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Reed Smith LLP
14:00 - 14:30
Wednesday, 18 September 2019
T1.5 Is past practice best practice? boil-off and contractual compensation regimes
Theme / field Technical Midstream Shipping
Is past practice best practice? boil-off and contractual compensation regimes
Could your approach to LNG boil-off rates (“BOR”) and their contractual compensation regimes be seriously damaging your wealth?
LNG cargo loss compensation regimes rarely reflect the realities from either technical or commercial perspectives. This is true for both trading and charterparty agreements.
The reason may be that the contractual parties value simplicity above accuracy. This is undoubtedly the case for trading agreements and periods on demurrage, where the calculation of loss presents a Buyer with a number of challenges in terms of remoteness and mitigation; especially in case of load port delays under a FOB contract. However, in the case of time charterparties, accuracy often seems to be sacrificed needlessly, or at least without any proportional advantage in simplicity.
In the pursuit of apparent simplicity, parity of cost may or may not be achieved between the parties. It may be time to (re)consider which party stands to benefit most when deviating from the path of technical accuracy.
Of course, we must also recognise the technical challenge of assessing boil-off for these commercial purposes. Some margin of error is unavoidable in the circumstances, particularly given the level of instrumentation fitted on board LNG carriers and the operational demands placed upon them.
There seems to be a wide spread reluctance to rely upon documented warranties and values (by way of cross-reference) in certain circumstances, but not others and especially not BOR values. Even where the provenance of such facts can be no more in doubt than others that are routinely relied upon - such as speed and consumption data.
It is also noted that ship-owners are reluctant to provide warranties of performance beyond what limited warranties that it they might extract from a ship-yard or contractor, particularly in circumstances where reliquefaction plants are retro-fitted. It appears there is some doubt about exactly what is included in the warranted BOR and what is excluded – especially when one looks at the calculation methods stated.
The paper explores the distinctions between the compensation allowed and the actual loss that might be suffered. The audience will be invited to revisit their own approach to this subject, or to “phone a friend”!