Storage space is a necessity for the owner of any physical commodity. Stockpiling in storage facilities permits greater flexibility and continuity of supply in the event of supply disruptions, increases in consumption or simply to give the storage user an opportunity to take a strategic position against anticipated price changes. As a result, storage space is always in demand, particularly for oil and petroleum products.
There are frequent press reports of plans to build new oil storage facilities around the world – the most recent being in India and Scotland. Earlier in the year, a new oil storage facility in South Korea was reported to have started operations and was drawing strong interest. Storage companies are keen to take advantage of not only the ever-growing storage needs, but also of the ever-increasing demands for storage facilities to provide a variety of services, including refining and blending.
When negotiating a storage contract, generally storage users have very little scope to influence the terms on which their products are stored. This may expose them to significant risks. It is therefore essential that, if the storage user has any scope to negotiate the terms of the storage agreement, it focuses its negotiating efforts on the most prejudicial clauses.
This Client Alert draws attention to the key contractual and non-contractual issues which should be of primary importance to any storage user when entering into an oil storage agreement, the so-called “red flag” issues. While we have concentrated on oil in this Alert, many of the issues are similar for bulk storage of dry goods such as grains.
Key non-contractual considerations
- Title – if an issue relating to title arises between the storage company, its creditors, the storage user and/or its creditors, as to title to the goods, this is likely to be determined by local law (irrespective of the governing law of the storage agreement). Legal due diligence should therefore be undertaken to identify the steps that need to be performed under local law in order to retain and evidence title to the goods, not only whilst the goods are in storage but also while the goods are in transit to and from the storage facility (e.g. are there any registration obligations?).
- Co-mingling – English law recognises rights of ownership of co-mingled goods, but the position under local law may vary and will need investigation. Risks associated with shortages and contamination will need to be considered. Difficulties may be encountered when trying to obtain financing or insurance in respect of the co-mingled goods.
- The storage company – commercial due diligence should be undertaken to investigate the location, condition and security of the storage facility and the professional reputation of the storage company. As said above, companies are increasingly trying to enter the profitable storage market. Title to the goods stored can be easily lost and it is therefore important that the storage company performs its obligations as agreed in the storage agreement, in accordance with its internal procedures and local law, and that it is a company of good standing with appropriate insurance.
Key contractual considerations
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As said above, this Alert only seeks to highlight the “red flag” negotiation areas. There will be other terms where amendments will be considered “nice to haves” but the ability to negotiate these will depend on the power of the storage user and in our experience few companies will have this leverage.
Storage contracts are usually relatively long-term and so, especially when considering the high value of the product being stored, it is obviously crucial that negotiations eliminate risks where possible before the contract is entered into.