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Study On Shipping In Oil And Gas Sectors Finance Essay

The oil can is mightier than sword – Anonymous

The statement above rightly describes the value of oil and gas today globally. We were never so much dependent on oil and gas as we are today. If we talk about Indian oil and gas industry then we can trace its beginning when the oil was first struck at Makum near Margherita in Assam in 1867. Since then the industry has come a long way. For nearly fifty years after independence, the oil sector in India has seen the growth of national oil companies in a protected environment. Then a process of change of the sector began in the mid nineties, from a state of complete protection to the open competition. The move was considered necessary in order to attract funds and technology from abroad into the sector. Few important points to be noted here is that the sector in recent years has been characterized by rising consumption of oil products, declining crude production and low reserve. India remains one of the least-explored countries in the world, with a well density among the lowest in the world.

The years since independence have however seen the rapid growth of the upstream and downstream oil sectors. There has been efficient use of resources for exploration activities and increasing refining capacity as well as the creation of a vast marketing infrastructure and a pool of highly trained and skilled manpower. Indigenous crude production has risen to 35 million tonnes per year, an addition of fourteen refineries, an installed capacity of 69 million tonnes per year and a network of 5000 km of pipelines.

With so much development taking place in the oil and gas sector in India and with very little exploration activities our dependence has greatly increased on oil and gas. Today we are having 14 refineries with a total capacity of 184.40 MMTPA and still if we look at the imports for the year 2008-09 then we imported 128.16 MMT of oil and 8.06 MMT LNG. .

Following was the situation of domestic crude oil production and consumption in India:-

Source: BP Statistical Review of World Energy, 2007

The above table indicates the total demand and production situation in the country till 2006 and it is the reason that in order to fulfil this need one important source is required and that is shipping. In this paper we will be focussing on the shipping in oil and gas sector, international practices in shipping of oil, different types of tankers used, chartering, etc

Initially we will have a look at the world oil and gas shipping scene and various terms and methods related to it then move on to Indian scenario.

International & Domestic Practices in Crude Oil & Petroleum Product Shipping

In 1954 Shell Oil developed the average freight rate assessment (AFRA) system which classifies tankers of different sizes. To make it an independent instrument, Shell consulted the London Tanker Brokers’ Panel (LTBP). At first, they divided the groups as General Purpose for tankers under 25,000 tons deadweight (DWT), Medium Range for ships between 25,000 and 45,000 DWT and Large Range for the then-enormous ships that were larger than 45,000 DWT. The ships became larger during the 1970s, which in turn required rescaling of the sizes.

The system was developed for tax reasons as the tax authorities wanted evidence that the internal billing records were correct. Before the New York Mercantile Exchange started trading crude oil futures in 1983, it was difficult to determine the exact price of oil which could change with every contract. Shell and BP, the first companies to use the system abandoned the AFRA system in 1983, later followed by the US oil companies. However, the system is still used today. Besides that, there is the flexible market scale, which takes typical routes and lots of 500,000 barrels.

Merchant oil tankers carry a wide range of hydrocarbon liquids ranging from crude oil to refined petroleum products. Their size is measured in deadweight metric tons (DWT). Crude carriers are among the largest, ranging from 55,000 DWT Panamax-sized vessels to ultra-large crude carriers (ULCCs’) of over 440,000 DWT.

"Supertanker" is an informal term used to describe the largest tankers. Today it is applied to very-large crude carriers (VLCC) and ULCCs with capacity over 250,000 DWT. These ships can transport two million barrels of oil. Because of their great size, supertankers often cannot enter port fully loaded. These ships can take on their cargo at off-shore platforms and single-point moorings. On the other end of the journey, they often pump their cargo off to smaller tankers at designated lightering points off-coast. A supertanker's routes are generally long, requiring it to stay at sea for extended periods, up to and beyond seventy days at a time.

Smaller tankers, ranging from well under 10,000 DWT to 80,000 DWT Panamax vessels, generally carry refined petroleum products, and are known as product tankers. The smallest tankers, with capacities under 10,000 DWT generally work near-coastal and inland waterways. Although they were in the past, ships of the smaller Aframax and Suezmax classes are no longer regarded as supertankers.

Chartering

The process of hiring a ship to carry cargo is called chartering. There are four types of charter arrangements by which tankers are hired

Voyage charter

Time charter

Bareboat charter 

Contract of affringement.

 In a voyage charter, the charterer rents the vessel from the loading port to the discharge port. In a time charter, the vessel is hired for a set period of time, to perform voyages as the charterer directs. In a bareboat charter, the charterer acts as the ship's operator and manager, taking on responsibilities such as providing the crew and maintaining the vessel. Finally, in a contract of affreigement, or COA, the charterer specifies a total volume of cargo to be carried in a specific time period and in specific sizes, for example a COA could be specified

as "one million barrels of JP-5 in a year's time in 25,000 barrel shipments." A completed chartering contract is known as a charter party.

One of the important factors to be considered for any charter party is the freight rate for carriage of cargo. The freight rate of a tanker charter party is specified in one of four ways:

1) By a lump sum rate

2) By rate per ton

3) By a time charter equivalent rate

4) By Worldscale rate

In a lump sum rate arrangement there is a fixed price which is negotiated for the delivery of a specified cargo, and the ship's owner or operator is responsible to pay for all port costs and other voyage expenses. Rate per ton arrangements are used mostly in chemical tanker chartering, and differ from lump sum rates in that port costs and voyage expenses are generally paid by the charterer. Time charter arrangements specify a daily rate, and port costs and voyage expenses are also generally paid by the charterer. The Worldwide Tanker Normal Freight Scale, often referred to as Worldscale, is established and governed jointly by the Worldscale Associations of London and New York. Worldscale establishes a baseline price for carrying a metric ton of product between any two ports in the world. In Worldscale negotiations, operators and charterers will determine a price based on a percentage of the Worldscale rate. The baseline rate is expressed as WS 100. If a given charter party settled on 85% of the Worldscale rate, it would be expressed as WS 85. Similarly, a charter party set at 125% of the Worldscale rate would be expressed as WS 125.

Shipping of Oil & Gas in India

Shipping requirements; be it import/export or domestic coastal movement are handled by the chartering desk of respective oil company. All the three types of chartering; viz. Time Charter, Spot Charter and COA (Contract of Affreightment) are used to charter ships. The process of enquiry through which ships are chartered is as under:

Process for Chartering Ship for crude oil/ product imports

Floating of Enquiry

Enquiry is floated to all the Indian Ship owners/ Indian Ship brokers registered with the importer.

Copies of all enquiries would be sent to DG (Shipping) and Indian National Ship owners Association (INSA), for obtaining mandatory No Objection Certificate (NOC) / Licenses.

Enquiries would be floated through e-mail / fax.

Receipt of Offers

Receipt of offers shall be through either of the following modes:

Dedicated email box with password protection. Separate mailboxes shall be provided for receipt of offers against each enquiry.

A dedicated fax in a locked room would also be available as an alternate mode.

Offers received by either of the above modes will be considered.

The offers will be printed / collated after the email box is opened at the designated time for receipt of offers specified in the enquiry or on the expiry of the extended time as provided in sub-clause (g) of this clause, as the case may be.

Unsolicited / Mid way offers will not be considered.

As a standard procedure, bidders will be required to submit hard copy of the offer and other related communications for records.

Evaluation of Offers

The offers will be ranked on the basis of freight.

Demurrage rate and Other Terms and Conditions of the Charter Party (CP) will also be evaluated.

Counter Offers / Negotiations

The process of Counter Offers / Negotiation is as under:

No Indian Ship Owner has quoted:

Negotiation will be held with all the technically acceptable bidders indicating their respective ranking. Whereas a Firm Counter will be given to lowest (L1) bidder, the counter to all other bidders will be Open (i.e. Open 1, Open 2 etc.). During negotiations, original rankings of the bidders can change depending upon their response to the counter.

Indian Ship Owner (s) has also quoted :

If offer is received from Indian ship-owner, (Vessels belonging to Indian Ship Owner flying the Indian Flag), the Indian ship-owner will have the first right of refusal vis a vis the lowest offer received from Foreign ship owner, in compliance with government guidelines.

Indian Ship Owner is L1

The counter shall be offered firm to the technically acceptable L1 Indian ship-owner. Open counters would be offered to other technically acceptable Indian ship-owners and all technically acceptable foreign ship-owners. The respective rankings of all the bidders shall be disclosed.

If negotiations are successful with the foreign ship-owner, Indian ship-owner will be asked to match the rate, failing which the ship will be fixed with the foreign ship-owner.

Indian ship-owner is not L1

The counter will be given firm to the technically acceptable L1 Indian ship-owner and ‘open’ to other technically acceptable Indian and foreign ship-owners. The relative ranking of all ship-owners shall be disclosed.

Fixtures on subjects

Once negotiations are concluded, the ship fixture will be confirmed on subjects with a time schedule, while the ship fixture is on subjects following activities will be undertaken:

Charterer’s management approval

Terminal/Supplier Acceptance

To arrange for license from DG (Shipping) in case of foreign ships

Obtain record note of negotiations and Fixture Note from the broker / owner for record.

Charter Party Agreement

Following Charter Party Agreements apply:

Voyage Charter Party (VC – for Foreign & Coastal) ASBATANKVOY with BPCL specific (Rider) Clauses.

Time Charter Party (Foreign Voyages) SHELLTIME 4 / 3 (for LPG)

Coastal and Time Charter Party. Charter Party agreements developed by BPC and in use.

Procedure for chartering out time charter vessels

For Chartering out vessels by the importer, Oil Majors, Trading and Shipping companies and Empanelled Brokers registered with the importer, will be intimated on position list, trading area, cargo grade, laycan etc. Negotiations:

Based on the offers received, the importer may carry out negotiation with best offer. On successful completion of the negotiations the vessel shall be given on subjects to the charterer for their approval. Charter Party Terms: Standard ASBATANKVOY Charter Party agreement shall be followed and finalized along with the rider clauses (after negotiations) with charterers.

Major players in Indian shipping industry (oil and gas)

The Shipping Corporation of India Ltd.

The Shipping Corporation of india is the largest Tanker owner in India. They have a well-diversified fleet of crude Tankers of all sizes: MR, LR-I, LR-II, Aframax, Suezmax and VLCC Tankers. 

The Shipping corporation of India has a Tanker Commercial Department which looks after scheduling and deployment of Tankers for feeding crude to various Indian oil refineries. Lighterage operations on the east and west coasts are also undertaken, to facilitate quick turnaround of Tankers, which otherwise cannot call on ports due to port restrictions/limitations.The department also ensures commercial deployment of in-chartered tonnage, to meet its obligations of lifting cargo under the Contract of Affreightment (COA).

Varun Shipping Company Ltd.

Varun shipping company has got its charters. Their charterers are comprise both domestic and international companies. Their main domestic charterers include Indian PSUs such as Indian Oil Corporation Limited, Hindustan Petroleum Corporation Limited, Bharat Petroleum Corporation Limited, Oil and Natural Gas Corporation Limited and private domestic sector conglomerates such as the Reliance Group and Essar Group. Few of the direct international charterers include Exmar Group and KS AS Hektorgas of Bergesen Worldwide Group.   

They have got 3 crude oil tankers with dead weight tonne of 106004,107081,106597 respectively and 10 LPG carriers of different DWT’s out of which they have two bare boat charter.

Essar Group

Essar group is also one of the important and big players in Indian oil and gas shipping industry. The company has got LCC and VLCC and is currently serving BPCL, HPCL, IOCL, etc. They have also got their business in core oil and gas sector such as refineries and retail outlets and the shipping segment of their business helps them in the process.

Great eastern shipping Co. Ltd.

They are India’s largest shipping service providers serving oil giants like Shell, Exxonmobil, etc. They have got a total fleet of 32 ships which include both oil and gas (LPG) tankers with 2.09 and0.02 MN DWT respectively.

There are also other big players and many are government owned such as Vishakapatnam Port Trust, Kolkata Port Trust, etc and among private players there are Apeejay shipping Ltd., Five star marine services etc.

Oil and gas industry would never have been so big and huge if there wouldn’t have been such means of transportations available because in India that is the only means of transportation of oil from outside. Though we can explore the possibilities of inter country pipeline transportation but we still have to cover quite a distance in this case. We are progressively building much bigger and mightier crude oil vessels now time will only tell how far we can go in this field.

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