FLOATING OIL-STORAGE AND ITS IMPLICATIONS ON INDIA’S ENERGY SECURITY — PART-1

The two parts over which this article has been penned seek to analyse the manner in which the intersection of two extraordinary events — the COVID-19 pandemic and the oil-price war between Saudi Arabia and Russia — produced a sequence of outcomes that significantly impacted India’s crude-oil vulnerability and the mitigating measures that the country adopted, with particular regard to its resort to ‘floating storage’.

While this article concentrates upon ‘floating storage’ as India’s option of choice, the overarch is that of Strategic Petroleum Reserves (SPR).  As such, readers are encouraged to read two earlier articles by this author, both of which analyse the significance of the Strategic Petroleum Reserves (SPR) ashore, and which may be accessed on the NMF website.[1]

In charting the events that led to the creation of the most recent — and ongoing — floating storage experience of India, the two parts, taken in aggregate, offer relevant inputs to India’s policymakers within the shipping and energy sectors, highlighting arguments against what, at face value, might seem like a good stop-gap measure to deal with a temporary glut of crude-oil at cheap prices in a situation where the country’s limited shore-based storage facilities are full.

A brief recapitulation of the very basic features of the offshore oil-and-gas process may be useful before proceeding any further.  Like its onshore counterpart, the ‘offshore’ production of crude oil commences with a variety of geological surveys, which are followed by the drilling of exploratory wells at specific locations within the continental shelf, which the surveys have indicated as being promising.  These exploratory-wells are created by a variety of purpose-build platforms, collectively known as ‘drilling rigs’, whose designs vary according to the depth of water in which the drilling must be done, the nature of the seabed at the location of the exploratory well(s), and, the hydrologic and weather conditions that are expected.  Once it is established that an oil-well can generate crude-oil in economically viable volumes, the ‘drilling rigs’ that were used for exploratory drilling are replaced by more permanent ‘production platforms’ and production commences.  This entire set of activities — involving geological surveys, exploratory drilling, the establishing of economic viability of the production envisaged, and, the actual production of crude-oil — is carried out by what is called the ‘upstream’ sector of the oil and gas industry, and is undertaken by commercial entities that are commonly known as ‘Exploration and Production’ (E & P) companies or consortia.  The obvious next step is to store the oil being produced until it can be sold.  Storage facilities are typically located in shore-based complexes.  These could be storage-tank-farms or within the premises of oil refineries.  Consequently, the oil has to be transported from the production offshore sites (the production platforms) to storage facilities ashore.  This transportation could be done either via undersea pipelines laid from the production platform to the storage facilities ashore, or via specialised ships known as ‘crude-oil tankers’, which take the oil to designated ports, where it is discharged for further transportation (via shore-based pipelines or via tanker-lorries or specially-designed railway wagons) to the requisite storage facilities.  This set of activities — involving the transport and storage of the crude oil — is carried out by what is called the ‘midstream’ sector of the oil industry, comprising specialised companies that are often (but not always) distinct from the E&P companies or consortia.  The actual refining of the crude oil into usable ‘products’ and the subsequent distribution and marketing of these ‘products’ are parts of the ‘downstream’ sector.

Storage tanks facilitate the accommodation of large volumes of hydrocarbons as well as the finished products (such as petrol, diesel, asphalt, etc.), and are often located within oil refineries, although, as mentioned earlier, they may also be located within specially designated ‘tank-farms’ that then feed the refineries.  Without storage tanks, the petrochemicals industry would be unable to safely store and process the roughly 101.18 million barrels per day (mb/d) of crude oil that was consumed globally in the year 2019 or, for that matter, even the Covid-induced lower consumption figure of 92.21 mb/d for the year 2020.[2]

When the crude oil is retained within tanks aboard ships for purposes of ‘storage’ rather than for ‘transportation’, it is said to be in ‘floating storage’ — also known as ‘oil on water’.  There are two primary reasons why crude oil may be stored in ‘floating storage’.  The first is if the owner of the cargo on board a tanker is unable to secure adequate storage in onshore facilities such as surface tanks, railway wagons, pipelines, or even the occasional Strategic Petroleum Reserve (SPR) reservoir/cavern.  The second is if the owner of the cargo — mostly likely an oil trading firm – is playing what is known as a ‘long game’ and wishes to store his holding of oil in anticipation of a future surge in oil-prices.

It is important that ‘floating storage’ is not confused with ‘Floating Production, Storage, and Offloading’ (FPSO) or ‘Floating Storage and Offloading’ (FSO).  The development of FSOs and FPSOs may be traced to the mid-1970s, when offshore ‘Exploration and Production’ (E&P) operations were experiencing a sudden boom.  The refineries that needed this crude oil being produced could well be located in a distant location or even in another country altogether.  So as not to waste time and money in first transporting the crude oil from the offshore production platforms to one’s own shore-based storage facilities, and then ‘re-shipping’ the oil to the eventual buyer, E&P companies began to anchor or moor oil-tankers in the close proximity of production platforms.  These tankers were known as Floating Storage Units (FSUs).  They could remain anchored (or moored), for several days or weeks.  Once a buyer was found and the sale concluded, the tanker would transport the oil directly to the buyer’s port-facility.  This eliminated the need to construct dedicated – and expensive – undersea pipelines and also reduced the frequency of offloading operations by tankers at one’s own ports.  Soon enough, transportation economics dictated the need to have larger and larger quantities of crude oil being stored in the proximity of the offshore production platforms for longer periods of time — months and years, rather than weeks and months.  Mid-sized tankers were found to be insufficient in size as well as in their ability to store crude oil for the protracted periods envisaged.  This latter point will be elaborated later in this article.   At this stage, suffice it to state that the need for larger volumes of crude oil to be stored for longer periods of time drove the construction and deployment of large, purpose-built vessels for offshore deployment.  It now became necessary for these vessels to periodically transfer some portion of their stored crude oil for its transportation to destination ports.  This was done by smaller ‘shuttle-tankers.’  Thus, these large vessels became known as ‘Floating Storage and Offloading’ (FSO) vessels.  Inevitably, the thought arose of eliminating production platforms themselves by incorporating production-functions within the FSOs.  In other words, the FSO was now envisaged not merely as a vessel that could store large volumes of crude oil for protracted periods of time and periodically offload some portion of its stored crude oil to shuttle tankers, but as one that could additionally undertake the production itself.  Thus was born the purpose-built ‘Floating Production, Storage, and Offloading’ (FPSO) vessel.  To bridge the time-gap separating the requirement and the construction of specially-built FPSOs, initially FPSOs were “typically a tanker type hull or barge, often converted from an existing crude oil tanker (VLCC or ULCC).”[3]  In more contemporary times, however, countries such as Japan and Singapore, which have a paucity of available land for the construction of large structures, have created Very Large Floating Structures (VLFS) to serve as offshore oil storage bases.  These steel and concrete structures are permanently moored to the seabed.  (See Figure 1)

Fig 1: Schematic depiction of an FPSO.  Credits: Bluewater Energy Services B.V.; https://www.bluewater.com/fleet-operations/what-is-an-fpso/

A major difference between FSOs, FPSOs, VLFS, and ‘floating storage’ in the context of this discussion is that while an FSU is characterised by its permanence, floating storage is a short-lived temporary phenomenon.  Another significant difference is that while a regular seagoing ship (tanker) is used for floating storage, FSOs, FPSOs, VLFS are complex floating structures made in the form of a ship’s hull and purpose-built to produce and store oil for protracted periods of time.  They are not self-propelled.  However, towed by tugboats, FSOs/FPSOs can remain moored at a single position at sea for more than 10 years!  They are an integral segment of offshore E&P operations, especially those carried out in remote and ultra-deep waters.   However, these platforms are not impervious to dangers at sea.[4]  The risk of collision between an FPSO and a shuttle tanker is a very real one, which is significantly exacerbated by bad weather and rough sea conditions.  Equally grim and equally probable are the risks of fire and/or explosion.  Failure of one or more auxiliary-engines on the FPSO, tug-boat failure, towing cable failure, and failure of the dynamic positioning system are other potentially-catastrophic risks. [5]

 

Drivers of ‘Floating Storage’

What then could drive a decision to opt for ‘floating storage’ using commercial tankers rather than purpose-built FSO, FPSO, or VLFS structures?   The answer lies in crude-oil ‘futures’.  ‘Futures markets’ or ‘futures exchanges’ are where products (crude oil, for example) are bought and sold — for delivery at some agreed-upon date in the future, but with a that is price fixed at the time of making the deal.  Here an investor predicts the price of a commodity at some future date and pays that price at the present time.  A particularly attractive feature of a futures contract in terms of crude oil is that until the delivery date, the buyer is not physically in possession of the oil, and so does not have to worry about storing it.   However, once that delivery date arrives, it becomes the buyer’s property and will remain so until the oil is sold on to others.  So far, so good.   But what if the market has unexpectedly weakened, to the point where the market price for the commodity is lower on delivery than upon?  (The market is then said to be ‘in contango’).  In such a scenario, oil-traders do have to take physical delivery of the oil.  If they were to sell the oil at this lower price, they would, of course, suffer a heavy loss.  So, they seek to store their purchases until they can obtain a better price.  Where to store this oil? now becomes a pressing question. “It is no coincidence that, at times when crude oil prices fall, maritime freight prices for the carriage of oil also often fall.  This is due to there being a glut of oil on the international markets… which depresses

oil freight-rates. Oil-tanker operators often find it difficult to obtain good charters for their vessels at exactly the time when oil-traders are looking for somewhere to keep their newly delivered (or about to be delivered) oil…”  Thus, what occurs is “a maritime contango marriage of convenience”. [6]   The trader (this may well be a government-body) charters idle oil-tankers to store the oil, while the shipowner finds a cheap way of employing his tankers, simply anchoring the vessels and offering these otherwise idle ships to be used as ‘floating storage units’.  This is known as ‘floating storage’.

This ‘marriage of convenience’ is fine as long as the period of floating storage is short.  This is because problems in both, the ship’s cargo tanks as well as the ship’s propulsion machinery start to become very serious issues as time passes.  To begin with, crude oil is actually a suspension of numerous hydrocarbon compounds.  If stored for long periods of time, undisturbed crude oil will begin to settle. The heavier hydrocarbons (such as bitumen) sink and coalesce at the bottom, while the lighter hydrocarbons (such as methane and ethane) rise to the top and, if permitted, escape as vapour.  In other words, the crude oil begins to degrade. This can lead a loss of quality as well as quantity, because of excessive sediment (or sludge) forming at the bottom of the cargo, which becomes unpumpable, leading to residues remaining on board (ROB) issues.  Moreover, unlike purpose-built FSOs, FPSOs and VLFS structures, oil tankers that are used as storage units are far more exposed to climatic conditions prevailing at the locations where they are anchored.  There can be considerable temperature-variations during the day and the night, which leads to a loss of cargo due to the release of gases such as methane and ethane into the atmosphere. Thus, the volume of the cargo on board is gradually reduced over time and the longer the oil is in storage on the vessel, the greater the possible loss.[7]  If these were not problems enough, the accumulated ‘sludge’ within the ship’s cargo tanks cause problems when tankers are sought to be brought into normal use, necessitating considerable and expensive cleaning.  Moreover, hydrogen sulphide, which is a naturally-occurring constituent of crude oil, significantly adds to the deleterious effects of protracted storage aboard tankers.  Depending upon the place from where the crude oil has been sourced, the proportion of hydrogen sulphide varies.  Crude oil that has a high content of hydrogen sulphide is called ‘sour’, while that with a low content of hydrogen sulphide is called ‘sweet’.  However, whether sour or sweet, all crude contains hydrogen sulphide and, when crude oil is retained in the ship’s tanks for protracted periods of time, this hydrogen sulphide causes considerable structural damage to the steel that the tanks are made from, as well as to the piping and the pumps of the ship.  The longer the period over which the ship in which the crude oil remains at anchor, the more serious are the problems encountered when the vessel is attempted to be returned to its normal pattern of deployment.  The ship’s propulsion and auxiliary machinery is never designed for long periods of idleness and past experience has repeatedly and conclusively shown a sharp increase in the frequency and gravity of machinery breakdowns when the ship returns to active duty.

How all this is to be contextualised to the Indian situation and the COVID-19 pandemic forms the second part of this piece.

 

About the Author: 

Dr Oliver Nelson Gonsalves is an Associate Fellow at the National Maritime Foundation. His research is currently focussed upon the several facets of India’s conventional ‘Energy Security’ in general, and, issues related to the Security-of-Energy, in particular.  He can be contacted at associatefellow1.nmf@gmail.com

 

Endnotes:

[1] Oliver Nelson Gonsalves, “Crude-Oil Storage in an Era of Plenty: Part 1: India’s Strategic Petroleum Reserves”, NMF Website, 06 May 2020, https://maritimeindia.org/crude-oil-storage-in-an-era-of-plenty-part-1-indias-strategic-petroleum-reserves/

See also:

Oliver Nelson Gonsalves, “Crude-Oil Storage in an Era of Plenty: Part 2: Lessons from the USA’s Strategic Petroleum Reserve”, 11 May 2020, https://maritimeindia.org/crude-oil-storage-in-an-era-of-plenty-part-2-lessons-from-the-usas-strategic-petroleum-reserve/

[2] US Energy Information Administration (EIA), “Short Term Energy Outlook”, 12 January 2021, https://www.eia.gov/outlooks/steo/report/global_oil.php

See also:

M El-Samanody, A Ghorab and AS Noaman, “Design and Study of Floating Roofs for Oil Storage Tanks,” Mechanics and Mechanical Engineering 21, No 1 (2017): 118, http://www.kdm.p.lodz.pl/articles/2017/21_1_11.pdf

[3] Håvard Devold, “The Oil and Gas Production Handbook”, p 10,

https://www.controlglobal.com/assets/knowledge_centers/abb/assets/1705/Oil-and-gas-production-handbook-ed3x0-web.pdf

[4] Utkarsh Bhardwaj, AP Teixeira, and Carlos Guedes Soares, “Review of FPSO Accident and Incident Data”, 2017, https://www.researchgate.net/publication/317074849_Analysis_of_FPSO_accident_and_incident_data

doi 10.1201/9781315157368-88

[5] Ibid

[6] “The Contango Conundrum”, Marsh & McLennan Insights, September 2015, iverwyman.com/content/dam/marsh/Documents/PDF/UK-en/The-Contango-Conundrum-2015.pdf

[7] Ibid

 

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *