Transaction procedures in international trade of petroleum products: Key to a successful transaction

In international transactions for the sale and purchase of petroleum products, a key aspect is the development of a clear and structured transaction procedure. This allows the parties to the transaction to have a clear understanding of the sequence of actions, the responsibilities of each party at each stage and ensures the safety and efficiency of the entire process.

Importance of drafting transaction procedures

A well-defined transaction procedure is a guarantee of successful fulfilment of transaction terms and prevents possible conflicts and misunderstandings between the parties. The process of developing the procedure takes into account all the peculiarities of the transaction, market requirements and international standards and practices.

Attention to nuances and issues

When developing and implementing transaction procedures, special attention should be paid to the nuances and potential problems that may arise at each stage. This includes legal aspects, risks associated with the transport and storage of goods, financial risks and other important aspects that can affect the success of the transaction.

Given the complexity and multitude of details in international petroleum product transactions, developing the right transaction procedure is an integral part of a successful business in this area.

In this article we want to give examples of the most common transaction procedures. What you need to pay attention to. What are the nuances and pitfalls. How to understand from the transaction procedure – the counterparty offering this procedure really has the desire and ability to supply the resource, or is trying to deceive his partner.

There is a huge number of schemes and conditions of resource supply, but based on business practice, in large international transactions, it is basically possible to conditionally divide the transaction procedures into three types:

  1. FOB procedures are procedures for a transaction at the port of departure where the seller sells the goods at his port without delivery.
  2. CIF procedures are transaction procedures where it is understood that the seller will make delivery of the goods at the port of destination to the customer.
  3. Sailing ship redemption procedures. This is a cross between the two preceding, where it is no longer FOB but not yet CIF, where the buyer on the high seas buys back the floating ship with the goods.

Consider each individual type of procedure below.

The market of oil products is a market of large, from the financial point of view, transactions and a market of intermediaries. And when there is a lot of money and a lot of intermediaries in the market, it unfortunately generates a huge number of frauds. There are always two historical disagreements between buyer and seller. The seller never wants to show the original documents for the goods before the buyer shows the documents that he has the money to buy the goods, for fear that the buyer is not real. And the buyer does not want to show the money in his bank accounts before the seller confirms the availability of his goods by documents or visualisation, because he also fears that the seller is not real. And, unfortunately, most transactions start with this very disagreement

1. CIF procedures.

The specificity of CIF procedures is that the seller delivers his goods to the port of destination and the buyer pays for the goods upon their arrival. The supplier, fearing the reliability and solvency of the buyer, in the vast majority of cases requests a bank instrument guaranteeing that he will be paid. This can be a bank guarantee, or a letter of credit, or an escrow account, and sometimes even a small deposit. And the buyer on his part wants to be sure that by freezing the money in his accounts he will definitely receive the ship in due course. CIF procedures in 99% of cases have a requirement for a bank instrument and only differ in whether before or after this bank instrument the customer will receive a package of documents on the goods for authentication.

It is important to note that the buyer and seller make the transaction procedures, and as they make them, so it will be. Accordingly, each transaction has its own unique procedure. In this article we only give examples of the most common ones.

In CIF procedures we want to draw the attention of the parties to the transaction to basic security measures. It is important for the seller to pay special attention to the bank from which the buyer issues its bank guarantee instrument. It should be realised that if the supplier receives a letter of credit or bank guarantee from a little-known small bank from an island country (for example), in case of delivery of the goods and non-payment by the buyer, it will be difficult to disclose the letter of credit or it will not be possible to disclose it at all. In our work we recommend suppliers to work only with large world-known banks, which are in the TOP 100 banks of the world, to be sure of the real financial capacity of the client, as the world’s largest banks will not go for illegal actions, and will not issue letters of credit or other financial instruments unfilled with money.

Clients also need to be careful. Look at who you are working with, who you are putting the banking instrument with. There are often common fraud schemes in the market, when fraudsters accept a letter of credit from a client not for the purpose of supplying oil products, but for the purpose of pledging the received bank instrument to their bank in order to obtain a loan. Or there are fraud schemes when small unknown banks monetise received letters of credit by colluding. It is important for customers to understand where they are putting the bank instrument and which bank is servicing it on the supplier’s side. We recommend that if customers are unsure of a supplier, they should first try to work with them on a trial shipment on an FOB or floating ship buy-back basis, where there is no need to put bank guarantees or letters of credit.

Here are the two most common CIF procedures.

The classical CIF procedure, when the seller gives the customer a partial package of documents for the goods, and after the buyer has issued a bank instrument, sends the full package of documents and sends the ship with the goods:

  1. Buyer issues ICPO in buyer company letterhead, buyer banking information BCL and TSA.
  2. Seller issues drafted Contract (open for possible amendments). Buyer signs, seals and returns Contract with company Information sheet (CIS) and buyer’s identity, for final endorsement. Seller gives the below listed Partial proof of product.
    (A) Seller Commitment to Supply
    (B) Certificate of Origin
    (C) Statement of availability of product
    (D) Product quality passport (Analysis test Report).
    (E) Guarantee letter to supply or refund buyer’s expenses.
  3. Within 3 to 5 banking days, Buyer’s bank sends Non-Transferable or preferably, Transferable Irrevocable Operative SBLC via MT760 or DLC via MT700 according to seller’s provided bank verbiage for the first trial shipment. Whereas the buyer is not able or willing to issue the bank instrument, the buyer makes a 10% guarantee payment against CIF (Negotiable). This payment however shall be deducted from the total cost of the transaction after inspection at discharge port. Seller’s Bank Issues Full POP Documents to Buyer’s Bank with 2% Performance Bond (PB).
    a) Copy of license to export
    b) Copy of Approval to Export
    c) Copy of statement of availability of the product
    d) Copy of the refinery commitment to produce the product
    e) Copy of Transnet contract to transport the product to the loading port
    f) Copy of the port storage agreement
    g) Copy of the charter party agreement to transport the product to discharge port
    h) Copy of Vessel Questionnaire 88
    i) Copy of Bill of Lading
    j) SGS Report at loading port
    k) Dip test Authorization (DTA) & ATB
    l) NOR /ETA
    m) Certificate of Ownership Transfer
    n) Allocation Transaction Passport Code Certificate (ATPCC)
  4. Shipment commences as per signed contract delivery schedule and the shipment should arrive at Buyer’s discharge port within 5-25 days. The SGS inspection will be borne by the Seller at the loading seaport and Buyer at the unloading seaport.
  5. Buyer releases payment to Seller by TT/MT103 upon receipt of the shipping documents and confirmation of the Q & Q by SGS/CIQ at destination port.

Non-standard CIF procedure in which the seller is ready to provide a full package of documents for the goods before the bank instrument is issued by the customer:

  1. Buyer issues letter of intent (LOI) to receive spa. Seller issues SPA and buyer signs and returns SPA with buyer’s passport data page and company registration certificate. With buyer’s CIS to issue SBLC verbiage and specification very important. CIS of buyer that sign the SPA and SBLC issuing account signatory
  2. Buyer returns the contract duly signed via e-mail to the seller. The electronically signed copy is legally binding and enforceable. Both parties deposit the same at their respective banks. Buyer also issues confirmable bank proof of funds and letter of authority to confirm at buyer’s bank.
  3. Seller gets vessel loaded, programmed and issues pop documents to buyer via email as listed below:
    a) Certificate of origin
    b) Product quality passport (analysis test report – SGS report)
    c) Bill of lading
    d) Freight cargo manifest
    e) NOR
    f) Vessel Q88
  4. Within three (3) banking days of buyer receipt of the above pop documents, buyer’s bank issues SBLC to seller’s nominated fiduciary (buyer’s account officer transmits copy to seller’s account officer and seller) showing buyer’s financial capability and readiness to purchase the cargo to seller’s nominated fiduciary bank account which will stand as security guarantee for the transaction, change of title ownership, cargo delivery and re assigning of cargo to current buyer.
  5. Upon seller’s bank confirmation of buyer’s bank SBLC deposit, (transmit copy to buyer) and transfers the title to the potential buyer’s company’s name and also re-issue all other outstanding documents to the potential buyer’s company’s name and also delivers the vessel to buyer’s destination (out-side port/terminal on international waters) and issues ETA to buyer’s pod.
  6. Vessel arrives at international waters and seller issues ATV and DTA (dip test authorization) to allow buyer’s inspection team to DIP test/q&q by SGS. inspection team shall board within 24 hours of ATV / DTA issuance
  7. Within 48 hours of a successful inspection, the buyer makes payment for product by MT 103 and tanker is taken over
  8. The seller pays commisions to all agents within 24-48 hours
  9. Next delivery

2. The procedure for ransoming a floating ship on the high seas (VESSEL TAKE OVER).

In 70% of cases, large shipments of petroleum products are made between refineries and large oil traders under long-term 3-5 year service contracts. As practice shows, the larger the contract, the lower the price for the resource the buyer is willing to pay. The seller, in turn, has a natural desire to increase its customer base and sell its goods more expensive. For this reason, there is occasionally such a situation when the seller within the framework of its main contracts streaming ships with oil products for its main customers, but while they are sailing, the seller in parallel several ships from the stream releases to the open market for sale while they are sailing. And if a new customer comes along and offers a higher price, he sells that ship offshore, turning it around to the new customer.

The supplier solves two tasks at once – he finds a new client and sells his oil products at a much higher price than planned. The customer is also satisfied – he is not buying a “cat in a bag”, but he buys a specific real ship, which can be seen and checked before the purchase. The supplier, in his turn, sells one of the ships on the high seas and simply loads a new ship to his main client, as at large anchor refinery clients, where 10-20 ships sail monthly, +/- one ship arriving late will not play a global role.

There may also be fraudulent schemes in this transaction. On the part of the seller, it is extremely important to check the solvency of the client before turning the ship to him. But as practice shows in such transactions, the most unprotected is the client. On the market is very common fraud scheme, when fraudsters just choose any favourite ship on the high seas and “draw” on it documents, and tell the client that it is their ship, but in fact have no relation to this ship. We recommend customers to carefully check the provided documents for the goods and the ship, and carefully look that you pay for the owner of the goods. The list of documents on the ship and how to check them we will describe in a separate article, but the most basic things we recommend:

1) Get a copy of the SGS for the ship from the seller and ask SGS to verify the authenticity of the document and whether it was issued to this company. SGS is well known and trusted and they make it easy to verify the authenticity of their documents with a call or email.

2) Go on board the ship with a DIP test to check the quality and quantity of the cargo by hired lab technicians. Yes, this is an expensive procedure, depending on the location of the ship, we have had practices where the DIP test cost $50,000 and even $100,000. But it is the right way to protect yourself. If you have to choose between the cost of a DIP test of $50,000 to $100,000 and the possible loss of tens of millions of dollars, it is worth it.

The most key thing in VESSEL TAKE OVER transaction procedures for buyers is the package of documents that the seller will provide before payments are made, and whether the seller allows the customer to go on board with the DIP testbefore payment. If the seller won’t let the customer on board with the DIP test and won’t show the customer the SGS, then this is a red flag

Here is what we believe to be the most common VESSEL TAKE OVER procedure on the market.

  1. Buy er issues Purchase Order upon receipt and acceptance of seller’s Soft Offer.
  2. Seller issues Memorandum of Understanding for buyer’s review and signing.
  3. Seller issues the Proof of Product documents in buyer company’s name as listed below;
  • Certificate of Origin.
  • Product quality passport (Analysis test Report).
  • Commitment to Supply.
  • Bill of Lading.
  • Cargo Manifest.
  • Vessel Q88.
  1. Within 5 banking days, Buyer’s bank issues a non-leased or generated Standby Letter of Credit (SBLC MT760) to Seller bank account for the buying vessel. In case of buyer’s bank inability to issue the letter of credit, the buyer can alter natively make cash deposit of $300,000 by TT wire transfer for security guarantee deposit for the buying vessel.
  2. Upon confirmation of the buyer’s SBLC MT760 or $300,000 security guarantee deposit by the seller’s receiving bank, seller bank issue the 2% PB, buyer provides their freight forwarder information to enable vessel master and ship owner make contact to initiate the process of maritime reporting and other custom clearance procedures prior to cargo arrival at the buyer’s destination port.
  3. Seller and Buyer signs the title transfer affidavit and the title ownership certificate is issued in the buyer’s company name.
  4. Upon arrival of the vessel tanker at the destination port, buyer will conduct product quality and quantity inspection.
  5. Upon receipt of the successful Quality and Quantity report, buyer full payment for the product by MT103 within 48 hours and product unloading commences at the buyer’s terminal.
  6. Seller pays the intermediaries involved within 72 hours after receipt of payment of the product from the buyer.

3. FOB transaction procedures.

FOB transactions have many more procedural options and have extremely important distinguishing features than CIF or VESSEL TAKE OVER. In FOB petroleum products transactions, a separate article will be visited, which will describe not only the main existing transaction procedures, but also the features of FOB petroleum products transactions and fraud options, in key hub ports such as Rotterdam, Fujairah, Houston and others. To read an article about FOB transaction procedures for petroleum products in key ports of the world: Rotterdam, Fujairah, Houston, you can read this link.

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