The concept of shipping pools and revenue distribution systems

The potential attractions of a shipping pool are the potential to increase vessel utilisation, achieve wider market coverage and intelligence, and achieve sufficient critical mass to be able to offer charterers Contracts of Affreightment. Pools can be extremely successful with the proviso that there are clear management structures, a common philosophy and understanding between pool members, clear terms of reference as set out in a pool agreement, plus a fair and transparent means of sharing the pool revenue.

The concept of an equitable revenue distribution system is to ensure each vessel in the pool receives a level of earnings which fairly represents its performance characteristics relative to the other ships in the pool. Irrespective of whether a ship operates within a pool or not, the owner of a modern, fuel-efficient vessel would expect to achieve a higher time charter equivalent (TCE) than one whose fuel consumption, for example, was somewhat higher, all other things being equal. Central to all revenue distribution, or ‘pool points’ systems is the need to be able to compare the performances of vessels within the pool on an equal playing field.

This requires the means to accurately report vessels’ laden and ballast speeds, fuel consumption and to screen out anomalous data points. The pool agreement should specify some of the more obvious conditions where data points should be excluded. These would certainly include maximum wind speed but also might extend to limits on ocean swell or engine slip. However, additional scrutiny of data is still needed to screen all data outliers for which there are no satisfactory explanations. Provisions may also need to be made to exclude the measurement of speed and consumption for ships that, for example in the oil sector, have been used as floating storage for an extended period and therefore have significant hull fouling as a result.

A decision also needs to be made as to whether the same fuel consumptions in port and port times should be assumed the same for all pool vessels, given that such figures can be impacted by extraneous events outside of the control of either the vessel owner or the pool manager. This assumes that all vessels within a pool are of a fairly similar size and type. Where there are pools which might combine ships of significantly different sizes, some differentiation would apply on port data.

Even between broadly similar-sized ships, potential differences in cargo intakes may be different either as the result of differences in deadweight, cubic capacity or other physical dimensions which might limit the amount of cargo carried on an individual ship or even preclude its deployment on a particular route. In this last context, a vessel’s flag might also be an issue. The question of parcel sizes and types becomes even more complicated in the context of chemical carriers where the numbers of segregations, cargo containment system and individual tank capacities also have a bearing on the cargoes that can be stowed.

Then comes the question of the time periods over which data points are collected and the frequency of updates. These issues may become particularly acute in volatile markets. On the one hand, the periods over which data points are measured must be sufficient to provide fair assessment of speeds and consumption, but this has to be balanced by the potential for markets to change significantly between the time over which measurements are made, and time during which the pool points are applied. Some pools address this issue by making monthly adjustments based on changes in bunker fuel prices and freight rates.

Pool points are assigned to individual ships on the basis of their assessed TCE versus a common reference point. This reference point may be the TCE for a nominal ‘100-point’ ship whose characteristics do not change between updates. In other instances, the 100-point ship might be an actual vessel operating in the pool or, alternatively, 100 points might be defined as the average TCE across the whole pool.

Whichever approach is chosen almost inevitably leads to problems of interpretation, although this is essentially a presentational issue. Take for example the case where a nominal reference ship is defined as the 100-point vessel whose characteristics do not change. It would be expected that any change in pool points for an individual ship would be due, principally, to changes in its speed and fuel consumption. However, one of the characteristics of shipping markets is that with higher freight rates and lower bunker prices, the differentials between the TCEs for better and lesser-performing vessels narrows and vice versa. In the former scenario, the pool points for a ship with a fuel efficiency which is greater than the reference ship would fall, even if its actual speed and consumption had not changed since the last data update.

What matters is the relative earnings capabilities of vessels within a pool. Similarly, a situation can arise whereby the pool points for an individual ship increase but its percentage share of the pool revenue goes down. This happens when additional vessels join the pool and therefore existing pool vessels are receiving a smaller share of what hopefully will be a larger pot.

There are a number of other considerations. A common one is the introduction of age adjustments to the pool points for older ships on the basis that they may not be as easy to fix, are restricted on the routes on which they are able to trade or operate in a two-tier market. Moreover, some pool managers now have to take account of vessels with scrubbers joining the fleet and ensure that owners of such tonnage are fairly compensated. With the introduction of ‘greener’ fuels such as LNG and methanol, the equitable distribution of revenue is likely to get more complicated. Whereas the economic advantage to having a scrubber installed can be readily calculated. The economic advantage of running LNG or methanol-powered ships may not be so obvious. How then should the owner of such a vessel be rewarded? Might this be through the use of carbon offsets?

The shipping industry continues to evolve, and with it the need for pool managers to keep their revenue distribution models under regular review. That said, the decisions made by individual pool members over the designs of their ships should be the same as if they operated independently. The decision to join a pool is a strategic one based on whether this is likely to increase revenue.