The SANCHI Oil Spill – Are we Prepared for a Condensate Oil Spill in Texas Coastal Waters

Unless you are a mariner or an oil spill responder, chances are you may not have even heard of the Motor Tanker SCHANCHI.

The Incident

On January 6, 2018, a collision occurred in the East China Sea near the mouth of the Yangtze River Delta. The 900-foot Panama-flagged SANCHI was loaded with 1 million barrels of condensate from Iran to South Korea when it collided with the Hong Kong-registered freighter CF CRYSTAL, carrying grain from the US. The SANCHI tanker carried 136,000 tons (1 million barrels) of condensate, which is an ultra-light version of crude oil valued at $60 million dollars. The CRYSTAL was able to return safely to port with its crew.

The SANCHI immediately caught fire, which burned for more than a week. A large explosion shook SANCHI on Sunday, January 15, resulting in the vessel sinking but leaving burning condensate on the ocean’s surface. All 32 members of the SANCHI’s crew, which comprised of 30 Iranians and two Bangladeshis, are now believed dead.

China State Oceanic Administration authorities said a 9-mile long oil slick was found southwest of the site of the sinking and another slick stretched 11 miles to the east.

What is Condensate?

Natural gas condensate is a hydrocarbon liquid and is very different from the black crude that is seen in most oil spills. It exists in gas form within high-pressure oil reservoirs and liquefies once extracted. Online Safety Date Sheets describe condensate as highly flammable liquid and vapor, low density (light), toxic if inhaled (due to hydrogen sulfide, benzene, toluene and/or xylene), brown to clear color and harmful to aquatic life.

Who is Responsible?

‘The reluctance of foreign banks to deal with Iran could complicate any compensation payments resulting from the collision last week of an Iranian oil tanker and a Chinese cargo ship, sources say” China oil spill compensation claims face Iran payment snags, Reuters, January 10, 2018.

The SANCHI was owned by the National Iranian Tanker Co. in Tehran. The SANCHI’s “Black Box” was recovered but liability has yet to be established by lawyers and insurers. While insurance companies work out the details of legal and monetary responsibility, international laws are in place to set up an immediate source of funding for the oil spill cleanup.

In the past, international compensation claims for major oil pollution incidents have fallen to the International Oil Pollution Compensation Funds (IOPC Funds) inter-governmental body (the U.S. is not a member). IOPC typically compensates for disasters over and above its members insurance company limits on payouts.

Maritime officials believe compensation for the SANCHI incident compensation would fall under China’s far smaller scheme known as the COPC Fund, as condensate is not covered by IOPC Funds.

This is not unique. The U.S. Coast Guard administers the Oil Spill Liability Trust Fund (OSLTF). The statutory provisions that cover the per-barrel oil tax that helps fund the OSLTF are codified in the IRC (Title 26 of the U.S. Code). Section 4611(a) imposes a per-barrel tax on:

·        “crude oil received at a United States refinery;” and

·        “petroleum products entered into the United States for consumption, use, or warehousing.”

Section 4612 includes definitions for “crude oil,” “petroleum products,” and “domestic crude oil” for the purposes of the applicability of the per-barrel tax:

·        “The term ‘crude oil’ includes crude oil condensates and natural gasoline.”

·        “The term ‘petroleum product’ includes crude oil.”

Unconventional Oil

Unconventional oil is petroleum produced or extracted using techniques other than the conventional method. This includes Canada’s heavy oil sands and bituminous sands, the United States tight oil (“shale oil”). Both unconventional oils yield condensate.

A 2011 Technical Advice Memorandum from the IRS stated that “tar sands imported into the United States are not subject to the excise tax imposed by § 4611 of the Internal Revenue Code” (i.e., the per-barrel tax that funds the OSLTF). It is unclear whether the IRS means “tar sands” or “liquids from tar sands”.

Unconventional oil defines how it is produced. Yet literature and personal experience suggest unconventional oils behave differently when spilled in a marine environment.

Texas Gulf Coast Unconventional Market

“Several oil pipeline companies this month agreed to move ahead on multi-billion-dollar projects that would link Texas shale fields to Gulf Coast export hubs, offering new outlets for burgeoning output expected in 2018.”

Source: Pipeline projects move ahead to tackle rising Texas shale output. Reuters, Dec. 29, 2017. 

Growing supplies of US condensate, largely from unconventional oil and gas plays, have resulted in a supply glut and deeply discounted prices. This a benefit to oil refiners and ultimately, consumers.

And while the oil industry (producers, transporters and refiners) have never been safer, there is always the human element. Simple human error means there is always the chance of an accident. Accidents are bound to happen.

So I ask are we prepared for a condensate spill on the Texas Gulf Coast?