Oil punt makes big bucks but coastlines at risk

By Tom Bergin
Guardian.co.uk
Friday May 1 2009

* Oil company windfall from contango trade
* Over 120 million bbls of oil, products held offshore
* Environmentalists say boosts risk of spills
* Shipping regulator called on to act

LONDON, May 1 (Reuters) - Big international oil companies are making hundreds of millions of dollars storing crude on tankers offshore in a trading play that environmentalists say sidesteps shipping rules and puts coastlines at risk.

The $100 per barrel drop in crude oil prices since July, to around $50, has pushed the market into an unusually sharp contango -- a scenario where the cost of oil today is much lower than the price of oil in the future.

Meanwhile, the global economic crisis has led to a more than halving in the cost of chartering oil tankers since last year.

This combination has created an opportunity to buy oil, simultaneously sell it for future delivery to lock in a profit, while storing the oil at sea until the delivery date.

London-based oil major BP made an exceptional gain of around $500 million in its downstream arm in the first three months of 2009, mainly due to the contango trade, Chief Financial Officer Byron Grote told analysts this week.

U.S. rival ConocoPhillips said last week that it spent around $1 billion in the first quarter buying crude to take advantage of the unusual market structure.

Other oil companies including Royal Dutch Shellsaid they also benefited from arbitraging the contango, while ship brokers said trading groups such as Swiss-based Gunvor and U.S.-based Koch Industries also participated.

In total, close to 100 million barrels of crude are being stored offshore, compared to none a year ago, Jens Martin Jensen, acting chief executive of Frontline, one of the world's biggest independent oil tanker owners, said last week.

Analysts have since said the figure could be even higher and that around 25 million barrels of refined products, including jet fuel and gasoil, are also being stored.

This compares with global daily consumption of around 84 million barrels a day and the roughly 600 million barrels of crude which is normally in transit on the seas from producers to users, according to International Energy Agency figures.

"This is an insane situation," said Professor Rick Steiner, marine biologist at the University of Alaska Fairbanks, who worked on the 1989 Exxon Valdez oil spill, the U.S.'s worst ever.

The Valdez clean up cost $2.5 billion and twenty years on, still-pungent oil still lingers on some Alaskan beaches.

UNNECESSARY RISKS

Environmentalists object particularly strongly to the armada of tankers currently sitting in the Gulf of Mexico, the North Sea, the Mediterranean, the Persian Gulf and off West Africa, because it serves no function in the supply of oil to consumers.

"The only people who derive any benefit from that activity are the people buying and selling the crude and the risk is borne by the coastal communities," David Santillo, a scientist with environmental group Greenpeace at the University of Exeter.

BP, Shell, Koch, Conoco and Gunvor declined or were unavailable to comment on the environmental risks involved.

Offshore oil storage brings risks additional to those posed by shipping crude to market because of the reliance on ship-to-ship transfers, rather than simply shipping crude from one permanent export terminal to another.

"This represents a higher risk of oil spills," said Marius Holn, co-chairman of Bellona, a green group that focuses on the North Sea.

The Bunga Kasturi Dua, a Malaysian VLCC (very large crude carrier) with a capacity of 2 million barrels, which ship brokers say is under contract to ConocoPhillips, is an example.

The vessel arrived empty at Scapa Flow, offshore Scotland, on Feb. 14 and was filled by three ship-to-ship transfers.

It will likely unload in a similar fashion in the coming months, as previous ships that anchored at the sheltered waters around the Orkney Islands, such as the VLCC Eagle Vienna, did before sailing away again.

UNREGULATED

A VLCC has to pay 88 pounds ($131) a day to the Orkney harbour authority to remain anchored at Scapa Flow, compared with the 4 pounds an hour it costs to park a car in central London.

"It's quite a good deal," Orkney Harbours Marketing Manager Michael Morrison said of his rates.

Once a vessel meets health and safety standards, it does not need a permit to sit fully laden in UK territorial waters, a spokesman for the Maritime and Coastguard Agency said.

It is the same in other countries, largely because no one envisaged offshore storage would develop, environmentalists say.

The 50 VLCCs currently storing crude break the spirit of the International Convention for the Prevention of Pollution from Ships, known as Marpol, the rulebook for carrying oil at sea, Simon Walmsley, Head of Marine at conservation group WWF, said.

Marpol, which is overseen by shipping regulator the International Marine Organisation (IMO), a United Nations agency, envisaged that oil would move from producer to user as quickly as possible.

Yet some Marpol provisions probably could be used to curb offshore storage, Walmsley said. "The IMO should act".

A spokeswoman for the IMO said she was unaware of any Marpol rule which would bar offshore oil storage.

Ports may also be breaking rules, common in many countries, that require environmental impact assessments (EIAs) to be conducted before new activities can be undertaken.

Morrison said an EIA of risks posed by crude storage was conducted at Scapa Flow and posed minimal risk.

The controversy comes as oil companies' green credentials -- often touted in their advertising -- face fresh attacks, after cancelled investments in wind and solar energy and a push into Canada's oil sands, a dirty and energy-intensive form of crude production.

"This is just one more example of companies placing profits over concern for the environment," Steiner said. For a Factbox on oil storage at sea, please see ANALYSIS-Floating oil lake likely to curb future oil prices

($1=.6739 Pound) (Additional reporting by Jonathan Saul; editing by Simon Jessop)

© Guardian News and Media Limited 2009

Floating oil lake likely to curb future oil prices

Oil and gas tankers sit anchored off the Fos-Lavera oil hub near Marseille, southeastern France, December 12, 2008. (REUTERS/Jean-Paul Pelissier)

LONDON/NEW YORK (Reuters) - Oil companies are storing a record volume of oil at sea in giant tankers as world crude supply outstrips demand, and this floating oil lake is now so big that it is likely to keep a lid on prices for some time.

Shipping analysts say around 100 million barrels of crude and about 25 million barrels of refined products, such as gas oil, are held in fleets of Very Large Crude Carriers (VLCCs) in Europe, West Africa, the U.S. Gulf and off Asian ports.

The volume of oil stored at sea has risen to record levels because the price of oil for use now is well below the value of oil for future delivery -- a market structure known as contango, typical of a bear market.

With tanker rental rates low and on-land oil stocks near record levels, it is cheap to store oil at sea, and using ships gives oil traders more flexibility than long-term storage tanks.

The last time floating oil stock levels were anywhere near these levels was in the early 1990s after the first Gulf war. Tanks were drained then into a rising market and traders and analysts say only a rise in demand will clear the stocks now.

But there is little chance of a quick recovery in oil use as the world faces its worst recession since World War Two, and the massive floating oil inventory is now haunting the market, an extra source of supply at a time when demand is extremely weak.

"Out of the market and off balance sheet, everyone knows about this oil but is trying not to think about it," said Simon Wardell, director of oil research at IHS Global Insight.

DEFERRED SUPPLY

"It is deferred supply, an almost ethereal source of oil waiting offshore. As long as it is unused, it is effectively acting as a support for the market, but at some point it will reappear so it is acting as a ceiling on oil prices."

Analysts calculate that the total of around 125 million barrels of oil stored at sea is equivalent to about 2.85 days of forward demand for the 30 industrial countries of the Organization for Economic Co-operation and Development (OECD).

The International Energy Agency (IEA) estimated in its last monthly report that on-land stocks were equivalent to 61.6 days of forward OECD demand. Adding the floating storage pushes OECD stocks up to 64.45 days -- exceptionally high by any measure.

"Historically, the general rule has been that 50 days of forward cover is mega bullish for oil prices, 53 days is bullish, 57 days bearish and 60 days mega bearish," said David Hufton, managing director of brokers PVM Oil Associates.

"What we are effectively saying is that oil stocks are much, much higher than has been acknowledged and the implications are that at some point any rally will come to a halt."

Analysts say the huge quantity of oil floating offshore may explain why the oil market has been relatively strong over the last few months at a time when the big industrialized countries have seen a sharp decline in oil consumption.

"INCREASINGLY BEARISH"

Oil prices hit record highs of almost $150 a barrel last July before reaching lows around $35 in December as recession worsened but have recovered since then and benchmark crude futures have steadied around $50 in recent weeks.

"Arguably, while oil is held in storage, it is kept off the market, and that may provide some explanation as to why prices are sticking at current levels," said Harry Tchilinguirian, a senior oil analyst at BNP Paribas in London.

"But if storage accumulates further, be it onshore or at sea, and demand for crude remains depressed, either the prompt price will need to be discounted relative to the future to encourage off take, or the future delivery price needs to rise to cover for the cost storage of excess supply."

Of these two options, traders say the more likely outcome is the first, with oil prices for immediate delivery coming under increasing pressure as oil is sold out of storage.

"The oil cannot stay in floating storage for years, or even too many months," said David Wech, head of research at JBC Energy consultants in Vienna. "This situation indicates an increasingly bearish picture for oil prices."

(Additional reporting by Jonathan Saul and Ikuko Kao in London and Luke Pachymuthu in Duabi; editing by Sue Thomas)

© Thomson Reuters 2009 All rights reserved