Analysis of cargo claims for oil Shortages

The   marine   underwriters   receive cargo  claims  due to  short receipt of liquid bulk cargo although  the  cargo had been  loaded, carried  and  fully  discharged  without the fault of the vessel.

The  marine  underwriters  by their experience observe that the claimant  usually receive less quantity of  cargo in commercial terms, even though no loss  has occurred.  The loss as  stated  to be found   is attributable to the fault of the vessel.

The  following  are the  reasons for shortage of oil cargo

  1. Trade ullage
  2. The unexplained shortage e. ordinary leakage
  3. OBQ (On board quantity)
  4. Remaining on board volumes (ROB)
  5. Using of superseded tables for calculation of Bill of Lading quantity
  6. Vessels experience factors
  7. Competency of the surveyors engaged for supervised loading and discharge of cargo

In early 70s the importers did not experience shortage claim so frequently unless heavy casualties occurred during sea voyage. But due to  price escalation of crude oil  at the end of 1973 ,both  Oil companies and cargo underwriters had suffered cargo losses  due to imposition of  standard insurance deductible say 0.5% on the value of whole consignment. Since imposition of excess on the higher value of consignment would have cost an oil company or receiver of the goods, initiative was taken to curve down the losses and  increase  overall accuracy in accounting techniques for crude oil movements.

Although a new set of petroleum measurement table was issued in the year 1980  to determine the density of oil at standard temperature but in some countries determination of density is still done  by age old measuring table which  shows errors in accounting.

Although the cargo loss below or equal to loaded quantity of 0.5% was not admitted by the ship-owners but in  the  USA,  the  0.5% allowance  has  been rejected by  USA courts  who  are very reluctant to accept a fixed yard stick maintained by the ship owners  in all cases  as loss of quantity, if any, on account of differences between load port quantity and prior to discharge may not always be within the trade allowance of 0.5%   due to various factors.

Another source of loss during voyage is on account of OBQ ( on board  quantity) and ROB ( Remaining on board)  due to short delivery of  on  board quantity and/or remaining on board quantity of cargo. Since the Ship owners become liable for such loss of quantity, the practice of crude oil washing has been introduced to prevent such losses.

When such types of losses occur, the cargo owner may deduct freight on account of ROB quantity and the ship-owners rely upon their defence on the ground that the ROB volume was not pumpable, either because the ROB was not liquid, or even if the same was liquid, it could not reach by the ship’s pipeline system and the pump.

Oil cargo claims

Oil cargo claims may occur due to the following reasons

  1. Shortage of quantity
  2. Deterioration of cargo

As per the Charter party agreement and/or Bill of Lading, shipper’s cargo quantity and specification should be considered as prima facie evidence to show the quantity and quality of cargo loaded on to the vessel. The carriers are liable for damage/shortage of  cargo  so  long the cargo will  be at the custody of the carriers. However, some inevitable losses may occur due to inherent nature and/or change in chemical composition of cargo. While dealing with the cargo claim, the underwriters should consider the type of voyage involved such as “simple”, “multiport”, “multicargo,” “lightering”, or “ ship to ship” transfer operation etc.

Oil shortage

The short receipt of oil without substantiating the cause of shortage is termed as “Paper shortage”. It has been stated that shortage occurs due to inaccuracies’ in the measurement and calculation errors for the quantification of liquid cargo.  However, the ship should be careful to ascertain the actual cargo quantity loaded on to the vessel and while discharging the same to avoid un-substantiating cargo shortage. It is important  to  note  that  deficiencies in measurement techniques  are related to  a shore or  terminal problem instead of  faulty calibration of the ship’s tank always.  The following are the areas of potential cargo shortage

  • Load port loss
  • Transit loss
  • Discharge port loss
  • OBQ/ROB loss

Load port loss

The load port loss generally occurs due to inaccurate measurement and calculations system for quantification of liquid cargo. This is happened , for example,  if  old  petroleum table 6 is used at the  load port and a new petroleum table is  used at the dis port. It is observed that not only is there non-compatibility between such results obtained with respect to the volumes, but also between the table used and datum temperature to which the volume is corrected. The comparison between old table and new table will produce an overstatement of quantity of oil measured when the observed temperature will be higher than the reference temperature.

Such inadequacies can be eliminated by cargo suppliers, receivers and the vessel operators if they  agree  to  use  the  most  current  API tables . The Voyage Analysis Report VAR- Modified Form is now used in the oil trade for  equivalent  relative values, if, when properly filled in. which  may be a useful method to protect the parties against the unjustifiable claims.  It is, therefore, concluded that discrepancy will certainly occur due to the calculation error in terms of volume if comparison is done between New and Old petroleum measurement table.

Loss due to Evaporation

The loss of cargo due to evaporation may occur during loading, cargo tank washing by crude oil and discharge. The hydrocarbon vapour loss occurs during sea voyage and depends on the condition of vessel, the use of inert gas and cargo volatility. The evaporation loss is now controlled by using reciprocal cargo pumps.

ROB claim may occur due to the following reasons

  1. Loss of cargo due to improper heating/steaming of liquid cargo, incapacity of the pump to pump the residual cargo lying in the ship’s tank
  2. Sediments or sludges from the cargo or trim restrictions imposed by discharging ports causing disturbance of free flowing of oil  to the suction end of the cargo discharging system.

How to minimize ROB loss

It is very difficult to prevent ROB loss unless proper care and technique are adopted to remove sludges by the ship’s stuff. The crude oil washing is now mandatory requirement under MARPOL 73/78 to prevent operational pollution from ship’s tank to increase the cargo outturn. The conventional tanker needs wash about 60% of cargo tanks where as tanker segregated with ballast tanks requires 25% wash of the cargo tanks to eliminate deposition of sediments. The extent of COW will influence the amount of ROB quantities upon completion of discharge and cargo outturn..

Water content in the Crude oil

Oil  shortage  may  be  found at discharge port due to presence of water in the Crude oil at load port. The water  may  be  settled  out  on the  voyage  if the crude oil is not processed in settling tanks at the port of loading since it will be difficult to spot the presence of water in the crude oil  while loading. The selling and/or buying of crude oil is done on Net Standard Volume (NSW) basis i.e dry oil after deducting S &W ( Sediment and water). The ship owners must ensure to ascertain the presence of water in the crude oil as quick as possible and should not accept the cargo document  with the remark  “NIL S&W” at the time of shipment since it is highly improbable that no water is present in the crude.

The  owners  should maintain a standard practice to take water dips three days after sailing , every 5 days on the voyage and three days prior to arrival at the pilot station towards the end of the sea voyage to identify the quantity of water settling out from cargo and to inform the charteres/cargo owners  through out  the voyage addressing the problem. The presence of water in crude oil develops emulsion to form with the  hydrocarbon  and  increases  ROB   volume on vessel  excessively  which  causes sludging of land tanks, if water can not be drained out.

Cargo  heating

The  liquid cargo like Crude oil carrying with wax content ( tends to solidify due to  atmospheric condition) requires heating  at required temperature during voyage and discharge and should be  properly recorded to justify that the heating instruction to the charterer has been complied with.

On arrival at the discharge port, the master of the vessel and/or crew member of the vessel should  not  try  for speedy  discharge of  cargo for quick  turnaround. It is to be ensured by the ship’s staff that  if  the cargo falls below the level of heating coil, it should be stripped out immediately. It will be in order  to  arrange  for stripping each tank to enable  one tank at a time  has a cargo level  below the coils  to utilize full stripping capacity to the particular tank.  The full stripping of cargo is possible, if higher level of stripping capacity is available in the ship or the stripping operation  is  successfully  done by using deep-well pump.

Pumpability

While issuing marine cargo insurance policy for liquid bulk cargo, the underwriters impose policy condition to obtain certificate of cleanliness and fitness of pipeline both at load and dis port from the surveyors of international repute. The surveyors should also examine as to whether or not ship’s valve, lines and pumps are capable of performing   smooth   movement of cargo without any obstruction.

Terms of Sale and/or Purchase

The oil cargo transportation is generally done under a voyage charter. The ship-owners issue Bill of Lading to the shipper after the cargo is  loaded on to the vessel  which will confirm evidence of contract of carriage, proof of acceptance of cargo and evidence of cargo ownership.

The ship-owner, under the terms of  bill of lading, may be absolved from the liability for the losses arising from inherent vice of the cargo such as volatility, wax participation, and S&W.  The responsibility of ship owners terminates on completion of discharge of cargo from the ship’s tank, disconnection of cargo hoses and after crossing the ship’s rail.

Cargo Insurance

The oil transaction in the International market  depends  upon  the sale and/or purchase contract of the client with their suppliers. The cargo may be sold on High sea sale basis and the bill of lading being a negotiable documents will be transferred to the new owners. The new owner  will  demand possession of the goods  by presenting the Bills of Lading to the master of the vessel at port of discharge as proof of  ownership of the goods.

Under CIF sales, the seller will select the vessel for transportation, pays ocean freight and arranges for insurance. In case  of  FOB shipment, the responsibility for selection and providing the vessel lies with the buyer and the Seller will load the cargo in accordance with the requirement of the buyers.

Although the  underwriters  have  been  approached to grant  “ All Risk” cover for  bulk oil but the cover excludes ordinary losses which includes shortage  due to adherence, temperature and density variation,  calibration problem, ordinary leakage and loss in weight or volume.  Under “ All Risk” policy if it is found that a certain quantity of oil was loaded but lesser quantity was  discharged, the liability under the policy may be admitted if the Assured  is able to show that the cause of shortage was due to the perils insured against.

Deductible

The word “ ordinary” refers to regular or inevitable i.e. loss that can be expected. The shortage of oil cargo may occur due to evaporation, density variation due to increasing  and/or decreasing  of temperature, calibration problem etc.   Hence, a standard deduction of 0.5% on the value of whole consignment is imposed by the underwriters to take care such ordinary losses.  Although there is no fool proof basis to arrive at that, 0.5% excess will be the suitable percentage to eliminate all kinds of paper shortage. The percentage of excess imposed depends upon the nature of commodity ( Liquid or Dry bulk), voyage, quality of the vessel etc.  It is important to note,  that the shortage of cargo exceeding the stipulated percentage imposed under the policy will not  be admitted unless physical loss is established

Conclusion:

Loading   and unloading supervision should be done by the surveyors of international repute both at Load and Disport to arrest cargo shortage. It is a customary practice that the Bill of Lading quantities should be determined on the basis of ship’s figure and/or where a commercial transaction requires Bill of Lading quantities to be based upon ship’s figure only, underwriters agree  to  accept Bill of Lading figures so calculated for comparison with discharge figures and the calculation of claims.  Hence, Bill  of  Lading  quantity  should be binding on  and acceptable to underwriters as proof of shipped quantities.

If the cover is extended up to the shore tank of the Assured and if loss occurs between shore tank and vessel, the quantity of shortage will be determined by comparison between shore tanks and Bill of Lading quantity.

If the policy is issued under “All risk” terms, the claim for shortage, if any, shall only be admitted if the assured is able to show that such shortage occurred due to the perils covered under the policy.


Sumon Ganguly
Consultant (Marine  Insurance)
Source: Book let published by INTERTANKO