reported that the company planned to introduce its own barge to the St Petersburg market before the end of the year. The barge in question was the 3,400 mt Vanino, which Transbunker has previously used to supply bunker fuel in Lithuania.

Petroprom informed Bunkerspot that it currently supplies both fuel oil and distillates using three bunker barges.

OV Ltd reported that it had previously considered buying its own barges – but the vessels that it had been looking at were not double-hulled, so these plans were placed on hold.

In fact, the planned introduction of double-hulled barges has been a major source of contention for the bunker market as a whole. Stung by accusations that Russia’s oil


Regional Focus

tanker f leet was sub-standard compared to the rest of Europe, the authorities decided to force through the mandatory introduction of double-hulls ahead of the International Maritime Organization’s (IMO) MARPOL deadline. It was a grand gesture, rendered rather ridiculous by the fact that there are almost no double-hulled bunker barges available in Russia. The deadline therefore had to be postponed to sometime in 2009, and many in the industry believe that it will be pushed back still further to 2010. Gazprom’s new double-hulled tankers in Primorsk show that some progress is being made – but there is still a long way to go.

In addition to St Petersburg and Primorsk, bunkering centres in the Baltic region include Vyborg, Vysotsk and Ust Luuga. Many of the St Petersburg-based players will offer bunker services in these ports too. Fuel Service Company does not supply in St Petersburg, but it uses two barges based in Vyborg – the Zvezva and the Baltica – and a barge called the Damansky in Ust Luuga.

Bunker Company Flagship told Bunkerspot that it was not currently supplying in St Petersburg, although it may return to the port in the future. The company does supply at Kaliningrad and ports in the Baltic using a tanker and two barges, the 3,000 mt Flagman I and the 700 mt Vladimir Nitzulenko. The company also operates in the northern port of Murmansk, using the 3,000 mt Osia.

The ports of Murmansk and Archangel see high demand for distillates from fishing trawlers and lighter fuel oil from fishing trawlers and other vessels plying the cold northern waters. Scadar LLC has been operating in Murmansk for more than a

decade, using its own barges to supply both in Murmansk itself and offshore in the Barents Sea.

Black SeaNovorossiysk and Tuapse are key export centres for Russia’s oil industry. The 1,500 kilometre (km) Caspian Pipeline Consortium (CPC) oil terminal, which forms a link between Novorossiysk and the oil f ields of Kazakhstan, has played host to a growing bunker community.

Key players include Transbunker which has a f leet of seven tankers servicing the Ukraine and Russia’s Black Sea ports.

Evrasia is also very active in this region, supplying at Novorossiysk, Kerch and Port Kavkaz. Sources report that Evrasia is currently the only company that can supply ex-pipe at the Sheskharis Oil Terminal in Novorossiysk, as well as operating its own f leet of barges.

Black Sea Tugs, which has connections to the Interbunker group, told Bunkerspot that it has been supplying since 1997 and it currently has two bunker barges on charter.

Lev Ltd has been building a strong base in the Black Sea and Azov Sea basins, with supply points in Rostov, Azov, Yeysk, Temruk and Kavkaz. The company uses three tankers for supply in Rostov and Azov, two for the Temruk market, and two for Yeysk.

The region supports a fair number of independent bunker suppliers – but there are reports that both Rosneft and Gazprom are taking a strong interest in this market.

Gazprom is currently already supplying in Azov and Rostov. Sources told Bunkerspot that the company had withdrawn from

Novorossiysk this year – but added that it planned to return ‘in a big way’ very soon. Rosneft has not yet made an appearance as a bunker supplier in the Black Sea region – but it is understood that it has made this a key objective.

Far East bunkersGazprom and Rosneft are already dueling in the Far East market, supplying in Vladivostok, Nakhodka, Vanino and other ports. Their ability to source product from their own refining networks will give them some hefty leverage, but they will not have everything their own way. The Far East market includes a number of independents that have impressive supply infrastructures and a loyal customer base.

Pavino Shipping has been active in all the main ports since 1996. Its f leet of tankers and barges not only supply bunker fuel but also carry a range of other petroleum products.

Transbunker is a major force in the Far East market too, using its five-strong bunkering f leet to supply in all the main ports. These include: the 2,353 mt Alexander Ioffe, which is used for cargo transportation and supplying bunker fuel in ports and on the high seas; the 3,389 mt Lidoga, which transports cargo and supplies bunker fuel in ports; and also the 1,621 mt Raisa Onychina, the 455 mt Huty and the 264 mt Zapravchik 06, all of which supply bunker fuel at ports and on the roads.

Looking to the future, the company hopes to introduce its first double-hulled barge in the Far East. Transbunker is currently using the 3,279 mt Siziman to supply bunker fuel in the Ukraine. However, the company may take it out of active service soon and turn it into a double-hull tanker. If the company does decide to go ahead with the double-hull upgrade and relocation, the Siziman could be in operation in the Far East by around April next year.

Over the next few years, a great many more double-hulled barges will make their appearance, and there will be more developments in terminals too. Will there be sufficient bunker demand to bring a return on this investment? Many believe that the seeds of growth have been sown, but the green shoots may take some time to burst through the frost of the credit crunch.


Spotlight on Fuel Testing

Since 1982, Lloyd’s Register’s Fuel Oil Bunker and Analysis Service (FOBAS) has been providing the marine industry with a comprehensive fuel oil testing and advisory service using shore-based analysis facilities. While this remains the core of the FOBAS service delivery, we have also been exploring whether there are other supporting options in meeting our overall objective of promoting a knowledge-centred approach to fuel oil use.

Widespread experience over the years has shown that marine fuel oils as supplied are highly variable in terms of the various quality parameters. This ref lects differences in such aspects as the source crude stock, refining severity, composition and proportions of blend components together with any contamination incorporated during storage, handling and delivery to the ship. Additionally, there is also the question as to whether fuel oils as actually supplied are – as they should be – truly homogeneous, particularly when blended as delivered.

Furthermore, once these fuel oils are onboard there will be additional quality changes resulting from mixing between different consignments or any tank residues, and the effectiveness of the treatment system. There are also the possibilities of blend separation, and the incorporation of extraneous material during storage or transfer to further complicate matters.

In the case of lubricants, while there is a far more consistent original material, service life will result in increases in contaminant materials (covering wear debris, combustion materials and from external sources) together with variations in a number of parameters as the oil deteriorates over time.

Generally, it is virtually impossible to distinguish between ‘good’, ‘reasonable’, ‘poor’ or even potentially ‘damaging’ fuel oils or lubricants without detailed analysis. To date, such analysis has only been provided by shore-based laboratories or, to a very limited extent, onboard testing. This applies to both fuel oils as loaded or at the various stages through the onboard handling, treatment and service systems, similarly with the lubricants in use. While

shore-based laboratories can undertake a full range of analysis there will inevitably be some time delay between the sampling and receipt of results. In the case of traditional onboard testing, not only is there only a limited range of tests which could be undertaken, but the reliability of results obtained is always open to question let alone the time and effort required to undertake such analysis.

Consequently, the ideal arrangement would be for there to be the capability for detailed and reliable analysis actually performed onboard with a minimum of effort – effort in obtaining the sample, undertaking the test and clearing up thereafter are all tasks to be minimised or eliminated altogether. By undertaking the analysis onboard, results are available immediately where any corrective action is to be taken, so enabling active fuel oil and lubricant management and awareness through the following key functions:

Sentinel. By onboard monitoring of the fuel oil, or lubricant, after the treatment system, or as delivered to the engine, it can be assured that product of the required quality is being supplied to the engine.

Alert. If problems arise, either due to the quality or non-uniformity of the product as supplied, being transferred or as treated, an alert, set against specific trigger values, will be initiated as soon as it is detected by onboard analysis. This is in stark contrast to the current situation, where serious machinery damage or environmental non-compliance may have occurred

Tim Wilson of Lloyd’s Register and Ultan

O’Raghallaigh of NanoNord maintain that

automated onboard analysis is the new frontier for fuel oils and lubricants

Tim Wilson is the FOBAS Product Manager with Lloyd’s Register EMEA and Ultan O’Raghallaigh is the Director of Business Development & Sales with NanoNord A/S.

Contact: Tim WilsonLloyd’s Register EMEAEmail: [email protected]

Ultan O’RaghallaighNanoNord A/SEmail: [email protected]

‘Onboard analysis provides the answers directly to

the user, thereby enabling the effects of adjustments

or maintenance to be assessed there and

then, and any necessary corrective action can be undertaken in a timely

manner’


before the operator even becomes aware of the problem.

Assessment. Is a purifier, or other treatment device, actually performing as required? What differences in effectiveness are encountered between units? How is the overall treatment system performing? Onboard analysis provides the answers directly to the user, thereby enabling the effects of adjustments or maintenance to be assessed there and then, and any necessary corrective action can be undertaken in a timely manner.

To meet these objectives, FOBAS is working with a Danish company, NanoNord A/S, on the development of the Lab-On-A-Ship automated oil analyser system which will provide fuel oil and lubricant analysis data onboard,

on demand, as frequently as required and without dispatch or other delay. FOBAS is convinced that the provision of timely, onboard data is fundamental to promoting awareness of the importance of fuel oil and lubricant condition to engine performance and environmental compliance.

As this edition of Bunkerspot went to press, NanoNord was scheduled to complete the Lab-On-A-Ship Type Approval testing, which includes an extensive external test correlation programme with the standard laboratory analysis methods. Additionally, the first of the pilot programme units are to be installed onboard ships which will mark the start of the evaluation programme, covering both system functionality and the practical application of the data generated. Bunkerspot will keep readers updated on the progress of the programme.

‘The provision of timely, onboard data

is fundamental to promoting awareness of the importance of fuel oil and lubricant condition to engine performance and

environmental compliance’



Cynics might suggest that lawyers appreciate nothing so much as the use of terms such as ‘due diligence’ and ‘reasonable care’, such as we find in the legislation implementing MARPOL 73/78 Annex VI, as they afford endless opportunities to debate their meaning in individual cases. Others may feel that this imprecision in the language is desirable; that there will be many instances where the ability to determine guilt or innocence dependent on interpretation is what makes laws fair because there are grey areas in every situation.

MARPOL is entering a new phase following US ratification and it can be expected that the enforcement of the treaty will intensify along with the penalties, and that such opportunities for debate will abound.

For fuel oil supplies, MARPOL says (although the legal statutes that implement MARPOL will vary from country to country):

‘The fuels shall be homogeneous blends of hydrocarbons derived from petroleum refining.’

‘The supplier will specify the exact density (to ISO 3675 Laboratory determination of density – Hydrometer method) and the exact sulphur content (to ISO 8754 Energy-dispersive x-ray f luorescence spectrometry).’

There would seem to be no obvious problem with this but consider, as some have, a situation where a fuel sample is divided into two and sent to two separate laboratories: one analysis shows the content as less than 1.5% but the other sample shows the sulphur as greater than 1.5%. In this case there appears to be no ambiguity in the legal language, no opportunity for debate, and yet it seems unreasonable not to seek clarification.

Sulphur is not easy to measure precisely, and repeatability and reproducibility errors are such that this will happen and the differences can be significant. The position Port State Authorities (PSAs) would or could take was initially uncertain. However, this is an issue that was taken up and after some debate the situation has now been resolved.

But if we look for a discussion about

the repeatability and reproducibility of the density measurement, we look in vain.

Perhaps these errors (approximately 3.0 kilogrammes per cubic metre (kg/m3)) are insignificant when the density is up around 1000 kg/m3. Alternatively, we don’t have a legal density limit so that on one side of the limit we are compliant and on the other side non-compliant so perhaps that explains the situation. However, as a matter of a consistent rigorous approach, ought we not to have a similar clarification?

And that brings us to the question of ‘homogenous’. What does ‘homogenous’ mean in the context of certified quality? Is there a definition? Is there a means whereby homogeneity could be measured, and what does it matter anyway? Well, perhaps it could matter quite a lot.

It is implicit in the MARPOL legislation that fuels are not, in fact, homogenous; why else are drip samples required? In the real world, whether dealing with bunker fuels or some other product, the assumption is that there is no such thing as homogenous; if there were, then a spot sample would suffice. So maybe we ought to have a legal definition and maybe it ought to be measurable.

A refinery produces a batch of fuel and certifies its properties. Once a batch of fuel leaves the refinery it may be subdivided any number of times. Even if we assume (as we should not) that it is not contaminated or adulterated, does not stratify in storage somewhere nor separate, it still leaves the possibility that because the fuel is not fully homogenous each sub-batch will show its own uniquely different properties. We know, of course, that in many tank farms fuels are in static storage, there is no tank mixer to keep the fuels homogenous. The

Contact:Jon WatsonRazaghi Meyer InternationalTel: +44 1903 884 472Fax: +44 7092 809 181Email: [email protected]: www.viscoanalyer.com

Jon Watson of Razaghi Meyer International

considers the ambiguities that surround fuel

testing in the wake of the implementation of

MARPOL 73/78 Annex VI

‘Of course, there should be no such errors but if the fuel has degraded or

been adulterated then the sulphur is suspect, but

how much of the error is possibly due to a degree of

non-homogeneity?’



longer a fuel is resident the more likely it is to begin to stratify and some fuels may even start to separate.

Thus, when we compare the analysis of a drip sample collected during bunkering with the refiner’s original analysis, which some suppliers may offer as the proof of quality during bunkering, we must expect some differences and these differences may be more than can be attributed to repeatability and reproducibility. How do we distinguish between errors due to a lack of homogeneity and changes due to adulteration or degradation of some kind?

Such differences may be significant. They could assume even greater significance in the search by PSAs for a ‘due cause’ test. Due cause is needed to enable PSAs to detain vessels in port while a full analysis of the fuels is completed. Without due cause, enforcement of MARPOL is likely to be very problematic.

We don’t yet know how the PSAs will establish due cause but one approach could be to examine the correlation between selected properties of a sample and the certified values. Not just the MARPOL Sample (which MARTOB (On-board Treatment of Ballast Water and Application of Low Sulphur Marine Fuel) reports as being too easy to falsify along with the records in its report to the European Union), but these could be samples that have come from the day tank, the engine fuel circuit or the bunker compartments.

The laboratory analysis doesn’t just report the %mass of sulphur and the density that MARPOL requires should be quoted, it also reports on all the other properties. So if any of the properties could be measured by the PSA quickly and affordably, they could use these measurements to test the validity of the fuel certificates.

So which properties to compare? Density and viscosity are the natural choices because sulphur is too difficult to measure off line while density and viscosity are very easy to measure quickly and accurately with American Society for Testing & Materials (ASTM) standard laboratory grade instruments in a port office or even on board a Coast Guard vessel.

Viscosity is a very sensitive indicator of change and particularly useful, though for the very reason that density doesn’t

normally show much change, a density error should be considered significant.

If either the density or viscosity is outside acceptable limits, it is safe to conclude that there is no valid certificate for the fuel and the sulphur content is therefore suspect. This then provides due cause.

Of course, there should be no such errors but if the fuel has degraded or been adulterated then the sulphur is suspect but how much of the error is possibly due to a degree of non-homogeneity?

One test house has commented (unofficially) that over 50% of commercial samples showed a significant density differ-ence from the supplier’s certified values and with a similar 50% or so showing significant differences for viscosity; ‘signif icant’ meaning here outside of repeatability and reproducibility allowances.

With vessels carrying more than one fuel, the chances of discovering due cause this way seem rather high. It would be unfortunate if the difference were due to homogeneity problems rather than fuel quality problems.

Whatever the methods finally chosen by the PSAs, online monitoring of density and viscosity, as the fuel is bunkered, is easy enough and allows the vessel operator to validate the supplier’s certificate (reasonable care and due diligence perhaps?) and protect against the risk of a due cause detention. By the same token, the fuel oil heater control viscometer could be used to determine the fuels used from their density and viscosity ‘fingerprints’ and thus validate the vessel logs.

Indirectly, the exercise becomes not one of testing sulphur but looking for and defending against due cause testing because, guilty or not of non-compliance with MARPOL, detention by PSAs while awaiting test results can rack up the bills for operators pretty quickly and with no possibility of recovering the money with a valid ‘due cause’ justification.

Insurance? Well, the P&I clubs might take the view, as some appear to do regarding non-compliance prosecutions, that cover is only valid if the operator has exercised ‘reasonable care’ and ‘due diligence’ and so here we are, back again to those two terms; the lawyers will win every time.

See you in court!

‘Whatever the methods finally chosen by the

PSAs, online monitoring of density and viscosity,

as the fuel is bunkered, is easy enough and allows the vessel operator to validate the supplier’s certificate

and protect against the risk of a due cause detention’



It has been well documented that the current high level of demand for the higher quality and lower emissions fuels for land-based industries has resulted in only fuels of inferior quality being made available for marine applications. In addition, the need to blend cutter stocks of variable quality with poor quality residuals has given rise to many instances of chemicals being detected in marine bunker fuels.

Following a number of cases where chemicals were detected in bunker fuels, the need for ‘forensic’ methods of analysis, which previously were perhaps considered only as part of an investigative process – after the event, so to speak – has been brought to the forefront for both shipowners and fuel testing agencies.

Before the marine industry takes the quantum leap of specifying limits and methods of analysis, a common sense review of these ‘forensic’ methods is needed in order to understand what is feasible and what is not.

There has been a call for the testing industry to work together towards harmonisation for these high-value methods of analysis. This in itself will not ensure that that ship operators have the opportunity to burn substantially better quality fuel in the future.

This will only be achieved by an in-depth research programme involving ship operators, engine manufacturers and testing agencies.

The correlation between concentrations of defined chemicals against operational problems needs to be clearly established.

To review the types of chemicals found in bunkers, and the most appropriate methods of analysis, we need to look at recent history.

Over the last 10 years, there have been several instances of chemicals being detected in bunker fuels. The ‘red’ list includes organic acids (which will be further discussed later), paint stripper, polystyrene, trichloroethylene, styrene monomer and, more recently, fatty acids and phenols.

Firstly, we need to consider the process for validation of any test method, whether physical or forensic.

The International Organization

for Standardization’s ISO 8217:2005 specifies the analytical methods to be used when testing.

Section 5.1 of this standard specifies that the fuel shall be homogeneous blends of hydrocarbons derived from petroleum refining and should not include any added substance of chemical waste which:a) jeopardises the safety of ships or

adversely affects the performance of the machinery; or

b) is harmful to personnel; orc) contributes to overall air pollution.

The methods specified in ISO 8217 have a long history of evolution and refinement.

In the days when the author was a ‘boy chemist’ these physical methods were purely manual in their operation; but over the ensuing years, as technology advanced, these methods were updated to allow the use of automated equipment.

In most instances automated equipment improved the precision of the methods and this served to reduce the expertise needed by the chemist to perform accurate analysis.

For the automated methods to be accepted by bodies such as Institute of Petroleum (now the Energy Institute) and the American Society for Testing & Materials (ASTM), an in-depth inter-laboratory programme was carried out, with very specific objectives.

On satisfactory completion of this programme, and once the equipment was seen to have test precision at least as good as the manual equipment, the methods were updated to include the new equipment.

In essence, these were the methods adopted by ISO for inclusion into ISO 8217 and, of course, other ISO standards.

The process to validate a test method includes:(i) a draft of the method(ii) a pilot of the programme(iii) an inter-laboratory programme(iv) evaluation of results and exclusion of

outliers.

ISO 4259:2006 - Determination and application of precision data in relation to methods of test recommends that for any inter-laboratory programme there need to be at least five participating laboratories,

Geoff Jones of Lintec looks at the growing

problem of chemicals being detected in marine

bunker fuels

Geoff Jones is General Manager of Lintec Testing Services Ltd.

Contact:Geoff JonesLintec Testing Services LtdTel: +44 1325 390187 (Office) Fax: +44 1325 460055Email: [email protected] Web: www.lintec-group.com


preferably more.The whole process outlined above takes

considerable time and, more importantly, defines the method of test, conditions of operation, acceptable equipment, reporting criteria and test precision.

There are many instances where test methods are specific for certain petroleum products and a good example of this is the method used for determination of Acid Number – previously called Total Acid Number (TAN) – in bunker fuels.

The test method commonly used is ISO 6619:1988.

The precision of this method is specific for lubricating oils rather than other petroleum products and, as would be expected, the precision achievable for tests on used lubricating oils is significantly worse than that for new oils.

The method does not have any precision for Strong Acid Number (SAN) and therefore we would urge a degree of caution in assessing whether very low SAN values can be considered to be indicative of corrosive activity for the fuel under test.

There is no doubt that SAN is, however, an indicator of the presence of corrosive mineral acids in bunker fuels, and this is one area where more work is needed to correlate low SAN values with damage to fuel injection equipment.

It is well documented that many crude oils contain relatively high levels of naturally occurring naphthenic acids. Consequently a high Acid Number – greater than 3.0 mg KOH/g – may not be an indicator of chemical contamination.

A high value may simply be a consequence of the crude source used to process the bunkers.

Lintec employs Fourier Transform Infra Red (FT IR) to differentiate between naphthenic and other organic acids that may cause corrosive activity.

This is often used as a precursor to analysis by Gas Chromatography Mass Spectrometry (GC MS).

GC MS techniquesGC MS has been a favoured analytical technique within the testing industry for some time.

A Gas Chromatograph, containing a highly specific separation column, is linked

to a mass spectrometer detector to identify target chemicals in petroleum products.

The effectiveness of this technique depends on factors such as selection of the correct chromatography column, expertise of the analyst and selection of the correct sample preparation medium.

Heavy bunker fuels naturally contain many chemicals, ranging from relatively low carbon number compounds to very high carbon number – and hence high molecular weight compounds.

It is the high molecular weight compounds that are critical factors for the so-called ‘direct injection’ GC MS technique.

Specific sample preparation is needed prior to injection into the GC MS, otherwise the chemicals for identification will be masked by many others present in the bunker fuel.

Techniques such as solid phase extraction (SPE) and derivatisation are often required, to ensure that the target chemicals are more amenable to detection by GC MS.

Fatty acids can be determined by means of this technique, as well as other acidic compounds not found naturally in bunker fuels.

The above technique is ideally suited as an investigative procedure required to ascertain the possible cause of damage to a marine engine. It is labour intensive and requires high level analytical skills.

Another GC MS technique used within the testing industry is ‘head space’ GC MS. This is ideal for the determination of Volatile Organic Compounds (VOCs), as it can be automated to reduce the time needed by the laboratory analyst, and can be performed prior to the fuel being burnt rather than afterwards, as is the case for the

direct injection technique.Head space is a very convenient

technique for volatile chemicals such as styrenes, many chlorinated hydrocarbons such as methylene chloride, chloroform and carbon tetrachloride, as well as many others, including alcohols.

Dichloropentadiene (DCPD) may also be determined using this technique.

Although not applicable for detection of high molecular weight chemicals, Lintec feels that head space offers the most appropriate and cost effective means of protecting ship operator’s interests.

Since it has started using head space analysis, Lintec has been involved in many instances where the fuel has needed to be debunkered based on chemical screening analysis and prior to the fuel being used.

Indeed over the past few months, Lintec has found many cases where styrene was present in bunker fuels at greater than 100 parts per million (ppm), with the highest value found being over 600 ppm.

Analysing our figures shows that over 6% of fuels tested for chemical screening during September 2008 were found to have elevated styrene levels of over 100 ppm.

Styrene at these concentrations may cause serious blockage of filters.

There are many ports throughout the world where bunkers have been found to contain styrene; the problem fuels are not isolated to one geographical region.

During October, Lintec also found several cases where a chlorinated hydrocarbon (dichloroethane) was present in bunker fuels at over 100 parts per million.

It is open to debate whether chemicals of non-petroleum refining origin have been actually present in fuels for many years. There is no doubt that improvements in analytical capability have meant that it is easier to look for and find these waste chemicals.

The more we look for chemicals, the more we will f ind.

The real test now is to link the types of chemicals to actual machinery damage and in time develop and refine a limit for chemicals for inclusion in a bunker fuel specification.

To achieve this, in-depth input from all sectors of the marine industry will be needed.


‘Over the past few months, Lintec has found many

cases where styrene was present in bunker fuels at greater than 100 parts per

million (ppm)

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