Oil punt makes big bucks but coastlines at risk

Tom Bergin Reuters 1 May 09;

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. [ID:nLS549105]

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 Shell said they also benefited from arbitraging the contango, while ship brokers said trading groups such as Swiss-based Gunvor and U.S.-based Koch Industries [KCHIN.UL] also participated. [ID:nLS836370]

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. [ID:nLM299333]

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. [ID:nLH256178]

"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 click on [ID:nLT37985] ANALYSIS-Floating oil lake likely to curb future oil prices [ID: nLU208217] ($1=.6739 Pound) (Additional reporting by Jonathan Saul; editing by Simon Jessop)