‘VOLUMETRIC SHRINKAGE’ ENTERS OIL CARGO CLAIMS VOCABULARY

Litigation involving cargo losses in bulk oil shipments carried on tankers is common. These losses traditionally have fallen into two categories – measurement losses and physical losses. The recent Tesoro Arbitration (S.M.A. No. 2587) indicates the crude oil tanker trade soon may be introduced to a third category of cargo loss called “volumetric shrinkage.” Oil is sold internationally by the barrel. It is a volume measurement of 42 U.S. gallons at a standard temperature of 60 degrees Fahrenheit. Barrel measurement losses involve errors arising from the imprecise nature of quantifying the volume of liquid products on oil tankers. Many factors effect measurement losses – human error, fluctuating cargo temperatures, inaccurate trim correction tables, application of incorrect volume reduction tables and a host of others. Measurement losses are merely paper losses, as the amount of oil in the vessel’s tanks never changes. Physical cargo losses occur when the product leaves the vessel’s tanks. These losses are caused by spillage, leakage, evaporation and cargo theft on occasion. The vessel owner will generally be liable for physical losses because he is expected to deliver the cargo that he has contracted to carry. Volumetric shrinkage is based upon the theory that the total volume of any liquid solution consists of the sum of the volumes of the individual components. However, if certain properties of each component vary appreciably, there may be a shrinkage in the total volume. This phenomenon is applicable to mixtures of light and heavy petroleum products. When a light crude oil is mixed with a heavy crude, the resulting mixture reflects a lesser volume than the sum of the two components. However, the volume discrepancy is only an apparent loss because the weight of the blend does not change. The Tesoro Arbitration involved two crude oil sale disputes. Two shipments of light crude were pumped from vessels to the buyer’s shore tanks that contained heavy crude oils. There was a 3.377 barrel discrepancy between the first vessel’s cargo volume and the shore tank volumes. The second vessel had a 2.841 barrel discrepancy. The seller successfully recovered $151,780 from the buyer for the discrepancy. The seller’s claim was based upon actual tests performed on samples of the blended crudes. The tests proved that “volumetric shrinkage” had occurred when the crudes were mixed in the same shore tanks. During the arbitration, the seller’s cargo inspector admitted that there was no standard in the cargo inspection industry for taking the volumetric shrinkage phenomenon into consideration. It was not until the second arbitration hearing that the arbitrators became aware of the technical import of volumetric shrinkage. Furthermore, the arbitrators accepted the fact that the cargo inspectors were unaware of the phenomenon when they measured the blend in the shore tanks. Blending is often performed on vessels. The potential for having volumetric shrinkage on an oil tanker is a realistic possibility. Indeed, some of the unexplained cargo losses experienced by oil tankers in the past may have been caused by this phenomenon. The closest case on point is the M/S Norma (1976 A.M.C. 936), which involved the inherent property of soybean cargoes to shrink during ocean transit. The court found the shortage was caused by an inherent vice in the cargo, and the carrier was not liable for the loss under the Carriage of Goods by Sea Act, also known as Cogsa. This act provides that neither the carrier nor the ship shall be responsible for the loss or damage resulting from wastage in bulk or weight or any other loss or damage arising from the inherent defect, quality or vice of goods. When vessels are requested in the future to blend cargoes and there are shortfalls between shore tank volumes and the ship volumes, one can expect vessel owners to raise the possibility of volumetric shrinkage. If cargo claims are then presented, it is possible that the Cogsa inherent vice defense, outlined in the M/S Norma case, will be raised by vessel owners to defeat the claims.


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