#ShipRecycling Market - Week 38 - FOURTH QUARTER DAWN! Despite the recent downturns in sub-continent markets which… https://t.co/sEJ0UluXua

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Test your #ShipRecycling Knowledge - Quiz #1 Click here for the answer: https://t.co/l9zx3dm5EI #maritime https://t.co/bOeufeCJou

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An exclusive interview of Dr. Anil Sharma, Founder & CEO of GMS, with @gulf_intel https://t.co/XBjoe0b9vb

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With great pride & fulfillment, we announce the successful completion of 200th free safety awareness sessions acros… https://t.co/Rukpxq083j

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[Tank]ing contracts: Doctrine of ‘Good faith’ versus ‘WOG’ and other exclusionary terms

2021 has been a very important year for the Shipping industry with the issue of carbon emissions, radical changes in the supply chain logistics, and with countries and corporations coming together to address larger issues at hand. What is fascinating to a novice to the industry are carriers particularly designed for the carriage of oil cargoes… e.g. Motor Tankers, Oil carriers, crude carriers, FPSO/FSO’s, etc., (will be referred to as Tankers collectively). If you have gasped at the size of the recent Ever Given vessel that halted world traffic at the Suez Canal, or the oil rigs in the movie Deepwater Horizon, try googling ULCC’s and VLCC’s. The Oil & Gas industry obscures as much as it reveals whether it is with respect to allegations of oil spills, carriage of cargo from sanctioned countries, or the general manipulation of market forces determining prices of the commodity.

It is no secret that the ship-recycling industry has always been under scrutiny, with ‘end of life’ Tankers being sold for safe-recycling to the Indian sub-continent to the West’s distress. This article aims to address nuanced issues arising at the time of sale of Tankers for demolition and representations and warranties (express/implied) made at the time by sellers and various commercial considerations.

Method/mode of sale: Tankers, often due to their inability to be worthy of carriage for another journey, or (increasingly of late) to battle the uncertainties and protect oneself against the uncertainties of the freight market, are circulated for sale by owners through brokers/broking houses for sale. Negotiations ensue between direct buyers/intermediary buyers and sellers: a crucial stage where contracts are concluded in course of the day, two at most due to volatile markets, competitive bidders, etc. If the terms and conditions for sale asserted by the Sellers cannot be agreed upon at the earliest, the negotiations die down and the deal withers away elusively, making prompt cost–benefit analysis of the deal a determining factor in the prices put in for the bids. This is a time sensitive and extremely competitive process in a niche and concentrated market.

Particularly, sellers are always on an inexorable march to be unrelenting in the incorporation of exclusion terms that only favor one side, and have repercussions on fair dealing in trade. One of the key themes of this article converges on the declaration of the quantity of ‘Sludges/Slops’ present onboard the Tankers. Specific and technical definitions can be found in The International Convention for the Prevention of Pollution from Ships (MARPOL), but below is a paraphrased version:

A Tanker (specifically designed to carry cargoes of Oil & Gas of complex compositions) over years (also depending on the number of years it has been chartered/commissioned as a carrier for crude/oil) accumulates residues/sludge/slops in the Tanks used for storage of cargo.

  • Slop - This mostly includes oily water that can be pumped out and cleaning is relatively quick and convenient.
  • Sludge – Depending on the density of cargoes the carrier has carried onboard, the semi-solid residues requiring precise cleaning and Hot wash;
  • Residue – Residues are mostly solid in form and require manual labor for removal, which is a time- and resource-consuming process (mostly found in older tankers that have been out of commission for a long time).

Tankers, even when markets showcase a conservative trend, fetch a decent recycling price. Sellers usually give an estimate of sludge and slops present onboard the vessel in MT/Cbm that determines the bids to be received from intermediary/end buyers who shall further sell the vessel for recycling or purchase the vessel themselves. These bids are not only placed keeping profit margins in mind, but also delivering clean and safe Tankers following best recycling practices

The Tanker needs to be thoroughly cleaned and freed of sludges and residues, gas free certificates must be provided to the ultimate recycler as a pre-condition of sale, and an inspection by safety officers and a state environment agency is required before any demolition permits are granted.

However, the position of parties in negotiations is often adversarial and parties are entitled to pursue their own best interests, as long as they avoid misrepresentations. This duty to negotiate ‘in good faith’ is often cited as being unworkable in practice as it is believed to be inherently inconsistent with the position of negotiating parties. The declaration of the quantity of sludge and slops onboard the vessel is directly proportional to the price the intermediary/end buyer will offer for the purchase of the vessel--cleaning costs of the residual sludge and slops being factored into the offered price to ensure that vessel is free of any potential hazard when finally delivered to compliant yards employing safe recycling practices.

 

Without Guarantee: Legal Implications

At the time of these contract negotiations, the estimate of sludge and slops stipulated in the MOA is preceded with the qualified condition that the same is ‘… given in good faith but without guarantee.’ The requirement of negotiating in good faith seeks to promote fair and open dealing to prevent unfair surprises and absence of real choice [1].T[2]? Yet, the inclusion of the word ‘without guarantee’ in itself should be enough to raise serious questions about the good faith aspect of negotiations, especially when bargaining positions of parties differ by and large.

Now, this is not to suggest that it is always so only in case of unscrupulous sellers who want to limit their liability knowingly, but also in cases of unsuspecting sellers who may want to cash in and hedge their position when freight markets are underperforming without making a  good faith AND reasonable attempt to determine the sludge quantities, or, make inadequate attempts that do not qualify as reasonable to determine the quantities, therefore jeopardizing accuracies.

Under English Law, the position of the meaning of ‘good faith’ is evolving jurisprudence, the effect of caveating any representation with the term ‘without guarantee’ is seemingly resolute; Dickensian descriptions would be [Pickwick Papers]- “…what can’t be cured, must be endured.”

For example, the leading Judgment on the effect that this disclaimer would have in a maritime contract (Lenodoudis Evangelos II) The Lipa[3], held that a standard deviation of 5%-10% shall be tolerated in case of short loading/cargo disputes, etc. as long as there are no major deviations from the material terms of the contract. Interestingly, it was also observed that when parties are involved in similar trade/businesses, the question of either party’s ‘reliance’ on representations hardly arises till the time a dispute surfaces.

In an alternate observation by an Arbitral Tribunal, the treatment of qualifying reservations on representations made in correspondence between parties is rather stringent, i.e. absent bad faith any such qualified notice preceded with Without Guarantee/ Without Prejudice is accepted by the party at their own peril and an unqualified declaration/Notice should be sought.[4]

What is abundantly clear is that on the basis of the above, when estimates are preceded with WOG, the Burden of proof to be discharged is the proof of bad faith on part of the party making representations. A buyer having an equal bargaining power may be able to factor in the cleaning costs for sludge and slops already in 10%-15% excess of declared quantities as a result of the qualified reservation of WOG, but serious issues arise when quantities are found to exceed any budgeted calculations and significant additional costs have to be incurred for the cleaning.
This begets an important question on which there seem to be none to limited answers in legal textbooks:

Can exclusion clauses like Without Guarantee extend to deviations in excess of tolerable/acceptable industry standards, and yet not qualify as misrepresentations on the seller’s part? Recent examples of Tanker sales to intermediary/end buyers are proving detrimental to trade practices where on ‘as is where is’ sale of vessels, the quantities observed onboard are found to be 100 % - 300% in excess of declared quantities.

The Tankers are sometimes in the Seller’s ownership for more than 10 years with a specialized crew, Masters, and team of engineers employed onboard to ensure smooth functioning and are specifically trained in management and cleaning of these vessels. In all probability, the seller’s crew may even be attempting to obtain this estimate in good faith but with the quantum that is at the time observed and inspected on sale, it comes across as manifest misdeclaration, given the resources that were at the sellers disposal to arrive at an accurate quantity. The parties find themselves in a closed loop, and sellers in these cases are often quick to resort to asserting their ‘Without Guarantee’ exclusion that they have insisted upon at the time of contract negotiation, raising the question of whether the estimates were accurate, to begin with.

In most cases, buyers may be forced to salvage their losses elsewhere with no hope of recovery. Most of the brokers/broking houses will sit on the fence and not provide either parties with any inputs in such a situation. The reason for this sometimes can range from Brokers failure to communicate the parties requirement and insistence clearly, their own lack of understanding of the repercussions aforesaid misdeclarations have on the parties commercial position, to the mere nonchalance that their role is confined to the ultimate delivery of goods from seller to the buyer and nothing beyond.

 

‘Contra Proferentem’: Solving the ambiguity of exclusion clauses

 

While Courts have insisted on parties’ freedom to contract and not interfere to solve and assist with minor inconveniences caused to parties by virtue of their own conduct [agreeing to exclusion terms in a contract], the liberties provided as a result of freedom to contract cannot leave one party with losses that they cannot breakeven on a deal while affording the other unqualified freedom to retreat into patterns where they continue to indulge in practices deterrent to fair trade. Legally, the principle of Contra Proferentem means:

if there is any doubt about the meaning or scope of an exclusion clause, the ambiguity should be resolved against the party seeking to rely on the exclusion clause on the basis that parties are not lightly to be taken to have intended to cut down the remedies the law provides for breach of contract, unless the contract contains clear words to that effect. In the case of exclusion clauses this means the narrower interpretation should be applied.”

One might argue that even with the best team of experts and reasonable efforts, only an estimate of sludge and slops onboard can be provided due to the inherent lack of scientific formula to determine the same, but with experts specifically dealing with the cleaning of Oil carriers to ensure safety, a clear and definite estimate (+/- 10%) is one phone call away. An alternate argument may be to suggest that rule of contra proferentem applies when there is an ambiguity/doubt about the meaning or scope of a term. We have already examined the flexibility offered by the term ‘Without Guarantee’ and implications thereof, but the reliance on the same cannot be sought upon by the Sellers in case the quantities so under-declared that had it not been for the misrepresentation, the Tanker would have been sold for a much lower price.

In light thereof, the interpretation of the meaning of Without Guarantee remains ambiguous and unclear vis-à-vis its scope w.r.t misrepresentations. Even with legal fiction created by yardsticks per the above case-laws, it is pertinent that contra proferentem apply and be construed against the sellers so narrow interpretation is given, especially in cases where sellers attempt to wriggle out of their obligation to provide an estimate in good faith by incorporating exclusion terms.

 

Author


Ms. Prachi Shah

In-House Counsel,
GMS Dubai
Email: legal@gmsinc.net

 


[1] BEATSON J., BURROWS A., CARTWRIGHT J., ANSON’S LAW of CONTRACT 65, OXFORD UNIVERSITY PRESS 2010

[2] [2001] UKHL 52, [2002] 1 AC 481, at 17

[3] [1997] 1 Lloyd’s Rep. 404

[4] IMT Shipping and Chartering GmbH v. Changsung Shipping Company Limited: THE ZENOVIA [2009] EWHC 739 (Comm)

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Awakening call to make regulations rationale for Sustainable Ship Recycling

Environmental issues are a growing concern for the maritime industry. Every industry should care about the sustainability of the environment and act responsibly, but stakeholders are often overwhelmed with multiple regulations created by various authorities worldwide. 

The IMO’s Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships (HKC) adopted in 2009 is the most widely accepted regulation impacting sustainable ship recycling. But at present, though ratified by a few nations, the HKC has not officially entered into force yet.

The European Union brought the EU Waste Shipment Regulation (EU WSR) into force in 2006. As per the EU WSR, the export of hazardous waste from EU member states to any developing (Non-OECD) country is forbidden. It allows the export of hazardous waste(s) from the EU to OECD countries, subject to prior agreement between the exporting and importing countries. The EU tries to enforce the EU WSR on end-of-life ships by classifying the end-of-life vessel itself as hazardous waste. The EU also developed another regulation in 2013, the EU Ship Recycling Regulation (EU SRR), which came into force in 2018.

Both EU WSR and EU SRR  are more “stringent” (for non-EU recyclers) than the HKC. As a result, ship owners are often accused of illegality when selling their vessels even to HKC compliant yards in the Indian sub-continent and Turkey. They are forced to take excessive and unnecessary actions that are economically disastrous and, at times, environmentally irresponsible. This results in a lose-lose situation for the owners, regulators, buyers, and even the environment. Consequently, well-intentioned regulations lead to the opposite consequence in reality. In the following paragraphs, we will study two such cases:

CASE 1: 

In May 2014, the owner of a 1987-built PCC decided to sell his vessel for recycling. It reached the end of its service life in the Mediterranean Sea, and the owner considered both Turkish and Indian ISO-certified Green yards. As is generally the case, there was a considerable price gap of around USD 200/Ton between the Turkish and Indian markets. The sellers completed the last cargo voyage from Antwerp, Belgium, to a West African port. As the vessel was not EU-flagged, EU WSR or EU SRR should not have applied—even if it was departing from an EU port / EU waters on a final cargo run. But, since the decision to recycle the vessel was made while she was in an EU port, the ship was arrested at Antwerp, and authorities forced the owner to complete the required paperwork to export hazardous materials. This expensive and time-consuming process cost the owner, and on top of that, they had to pay compensation to the Indian yard to cancel the sale. In the end, they had to resell the vessel to a Turkish yard at a significant price reduction. Was this particular yard truly better than the Indian yard? Did the delays in the recycling of the vessel benefit society and the environment?

CASE 2: 

In Oct 2020, a 1989-built small PCC came close to the end of its service. The sellers decided to recycle the vessel in Turkey as their last discharge port was Autoport, Turkey. When the ship sailed out from Vigo, Spain, to transport the cargo to Autoport, the Belgian authorities intervened and declared that the vessel had breached EU WSR. They further stated that the decision to recycle the ship was made while she was in an EU port. As a result, the owner had to bring the vessel back to Spain, complete the notification formalities, and pay high compensation to the Turkish yard for canceling the deal. Apart from that, the notification process took the owners more than seven months to complete because of discrepancies in some of the information provided to the authorities. The owner thereby had to resell the vessel to an EU-listed Turkish yard with a massive reduction in the price. For the seven months, the sellers waited for the paperwork to clear, the ship IDLED. What are the economic and environmental costs of idling a vessel for SEVEN months? Is the EU-approved yard TRULY better than an HKC certified yard? Professionals in the field believe that a well audited HKC yard is BETTER than an EU-approved yard in Europe that does not have to go through strict audits. If this is the case, to whom is the EU SRR benefitting? The so-called guardians of the environment and the regulators who blindly follow them should be ashamed of a monster they have created that helps no one and harms the environment and workers they seem to be protecting.

The Good, The Bad, and the Ugly (HKC, WSR, SRR)

Without evading our responsibility to protect the environment, we should reconsider the grey areas in the prescribed regulations. To make business more efficient and uniform worldwide, the IMO HKC should be treated as the precise regulation for ship recycling. The implications of both EU WSR and SRR are punitive and designed to discourage owners from going to HKC compliant – the good – yards. In other words, while HKC has been a big step towards sustainable ship recycling, the EU regulation has slowed the adoption of sustainable ship recycling. This concern should be dealt with with the utmost urgency by all stakeholders. More importantly, we ask owners, advisors, and regulators not to bow to stupidity and fear headline risks when true courage is needed.

 

Author


Mr. Amit Malhotra

Senior Trader,
GMS Japan
Email: snp@gmsinc.net

 

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29th June 2021: The GMS Group, the world’s largest cash buyer of ships, rigs and offshore assets for recycling and a leader in the maritime industry, is excited to announce the appointment of Mr. Nitin Mehta as its new Chief Financial and Strategy Officer. Nitin brings with him vast experience in the financial and maritime sector, most recently as Chief Executive of Tomini Group. In his new role, he will be responsible for all areas of the diversified group’s operations, including recycling and shipping. He will lead the existing team of talented professionals at GMS into a new era of opportunity and growth, with a mission to take the company to the next level and add value to all business areas.


ABOUT GMS

Founded in the USA in 1992, GMS is the world's largest Buyer of ships and offshore assets. The firm's mission is to create value in safely disposing aging assets while improving health, safety, and environmental standards across the various recycling destinations and to generate awareness about the significance of recycling in the maritime world.

For further information or inquiries, please feel free to reach out to us at bd@gmsinc.net

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EU Ship Recycling Regulation: An  Inhibitor or Catalyst for Greening Ship Recycling Yards?

Within the last two weeks, the ongoing debate on the European Union Ship Recycling Regulation and a bilateral agreement between the European Union (EU) and India to solve the Basel Ban Amendment conundrum is re-surfacing once again, as the Danish Environmental agency is reportedly investigating Maersk’s recycling standards in India. Moreover, in its recent webinar, the European Community Shipowners Associations (ECSA) strongly defended the position that the EU must recognize the developments made by the Indian ship recycling yards and include them in the EU-list of approved yards, in order to boost further development of yards in India. Maersk also stated that some of the Indian ship recycling yards that applied for inclusion on the EU-List are even better than the yards that are already approved by the EU. 

Even though the EU has audited a few yards in India, they did not approve them for two external factors, which are beyond the control of yard owners. For example, modern hospitals (including a Trauma centre) and downstream waste management facility that is equivalent to EU Standards. It is to be noted that the Gujarat Maritime Board has already approved a USD 1 million grant for developing a trauma center in Alang, along with advanced healthcare infrastructure for yard workers. The Beaching method itself is the indirect criterion for not accepting any yards in India, even though the EU never pointed it clearly out in its regulation or its audit reports.
 
In order to deduce whether the beaching method itself be the indirect reason to neglect Indian yards, a technical assessment of the recycling process in India must be conducted, including the cost and quality of recycling at an EU-approved ship recycling facilities vs. at an Indian recycling yard.  The most common response echoed in current times about the beaching method of ship recycling is that it is the most dangerous recycling method to the environment and yard workers. Moreover, low labour wages and poor environmental compliance costs are the reasons why South Asian yards offer higher prices on end-of-life ships and more than 90% of end-of-life vessels thus end up in these countries. Accordingly, we present the following assessment!

Quality Vs. Cost:

A typical 10,000 Light Displacement Tonnage (LDT) container vessel will have about 5% weight loss due to corrosion, loss during recycling, and wear and tear over the operational lifecycle of the vessel. In addition, nearly 0.5% non-ferrous, 4% machineries, and 0.5% reusables (such as furniture and fixtures) are recovered during the recycling process. The remaining 90% is ferrous. In the case of South Asian countries, nearly 75% of the remaining 90% of ferrous gets routed to re-rolling mills as steel plates, including direct use of steel plates to make flanges, girders, and pipes. 15% of the remaining 90% heads for melting, which includes irregular size scrap. In the case of Turkey and other EU recycling yards, most of the remaining 90% ferrous heads directly for melting and only a fraction of it is sent to the re-rolling mills. 

Comparison of Labour and Hazardous Waste(s) Management Costs for EU Approved recycling yards (for example, in Turkey) and India when recycling a 10,000 LDT Container vessel is as follows:

The daily wages paid to laborers are prescribed by the respective recycling nation, considering its domestic socio-economic conditions. The prescribed wages in South Asian countries for unskilled labor are between US$ 4 to US$ 6 per day. In comparison, wages for unskilled Turkish laborers are about US$ 16 to US$ 17 per day. The difference of US$ 12 per day equates to US$ 36,000 per month (considering 100 workers per yard with paid leave). The recycling duration of such a vessel at a Turkish yard (which typically takes about 4 months to complete), adds up to US$ 144,000or an additional US$ 15 per LDT cost on wages when compared to sub-continent recycling countries. 

When evaluating the environmental cost, the removal and disposal of each ton of Asbestos is about US$ 800 in Turkey. In contrast, it costs a mere US$ 300 per ton in India, given that the Government of Gujarat owns the waste disposal facility. Presuming about 10 tons of Asbestos for a given vessel (higher value), it costs about US$ 8,000 for disposal in Turkey. Disposal of paint chips generated during the recycling costs about US$ 500 per ton in Turkey, whereas it is comparatively cheaper (US$ 200 per ton in India). 

In summary, it would be safe to presume about US$ 150,000 as environmental / waste management costs in Turkey for all types of wastes identified in an Inventory of hazardous materials developed as per the IMO’s Resolution MEPC.269(68) guidelines and adds an additional US$ 15 per LDT for hazardous waste management if recycled in Turkey as compared to India. 

It is to be noted that the higher cost of wages and hazardous waste management cannot be associated with a higher quality of work. For example, heavy metal contamination levels at the coast of Aliaga’s ship recycling zone exceed the prescribed limits and is considered heavily polluted (Source: Heavy metals contamination levels at the coast of Aliaga ship recycling zone, Marine Pollution Bulletin 64(4):8827 published in March 2012).  Including labor and hazardous waste management costs, Turkey should offer US$ 30 - US$ 35 per LDT less than the prices offered in India (or any South Asian recycling Country).However, the fact is that Turkey consistently offers US$ 90 to US$ 160 per LDT less than India (or any South Asian recycling Country) as the domestic value of steel generated from recycling is less when compared with South Asian countries. The EU-list of ship recycling yards even offers US$ 200 - US$ 300 less per LDT than the sub-continent. 

All of the above factors should serve as an eye-opener for those who believe that ship recycling yards in South Asia offer higher prices due to the implementation of poor/inferior recycling practices aimed at cost-cutting. The significant improvements undertaken by the South Asian ship recycling facilities within the last few years must be acknowledged and appreciated by the global maritime community, rather than criticized and ignored because of the use of beaching as a method for docking/grounding/landing ships for recycling. The contribution of the ship recycling industry towards sustainability is immense. It also helps to decarbonize the atmosphere in the wake of issues such as global warming, depletion of the ozone layer and climate change.

In conclusion, irresponsible recycling is possible in all methods of recycling. However, associating such practices only to a particular geographical region or a specific recycling method is a fallacy. The landing method practiced in Turkey is, in fact, no different from the beaching method practiced in South Asian countries. What should truly matter is how a ship is recycled safely and environmentally soundly after beaching or landing. A bilateral agreement between India and the EU should take place at the earliest and yards in India should be included in EU-list of approved ship recycling yards. In any event, even without EU-flagged vessels, South Asian yards will survive, but effective implementation of EUSRR becomes questionable. 

What do you think? Is EUSRR an inhibitor or catalyst for safe and environmentally ship recycling?

 

Author


Dr. Anand M. Hiremath

Head, Research & Development
Lead Coordinator, Sustainable Ship and Offshore Recycling Program (SSORP), 
Global Marketing Systems DMCC
DUBAI, United Arab Emirates


ahiremath@gmsinc.ae  
green@gmsinc.net

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Offshore Assets – The “Terra Incognita” Of Ship Recycling

Recycling has been widely described as “the 4th Pillar of the Shipping Industry”, behind the Newbuilding, Chartering, S&P sectors. The majority of shipping professionals have indeed heard or were involved at some point in time with an Asset that had to be recycled, was about to be recycled, or simply liquidate an Asset in a constantly active market and always guarantees the minimum residual value of their Vessel. The tricky part is though, that despite the fact that everyone has heard of the recycling of normal Bulkers/ tankers/ containers when it comes to offshore Assets (mainly jackups, floaters - rigs in general, offshore support Vessels), the understanding of the Industry is not to the same extent as on the normal commercial Vessels.

The reason behind the fundamental lack of experience in this sector can be justified. 

Such Units are not considered as part of the normal shipping industry but mainly constitute part of the Oil & Gas – Energy sector, as they have been used on exploration, drilling and support, not in the actual transportation of the commodities.

Owners of these Assets have not been considering the residual value of their Units since the spread between the  NB prices, and the recycling rates is the biggest that anyone can find across the shipping sector. Just for comparison purposes, while the price of a VLCC tanker in the NB market would be in the 70-80mil range, her residual value would fluctuate in the 16-20mil, indicating approximately a 25% return when selling for recycling. On the other hand, when an NB price of a Jackup Rig would say in the $250mil, her recycling value will marginally come to $3mil (on average), which indicates a 1-1.5% return on the investment. Commercially rig Owners were never dependent on the recycling market for cashing out on their Units.

Regarding the charter Hire for the Offshore Units, one can observe that “when it rains, it pours”. Retaking the JUR as an example, the Units, depending on the region and specs, when on charter - can easily earn anywhere from $50,000- 150,000 per day, exceeding the typical historical average earnings of commercial Vessels. In times of turmoil of the Oil Industry, when oil prices fell to the $25-30/bbl, the decision was clear for Owners to lay up their Units and wait for the next upside- instead of immediately sending them for scrap – who would normally get rid of a cash cow, mainly if she can be laid up cheaply and have proper maintenance at logical rates to avoid huge reactivation bills?

On the 2 points above, we have taken only the example of the JURs. When looking into floaters, such as semi-submersible rigs, or even drillships, the NB prices as well as the daily earning, are even more significant.

Furthermore, let’s not forget the Ownership of these Units. Mainly rig Owners tend to be either state-owned companies or stocklisted companies – eitherway  firms that can have easy access to substantial financing lines to perform their operations and stockholders that need to be involved in the process. Owners described above have always been conscious and hesitant to sell their Units for recycling, especially in the subcontinent, in view of the lack of a necessary framework & regulations governing the recycling activity. Owners had to wait for the IMO guidelines of the Hong Kong Convention to be exercised and implemented, with India leading the charge and Bangladesh slowly following, for considering the recycling of their Assets as a viable solution.

Additionally, we can not avoid the issue of the logistical nightmare of transporting the Assets. For example, the majority of Drilling Rigs, since operating in major oil fields all around the globe, are often located in the middle of the oil fields, or in layby berths/ anchorages in jurisdictions and locations far away from the actual recycling destinations. Taking into account the weather restrictions on transporting the Units (US hurricane season, COGH winter season, monsoon season in the subcontinent), the principal dimensions (leg protrusion on JUR/ thrusters in Semi-sub Rigs, increased beam, heavy drafts, reduced stability), the means of transportation (wet or dry tow) it is evident that transporting these Units was never a ‘‘stroll in the park” and not compared to normal towing of a ship shaped Unit. It certainly requires tremendous logistical preparation and increased cost for bringing such Units to the subcontinent destinations. Adding to the above, the low LDT of such Units (f.e. JUR has on average 6,000-10,000 LDT) can make the exercise futile, and the transportation cost may overcome the residual value of the Asset.

Finally, the values of the Drilling rigs in terms of recycling are heavily dependent on the extra equipment that remains onboard at the time of the recycling, which is included in the recycling sale. While price fluctuations in normal Vessels could be in the $10-20/lt for 2 similar size Vessels, 2 rigs are most probably never the same, and one can observe $40-50/lt differences in the recycling rates for 2 similar rigs. The main reason behind this is the extra equipment, especially on the drilling side. Riser pipes, BOP, cementing Units, mud pumps, raw water towers, thrusters are equipment that can considerably increase the value of the Asset if left onboard. Rig majors though, due to the value of these items being great, tend to remove the equipment for further use in other Assets (or due to these being 3rd party hired items), literally stripping them and leaving only the basic shell to be recycled, which of course will not be demanding any premium over a normal, more accessible to cut, Bulk Carrier. Discounting the already reduced recycling price of a Rig was not leading Owners towards seriously considering the demo market.

 

BUT THE TIDE IS TURNING.

Over the past 6-7 years, we have observed that oil prices have not been anywhere near the excess $100/bbl levels, which would make the exploration and drilling highly lucrative for Owners. The two significant downturns of the Oil price, in 2015-2016 and just recently during COVID-19, have normalized the prices in a prolonged period of lean cows. Rig Owners have been forced to look more actively into the recycling market, especially for their unemployed laid-up Assets.

Locally, the tolls for improving the recycling industry are well known and adhered to. The Hong Kong Convention has strong roots in India, with more than 80 yards being certified by IACS classes as compliant to the relevant guidelines, for which the yards are vetted regularly for certification renewal. This is a token to an evolving industry that had come a long way since 2014 when only 4 yards had taken the initiative to invest in such a direction. With only a handful of yards not being certified yet, but working towards this direction, India has emerged as the primary location for recycling Offshore Assets (and preferred), with many Owners opting also for a 3rd Party monitoring reporting service during the recycling process. Following India, Bangladesh already has its first HKC approved yard, with several more yards working towards the certification. For those who have experienced the early stages of HKC implementation in the subcontinent, our hope is that we will see Bangladesh rapidly increasing in the number of HKC yards within 2021-2022 and Pakistan to join overall, providing more solutions to Offshore Rig Owners for recycling their Assets.

Closing this explanatory article, I need to mention that what many believe to be a super cycle for commodities has affected the residual values. We are currently experiencing the most robust recycling market of the past 5-6 years, with prices well above $500/lt for normal commercial Vessels and the mid- high $400s for Offshore Assets- Rigs. In such an environment, the ideal conditions are there for Rig Owners to get the best residual value in many years for their Assets.

It should be pointed out that at the time of this article being written, there are more than 20 Offshore Rigs in the recycling market, either being marketed or already sold to Cash Buyers, which is a historical high for the Offshore Recycling Industry and a sign of things to come.

Everyone is looking forward to an era where Offshore Assets recycling will no longer be a “terra incognita” but rather a “Terra Nova”.

 

Author


Mr. Faidon Panagiotopoulos

Senior Trader,
GMS Dubai

snp@gmsinc.net

 

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