The FOB price of crude oil cargoes is calculated based on Net Standard Volume figure stated in the Bills of Lading and Quantity Certificate.
If before loading there is any quantity of free water in the loading lines, the risk is that the buyer of cargo will actually purchase a lesser quantity of crude oil than stated in the Bills of Lading and Certificate of Quantity, because the free water loaded with the cargo will settle out of the crude oil during the carriage and there will be a larger quantity of free water at discharge port than at loading port and a lesser Net Standard Volume figure than stated in the Commercial Invoice, Bill of Lading and Certificate of Quantity.
An example of such case was the English law case Totsa Total Oil Trading S.A. v. Bharat Petroleum Corp Ltd.1. The case concerned a shipment of 949,092 net barrels of crude oil from Nigeria to Mumbai, in India.
The Net Standard Volume stated in the Bills of Lading and Quantity Certificate was determined based on the shore tanks measurement report. However, after loading of cargo in the vessel`s tanks, the comparison of TCV and NSV figures resulting from the shore tanks measurement, that is, Bills of Lading figures, with the TCV and NSV figures resulting from the ship`s tanks ullage readings revealed that the cargo contained 4,307 barrels of free water. That quantity of water in the cargo after loading in the vessel`s tanks could only have originated from the shore load lines. Both the surveyors and Master issued letters of protest to the terminal representative.
By the time the vessel arrived at the port of discharge most of the free water had settled out of the crude oil and the surveyors estimated to be between 42,000 and 45,000 barrels of water in the cargo. This meant that out of the 949,092 net barrels stated in the Bills of Lading to have been shipped, there had actually been shipped about 900,000 net barrels.
Due to such cases the carriers require the verification of loading lines before loading.
Normally, the shore tanks measurement can show if there was any free water in the shore tanks before loading. If before loading the cargo surveyors discover any quantity of free water in the shore tanks, they will tender a Letter of Protest to the loading terminal representative. The surveyor`s Letter of Protest and the Shore Tanks Measurement Report countersigned by the loading terminal representative can serve as evidence against the loading terminal and/or shipper in case the buyer of cargo wants to recover the sum paid for the quantity invoiced in excess of the actual Net Standard Volume figure.
For the Master it will not be possible to know immediately after loading the actual quantity of free water in the cargo shipped on board due to the turbulence that occurs during loading and insufficient settling time. The only accurate measurement on board the vessel can be made before discharge, because during the carriage the free water will settle out of the crude oil. After discharge in shore tanks the free water will again need time to settle out of the crude oil. This is the reason why the only reliable figures are those stated in the Shore Tanks Measurement Report before loading and Ship`s Ullage Report before discharge.
The other evidence are the cargo samples drawn from the loading terminal shore tanks, loading line and vessel`s tanks. The analysis of samples would allow the surveyors to determine whether the water was loaded with the cargo from the shore or it was introduced from the vessel`s lines.

by Vlad Cioarec, International Trade Consultant

This article has been published in Commoditylaw`s Oil Trade Review Edition No. 4.

Endnotes:

1. [2005] EWHC 1641 (Comm)