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Transport legal update: Tanker Pools and Pooling Agreements

    • Shipping
    • Transport

    04-09-2013

    This first part of this article discusses what tanker pools are and why they are formed. The second part of this article discusses tanker pooling agreements, more specifically: their nature and purpose; a tanker owner’s obligations under the pooling agreement; a pool operator’s obligations under the pooling agreement; and how tanker owners are compensated under the pooling agreement.

    Tanker Pools

    A tanker pool is a collection of tanker vessels under various ownerships, placed under the care of a single administration (more specifically the “pool manager”). The main reason tanker pools are formed is to enhance the overall earnings of the individual tankers.

    An owner’s chances of securing employment for, and deriving income from his tanker may generally be increased if the tanker is entered into a pool. This is because a tanker pool will often have a very strong brand in the marketplace. It will leverage off its brand and advertise the individual tankers as a single cohesive fleet, and in a way unlikely to be rivalled by tanker owners operating individual vessels or small fleets. Influenced by the strength of the brand and the fact that the pool will more than likely offer a variety of tonnage, a broker may prefer to approach a pool to satisfy any tanker demand. It also allows entry into longer term Contracts of Affreightment to secure regular long term employment.

    The income derived from a tanker’s annual employment may also be supplemented by the earnings of other tankers in the pool. In this way, and through savvy commercial management of the pool fleet, the pool mitigates the owner’s risk in the trading of his tanker. Employing tankers in a mix of short-to-medium and long term employment creates a solid financial base to the pool. If the spot market suddenly swings upward, spot tankers will be able to take maximum advantage. By contrast, if freight rates fall sharply, the tankers engaged on medium to longer term employment provide a safety net for the remaining pool tankers braving the spot market downturn.

    Pooling Agreements

    A pooling agreement is essentially a constitutional document. In the same way that memorandum and articles of association are used in order to form companies in the UK, the tanker pooling agreement is used to set up a tanker pool. Typically (and amongst other issues) such an agreement will cover: the objective of the pooling agreement; the authority of the pool managers; the capacity in which the pool managers shall act; and how hire is calculated and paid to a pool participant.

    Tanker owners enter their tankers into the pool, often using a time charter agreement with the pool managers acting as quasi-charterers. Shelltime 4 is commonly used for tankers. Rather counter-intuitively, it will usually be agreed as a part of the Pool Agreement and with either a rider clause or an addendum, that the Shelltime 4 does not constitute a charterparty between owner and charterer, so as to negate the usual rights and obligations that are inherent in that relationship.

    Each tanker owner retains responsibility for financing and crewing his tanker, although in reality, he may well subcontract all or any part of his husbandry responsibilities to a specialised tanker manager, who would then be expected to work in close co-operation with the pool administration. If a Shelltime 4 is used, the owner will provide the usual warranty in respect of the tanker’s description and condition (clause 1); but also the owners will be obliged to maintain their tankers (clause 3).

    By contrast a pool operator’s obligations will extend to the commercial operation of the tankers, which amongst other things, will include tanker performance monitoring. A tanker pool should be able to effectively assess the performance of each tanker, and will usually be aided by computerisation and independent weather analysis. This function will be crucial when it comes to deciding pool points’ allocation to each individual tanker (weighting), and hence how much income an owner derives from his tanker being entered in the pool.

    The fundamental policy of a tanker pool is that earnings are collected and then distributed equitably to the pool participants. The exact methods of achieving this objective varies between pools to some degree, but the intention remains the same. Various methods are used to arrive at an equitable weighting assessment for each pooled fleet of tankers. Some considerations that may be taken into consideration when deciding on the weighting include: net daily returns – over a period of time (usually years) the actual net daily returns of the tankers provide a useful indicator; freight market indications – by obtaining market quotations for similar trips, those responsible for drafting a pool’s weighting assessments can readily compare the value of various tanker types and sizes in their fleet; and independent market indications – a regular review produced by a freight market analyst can also have a certain degree of value. Armed with this information (and possibly various other sources), the relative worth of the tankers can be assessed and an equitable distribution made.

    Until the market improves generally, securing employment for tankers by entering them into pools is likely to remain a popular option. The market has not experienced an upward trend in a number of years and to that end, an owner entering his tanker into a pool is an effective way to spread risk.

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