This is the concluding segment of a two-part article — published online by the National Maritime Foundation (NMF) on successive days — which seeks to analyse the manner in which the intersection of two extraordinary events, namely, the COVID-19 pandemic and the oil-price war between Saudi Arabia and Russia, produced a sequence of outcomes that significantly highlighted India’s crude-oil vulnerability and the mitigating measures that the country adopted, with particular regard to its resort to ‘floating storage’.

Part 1 of this article dwelt (inter alia) upon the disadvantages of using regular tankers for offshore storage, instead of purpose-built floating structures such as ‘Floating Production, Storage, and Offloading’ (FPSO) vessels.  It is reiterated that the option of ‘floating storage’ adopted by India needs to be viewed against the backdrop of Strategic Petroleum Reserves (SPR) per se.  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]

India’s actions took place against the backdrop of the COVID-19 pandemic (which is, at the time of writing this article, still ongoing).  The initial months of the pandemic witnessed sluggish demand in large oil-importing economies such as those of China and India, with many countries, including these two, having imposed ‘lockdowns’ of varying durations and intensity, at a pan-national level.   This ignited what we might call a ‘crisis’ phase in terms of floating storage.  In this initial phase —beginning in February of the year 2020 and lasting until early-March of that year — contracted shipments of crude-oil could not reach their destinations because of force majeure (the non-performance or non-completion of an obligation or contract due to unforeseeable circumstances, without any liability to the party that invokes it).  Issues of liability notwithstanding, several shipments of crude oil were left stranded aboard tankers, even as charterers frantically searched for alternative buyers.  On the other hand, the second phase — the ‘boom’ phase — saw the demand for oil pick up as oil-importing countries sought to purchase large volumes of crude oil, which was being sold at historically low prices in the aftermath of the destructive price war waged between Saudi Arabia and Russia, in early March 2020.  The ensuing demand for cheap oil led to one of the greatest storage problems of recent times.

Although force majeure has been invoked within the commodities trade as a consequence of the outbreak of armed conflict, the occurrence of natural disasters, and other debilitating economic circumstances, its invocation because of a pandemic was novel.  Energy companies were thrown into a tizzy by unsold cargoes and mounting inventories.  Initially, these companies rejected and opposed the legal explanations offered by China’s National Oil Companies (NOCs) such as the China National Offshore Oil Corporation (CNOOC) and PetroChina.  Several, if not most suppliers felt that an economic slowdown and a milder-than-usual winter were the real reasons for China’s refusal to take possession of the oil-cargoes.[2]  However, the closure of port terminals and resistance by crew members on board the stranded ships compelled suppliers to come to terms with this extraordinary situation and explore alternative markets in Asia.  Therefore, uncertainty of demand following the outbreak of the COVID-19 in China, and the consequent search for alternative buyers were the initial triggers – in February 2020 – for the decision to use ships that were already laden with unsold energy-supplies as floating storage units.

On 06 March 2020, negotiations, between the Organisation of Petroleum Exporting Countries (OPEC) — led by Saudi Arabia — and Russia, to limit crude-oil production failed.  This set off a chain of events that eventually led to the greatest decline of global crude-oil prices in history.  Pre-empting Russian moves to capture additional market share, Saudi Arabia retaliated the next day by announcing massive discounts on its ‘Arab Light’ and ‘Arab Medium’ grades of crude oil, specifically targeting European, American, Chinese and Indian refiners, who were thus far processing Russian oil.  Unsurprisingly, global demand for Saudi oil — priced at an amazing US$ 25 per barrel, a price last seen in 1998 — rose drastically.[3]

Responding to this demand, Saudi Arabia’s national shipping company, Bahri, chartered approximately 20-30 large tankers — mostly VLCCs — to transport this discounted oil to its buyers.  Other major oil producers, such as the United Arab Emirates (UAE), Nigeria, Russia and Iraq, immediately joined the fray to transport cheap oil on large ships.  As a consequence, the daily charter rates of available VLCCs on the popular West-Asia-to-China route skyrocketed from less than US$ 25,000 per day in the beginning of February to an average US$ 243,000 per day in early March.[4]  Concurrently, higher charter prices compelled several refiners — such as those from Malaysia and India — to charter smaller ‘Suezmax’ and ‘Aframax’ tankers, which hold one million (MMbbl) and 650,000 barrels (bbl) of crude oil, respectively.[5]

Soon, all this excess output caused the average global price of per barrel to plunge from US$ 32 in March to US$ 18.38 per barrel in April 2020.[6]  In the US, the average price of the West Texas Intermediate (WTI) benchmark for the month of May 2020 fell to a historic low of US$ -37.63 per barrel.[7]  This effectively meant that a US supplier would have to pay a buyer to evacuate the oil!  These low prices were not only hurting American producers (as Russia had originally intended) but all major producers, who saw their revenues fall to a trickle, and feared that a sustained price war, coupled with low demand due to the COVID-19 pandemic, would cripple their economies.  Consequently, on 12 April 2020, in a deal brokered by the USA, OPEC members and Russia agreed to an unprecedented production-cut.  According to the terms of the deal, the OPEC+ nations (OPEC + Russia) would cumulatively cut production by 9.7 mb/d in May and June 2020; 7.7 mb/d from July-December 2020; and, 5.8 mb/d January 2021 to April 2022.[8]

Despite these massive production cuts, approximately 80 large tankers (55 VLCCs and 24 Suezmax ones) were speculated to remain as floating storage into June 2020.[9]  At its peak, an estimated 150-200 MMbbl were stored in crude oil tankers at sea.  At the same time, approximately 70 MMbbl of refined petroleum products — aviation turbine fuel (ATF), gasoline, diesel, lubricants, etc., — were in storage in ‘product tankers’, with most such vessels remaining anchored near oil trading hubs in the USA, Singapore, and West Asia.


Not a Novel Phenomenon

Since the ‘Demand Shock’ of 2008-09, when the price of per barrel of crude oil skyrocketed to an all-time historic high of US$ 148, the world has experienced multiple cycles of a supply glut stemming from the competition between major oil-producing countries — including the US — to gain a larger share of the global crude oil demand, mainly from Asia’s emerging economies.[10]  The ongoing glut is certainly not the first.  However, what distinguishes this episode from its predecessors is the sheer scale at which crude oil is sitting in tankers at sea.  In 2014-2016, an estimated 120 MMbbl was held in floating storage.  Similarly, in February 2009, approximately 100 MMbbl were stored at sea soon after average global oil prices touched US$ 148 per barrel.[11]  Demand, however, did not drop as abysmally as 2020.[12]

In the present context, the early scramble for tankers shaped an impression that – despite force majeure declarations – crude oil was moving to various centres of demand; but, as consumption within the large Asian economies dropped significantly, more tankers became available to store the record surplus of crude oil that was still being produced.  Net importers like India, China, Japan, South Korea etc. understood the financial implications of this cheap oil and promptly set off the scramble for floating storage with their large purchases.


Meanwhile in India…

By the first week of February 2020, the global average price of crude oil had fallen to US$ 55 per barrel from US$ 68 per barrel in the previous month after demand from China collapsed.  This meant that the futures market was in ‘contango’.  As had been explained in Part-1, in a ‘futures market’ involving crude-oil, the trader in oil futures predicts the price of the crude oil at some future date and pays that price at the present time.  Now, until the agreed date of delivery date arrives, the buyer is not physically in possession of the oil. Obviously, until this point in time, the buyer so does not have to worry about storing it and he then sells it, thereby making a profit without ever actually taking physical delivery of the oil.  But in the instant case, the market had unexpectedly weakened, to the point where the market price for the was lower on the delivery-date than had been anticipated.  If the trader were to sell the oil at this lower price, he would suffer a heavy loss.  So, the oil-traders now have to take physical delivery of the oil and need to store their purchases somewhere until they can obtain a better price.  Floating storage is now opted-for. So, VLCCs suddenly find themselves in hot demand and the cost of cratering a VLCC skyrockets.  In India, national refiners like Hindustan Petroleum Corporation Limited (HPCL) and Bharat Petroleum Corporation Limited (BPCL) opted to transfer cheap crude oil purchases, mostly on smaller vessels due to the high charter rates of VLCCs and the short distance between West Asia and India (which can be covered in less than a week).[13]  This brought the oil to Indian ports at rates cheaper than would have imposed had the oil come in VLCCs.  But what was to be done thereafter?  Where was the oil to be kept?  Clearly, every shore-storage option had to first be utilised and this proved inadequate, floating storage would need to be resorted-to.

Thus, India’s scurry to purchase cheap crude oil led to the saturation of more than 210 million barrels of onshore storage encompassing storage tanks at refineries, inter-state pipelines and inland depots by early-May 2020.  Further, the country’s Strategic Petroleum Reserves (SPR), with its present total capacity being 39.14 million barrels, was also filled by cheap oil purchased from Iraq, Saudi Arabia and the United Arab Emirates (UAE).[14]  On the other hand, with economic activity within the country being hamstrung by COVID-induced restrictions that had remained in place since 25 March 2020, domestic demand was low.  This demand meant that the oil that had been stored onshore could not be refined immediately, due to the narrow shelf-life of petroleum products.  Consequently, the twin conditions of saturated onshore storage and low domestic demand, compelled refiners to opt for the storage of as much as 50 million barrels of oil on tankers at sea.[15]  Even this desperate measure was insufficient and, finally, Indian refiners were compelled to declare force majeure on several contracted-purchases from Saudi Arabia, Iraq, UAE and Kuwait.[16]


A Practical Solution – but not Quite the Right One

Storage at sea is a ‘sponge’ to absorb excess oil when onshore storage has reached its capacity.  For the reasons that had been elaborated in Part-1 of this article, this form of storage must, if it as adopted at all, necessarily be a short-term measure.  This very ability to accommodate sudden gluts is also its shortcoming because over-production on such a large scale is not very common.  This gives rise to several criticisms regarding its inelasticity:

First, floating storage is an expensive way to store crude oil and petroleum products.  For instance, let us assume that a refiner purchased 2 million barrels of oil at US$ 20 per barrel, for a total price of US$ 40 million.  At its peak in April, the daily charter rate of a VLCC was US$ 250,000.  If the VLCC took a maximum of seven days to reach India’s west coast from Saudi Arabia, then the total value of the cargo would be US$ 41.75 million by the time it reached Indian shores (US$ 250,000 x 7 days).  If the refiner now maintained the vessel as ‘floating storage’ for a month, the total value of the commodity would shoot up by US$ 7.5 million.  Thus, at the time of eventual offloading of the cargo to a shore-based facility, the total value of the crude oil would now be US$ 47.50 million (US$ 40 million + [US$ 250,000 x 30 days]).  In addition, the importer would have to account for increased port-related charges, enhanced demurrage (a waiting fee paid to the ship-owner for delays in unloading), augmented insurance-costs of the raw crude, etc., in addition to the fixed costs involved in transporting the port to the refinery, and, the cost of the refining process, as also the transport of the refined product to centres of demand.  Thus, although the refiner might still turn out a profit, the high cost of floating storage significantly diminishes this margin.

Second, as explained at length in Part-1, although crude oil — under the right conditions — has a shelf life of approximately five years, it degrades if left undisturbed in a ship’s tank for a prolonged period.  Such a degradation will likely lead to the formation of a thick residue or ‘sludge’ at the bottom of the tank, which cannot be pumped out, as also the loss of naturally-occurring gases within the crude oil, such as methane and ethane.  In aggregate, this creates variations in the volumes purchased and those delivered, raising a host of potentially-damaging contractual complications and, insurance-based and legal claims.  Equally significantly, the quality of the crude oil gets altered.

Third, once again as explained in Part-1, oil tankers that are used as floating storage units are themselves susceptible to extensive damage by the cargoes they hold.  For instance, the hydrogen sulphide in crude oil, especially in ‘sour’ varieties of crude, corrodes the ship’s tanks, pipelines, pumps, and machinery, with which it comes into contact.  Further, repeated washing operations to clean any leftover sludge tends to damage the tanks themselves.   Ship owners are, therefore, very chary of chartering their ships for use as floating storage for extended durations.  In the case of a refusal by the owner to extend the charter of the ship as a floating storage unit, the owner of the cargo will have to risk a ship-to-ship transfer of the stored commodity at sea.  This is especially dangerous given the vulnerability of these oil-tankers to the risk of collision and pollution, especially during inclement weather.



The prolonged storage of crude oil on board tankers results in higher operating costs for the owner of the vessel, and the partial loss of cargo — along with future revenue — for the owner of the cargo.  Thus, unlike onshore crude oil and petroleum product terminals, or purpose-built offshore Floating Storage Units (FSUs) such as Floating Storage and Offloading (FSO) units, Floating Production, Storage and Offloading) vessels, or VLFS (Very Large Floating Structures), the short-term storage of crude oil on board tankers is a risk-prone activity for marine insurance as well as the environmental and safety regulations of the port state.

Fortunately, floating storage is likely to reduce significantly as we move through the opening months of 2021.[17]  Countries like India and China are now rapidly opening up their economies, which signals not only future demand but also the freeing-up of onshore storage.  However, production cuts agreed upon by the major oil producers are not commensurate with the fall in global demand[18] and “with a persistent oversupply expected to carry into 2021, the rise and fall of floating storage, looks set to keep making waves”.[19]

Analysts speculate about the motives behind high oil-production and continuing — albeit sluggish — demand from importing nations for a commodity that is already in surplus.[20]  The answer is simple: uncertainty.  Countries that are still under lockdown are eager to revive their economies and expect oil consumption to climb sharply once manufacturing kicks into high gear and travel restrictions are relaxed.  They fear that as the supply of crude oil becomes tighter due to production cuts, the price of oil will rise steeply, as it traditionally does during the winter months when Europe and North America consume higher volumes of energy in order to stay warm.

The re-opening of India’s economy coincides with the push for self-reliance within India’s manufacturing sector.  Coming a few weeks before a violent confrontation with Chinese troops in mid-June of 2020 along the country’s north-eastern border, Atmanirbhar Bharat or ‘Self-reliant India’ is a mission that prioritises financial support for Medium Small and Micro Enterprises (MSMEs), agriculture, technology and infrastructure projects among other sectors.  In the coming months, India hopes to continue to attract foreign investments through its ‘Make in India’ initiative and to reduce its dependence on Chinese imports in several key sub-sectors like agri-products.  Establishing secure energy-supplies is a pre-requisite to the success of this mission.  For instance, India is on the brink of achieving complete self-reliance in urea production.  Urea is a key ingredient in fertilisers and animal feed and is manufactured in plants that are use natural gas as a feedstock (raw material).[21]  Therefore, India’s aspiration to build an economy that is resilient to geopolitical upheavals is contingent upon the ready-availability of cheap energy in secure and versatile installations the near future.

The global floating storage phenomenon of 2020 and India’s role in it is a revelation that oil-storage in such volumes is not always a sign of desperation but could well be one of anticipation of large profits once international global prices stabilise.  However, it also points to the inadequacy of storage infrastructure within the world’s third-largest consumer of crude oil.



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



[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] Jessica Jaganathan and Chen Aizhu, “China’s biggest liquefied gas importer suspends some contracts as virus spreads,” Reuters, 06 February 2020 https://in.reuters.com/article/china-health-lng-cnooc/chinas-biggest-liquefied-gas-importer-suspends-some-contracts-as-virus-spreads-idINKBN2001HB

[3] Saudi Arabia had a spare production capacity, which could produce 2.6 mb/d.  On the other hand, Russia could only increase output by 200,000 bpd.  That said, Saudi Arabia requires a much higher breakeven price (estimated at US$ 82 per barrel) than does Russia (estimated at US$ 42 per barrel) to balance its budget.  Hence, although the Kingdom gained larger a larger market share, the Federation could better sustain itself during the ensuing months of low oil revenues.

See: “What’s Behind Saudi Arabia’s Oil Price War with Russia,”, Reuters, 15 March 2020. https://www.aljazeera.com/programmes/countingthecost/2020/03/saudi-arabia-oil-price-war-russia-200315114308947.html]

Also See:

“Saudis sell oil at $25 in market share grab from Russia: Reuters,” Al Jazeera, 14 March 2020

[4] Alex Longley, Jack Wittels and Firat Kayakiran, “Saudis’ Oil Tanker Spree Drives 700% Surge in Ships’ Earnings,” BloombergQuint, 13 March 2020 (updated 16 March 2020). https://www.bloombergquint.com/business/saudis-send-oil-tanker-rates-soaring-with-huge-booking-spree

[5]  Debjit Chakraborty and Sharon Cho, “Asian Oil Buyers Hiring Smaller Ships as Supertanker Rates Soar,” BloombergQuint, 16 March 2020. https://www.bloombergquint.com/business/asian-oil-buyers-hiring-smaller-ships-as-supertanker-rates-soar

[6] “Average monthly Brent crude oil price from July 2019 to July 2020 (in U.S. dollars per barrel),” Statista, https://www.statista.com/statistics/262861/uk-brent-crude-oil-monthly-price-development/

[7] Catherine Ngai, Olivia Raimonde, and Alex Longley, “Oil Plunges Below Zero for First Time in Unprecedented Wipeout,” Bloomberg, 20 April 2020. https://www.bloomberg.com/news/articles/2020-04-19/oil-drops-to-18-year-low-on-global-demand-crunch-storage-woes

[8] “The 10th (Extraordinary) OPEC and non-OPEC Ministerial Meeting concludes,” Organization of the Petroleum Exporting Countries, No. 6/2020, Press Release, 12 Apr 2020, https://www.opec.org/opec_web/en/press_room/5891.htm

[9] Ian Taylor, “Global: Drewry: Tanker Rates Will ‘Hit the Roof’ if Producers Outside OPEC+ Fail to Curb Output,” Bunkerspot, 16 April 2020. https://www.bunkerspot.com/global/50318-global-drewry-tanker-rates-will-hit-the-roof-if-producers-outside-opec-fail-to-curb-output#

[10] “How Much Petroleum does the United States Import and Export?,” US Energy Information Administration, https://www.eia.gov/tools/faqs/faq.php?id=727&t=6#:~:text=In%202019%2C%20the%20United%20States%20exported%20about%208.57%20MMb%2Fd,0.53%20MMb%2Fd%20in%202019.

[11] Jonathan Saul, “Oil Held in Storage at Sea Approaching 2009 Record as Glut Builds Up,” Reuters, 01 April 2020. https://www.reuters.com/article/global-oil-tankers/oil-held-in-storage-at-sea-approaching-2009-record-as-glut-builds-up-idUSL8N2BP4OA

[12] Fotios Katsoulas, Karim Fawaz and Krispen Atkinson, “Floating Storage: How much of the Oil Supply Surplus can be Stored by Tankers?”, IHS Markit, 17 April, 2020, https://ihsmarkit.com/research-analysis/floating-storage-how-much-oil-surplus-can-be-tanker-stored.html

[13] Debjit Chakraborty and Sharon Cho, “Asian Oil Buyers Hiring Smaller Ships as Supertanker Rates Soar,” BloombergQuint, 16 March 2020. https://www.bloombergquint.com/business/asian-oil-buyers-hiring-smaller-ships-as-supertanker-rates-soar

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

[15] “India devises a unique way to store cheap oil as storage tanks are now 100% full,” Live Mint, 05 May 2020. https://www.livemint.com/politics/policy/india-devises-a-unique-way-to-store-cheap-oil-as-storage-tanks-are-now-100-full-11588640854536.html

[16] “IOC Declares Force Majeure on Oil Purchases from Saudi, UAE, Iraq, Kuwait,” The Economic Times, 01 April 2020 https://economictimes.indiatimes.com/industry/energy/oil-gas/ioc-declares-force-majeure-on-oil-purchases-from-saudi-uae-iraq-kuwait/articleshow/74932510.cms?from=mdr

[17]  Max Tingyao Lin, “2021 Will See End of Floating Storage with Oil Recovery”, Trade Winds News, 14 January 2021, https://www.tradewindsnews.com/tankers/2021-will-see-end-of-floating-storage-with-oil-recovery-analyst-says/2-1-944288

[18] Yoshinobu Ono, Kazuhiro Kida, Hidemitsu Kibe and Shuji Nakayama, “Global crude inventories to max out in 2 months amid coronavirus,” Nikkei Asian Review, 27 April 2020. https://asia.nikkei.com/Spotlight/Datawatch/Global-crude-inventories-to-max-out-in-2-months-amid-coronavirus

[19] “2020: The rise and fall of Floating Storage”, Tanker Operator Magazine, 17 December 2020, https://www.tankeroperator.com/news/2020-the-rise-and-fall-of-floating-storage/12047.aspx

[20]  Jo Borrás, “Millions of Barrels of Oil Nobody Wants are Floating in The Ocean,” Clean Technica, 08 April 2020. https://cleantechnica.com/2020/04/08/millions-of-barrels-of-oil-nobody-wants-are-floating-in-the-ocean/#:~:text=Millions%20Of%20Barrels%20Of%20Oil%20Nobody%20Wants%20Are%20Floating%20In%20The%20Ocean,-April%208th%2C%202020&text=That’s%20where%20they%20are%20storing,gills%20(with%20oil).%E2%80%9D

[21] “Atmanirbhar Bharat’s first boost to be made in China; 5 new urea plants to make India self-reliant,” Financial Express, 13 July, 2020. https://www.financialexpress.com/economy/atmanirbhar-bharats-first-boost-to-be-made-in-china-5-new-urea-plants-to-make-india-self-reliant/2022079/



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