Michal Milowicz, Loss Controller, Litasco SA
In the global multi-stage transport of oil, not every drop loaded will be accounted for. Although the “Lost” volume is small, less than 1%, these losses take place hundreds of times every day, all around the world. That seemingly negligible part is not ignored by the industry. That is what “loss control” was created for.
Loss is a fact of life in the oil business – not all the oil that gets loaded onto a ship will reach its final destination. Our industry has been making use of protective margins for decades and loss of volume has been factored into our deals from the industry’s inception. Although in this article we will see decimals of one percent discussed (which might seem negligible), please keep in mind that 0.1% of one cargo delivery worth 70M$ represents 70,000$ in value. Trading house might execute hundreds of cargoes in a month and although cargo sizes and values will obviously differ, the overall financial value of even marginal loss reduction is undeniably significant.
There are many sources of losses: some come from the physical properties of cargo and natural processes happening at various cargo transportation stages or cargo handling. Some are caused by technical processes and finally there are losses that originate from human errors or plain greed.
What is a “loss”? The answer is more complicated than you might think. It can be just as straightforward as there being less cargo delivered than loaded… but that is where details start to pile up, and therein lies the devil. When loss occurs, the first question we need to ask ourselves is whether part of cargo has disappeared else unexpectedly, or whether it is all there in actuality, but has simply not been measured correctly. Maybe someone forgot to close one valve and cargo filled a section of pipeline that was not planned to be used (or even did not close the valve on purpose for nefarious purposes). Perhaps the oil was kept at higher temperatures for longer than expected, leading to excess evaporation. Or perhaps during measurements, someone made a mistake or whilst calculating forgot that specific correction needed to be added for the particular cargo or conditions. It may even be as simple as a typo being made while entering data or a copy-paste error. All of the above hypothetical scenarios can become “loss”, which need to be interrogated and reconciled against the value of the cargo, which is ultimately. established on a piece of paper.
Crude Oil & Petroleum products Quality & Quantity determination is a complicated, multi-stage process. Not all of that process is an exact science – indeed some of those stages are more skill than science. In other words, the process is not 100% accurate.
Historically, crude oil is traded in “oil barrels” as a unit of measurement. One barrel is 42 gallons. Those extra 2 gallons were added to compensate for expected evaporation and leaks, guaranteeing that the recipient would get the 40 gallons he paid for. 2 gallons represent 5% of volume.
In the 1980s, before double hull tanker ships became mandatory, the accepted loss on Crude Oil deliveries was 3-5%. A decade later it went down to 0.5%. A few years later, it dropped further to 0.3% where it remains as the average and acceptable loss level until this day.
Current sales contract clauses, insurance policies, tender documents and customs regulations will assume 0.5% or 0.3% as a standard reference point. There has been not much incentive to
investigate losses below those thresholds… until now. In today’s world of tightening margins and environmental awareness, those seemingly small losses are getting a second look.
We are living in the era of optimisation. Loss control is a relatively low-hanging fruit that can not only generate margins for companies but also impact ecological aspect of our business. It is a moment when “eco” & “econo” go hand in hand. “Lost” oil stands for a loss of money and/or de facto pollution.
The oil handling process comprises of many complicated stages, with each one being imperfect, thus prone to generating losses. Oil trading houses rely on service providers who are meant to ensure that every stage is performed as efficiently as possible. With many counterparties involved in the business, each having competing interests, it is hard to ensure this efficiency standard holds true at all times. It is only thanks to a deep technical understanding of each stage of oil transport that we can either identify the root cause of loss or improve the process itself and reduce the loss.
It is not possible to control every source of loss. Even less control rests in the power of a trading company, who typically is not directly involved in the handling process on the ground. However, these losses are definitely worth looking into.
There is an established reactive approach to controlling losses by post-loss investigation or increased live scrutiny of a specific operation. There is also a proactive approach where non-evident sources of loss are identified by real-time data analysis. The latter one is still to be widely adopted.
In order to counteract loss of cargo we can send our representative (Superintendent), who will witness measurements and sampling live and in person. A Superintendent can make sure that proper procedures are followed by independent inspectors, terminals and ship crew and verify that calculations are done correctly. We appoint them when we expect issues, usually as result of previous experience in given location or other known complication. The aim of this approach is to try and prevent the loss before it occurs, rather than determine liability for the loss after the fact.
If loss has already occurred, we react by analysing available information on given operation. If possible, we can request additional actions, measurements or analysis to be performed by inspectors. Detailed analysis of each stage can show errors or procedural shortcomings that put measurement accuracy under scrutiny. This way we might track down that one valve left open, or even that one typo in the data. All of that becomes basis of Quantity Claim that we can then submit to counterparty in hope of recovering lost value by proving there is discrepancy between what they actually have received and volume than was recorded on paper.
The Proactive approach is based on analysing data of all company loading and discharging operations and looking for trends that can be linked to repetitive losses. Once those are identified, the root cause is investigated and appropriate counter-action applied.
In digital age, we can use data to decide where to focus our expertise. Combining expert knowledge and loss-conscious approach by various company departments, we can reduce average losses significantly below those globally accepted levels. A decimal of a percent saved might seem small, however, when applied to the whole company’s traded volume in a year, it becomes really significant.
Expertise brings value, but the trick is to know where to look.