Demurrage in Petroleum Trading: Delay Fees That Can Cost Thousands Per Day

Your petroleum shipment arrives at port on schedule. But there's a problem with customs documentation that takes three extra days to resolve. When you finally get it sorted out, you receive an invoice: $75,000 in demurrage fees. The product itself cost $5 million, and now you're paying an additional 1.5% just because of a three-day delay. Welcome to one of petroleum trading's most expensive surprises.

Demurrage catches many first-time importers off guard. It's not a scam or hidden fee – it's a legitimate cost built into vessel charter agreements. But it can turn a profitable deal into a loss if you don't understand how it works, how much it costs, and how to avoid triggering it. Let's break down everything you need to know about demurrage in petroleum trading.

What is Demurrage?

Demurrage is the penalty fee you pay when a vessel is delayed beyond the agreed time allowed for loading or unloading operations. Think of it as overtime charges for keeping a rented ship waiting.

When you charter a vessel (or when the seller charters one for CIF delivery), the charter agreement specifies how much time is allowed for loading at the origin port and unloading at the discharge port. This free time is called "laytime." If operations take longer than the allowed laytime – whether due to port congestion, documentation delays, equipment problems, or any other reason – you start paying demurrage.

Demurrage applies to any petroleum transaction involving vessel transportation: Tank-to-Vessel (TTV), CIF shipments, FOB with vessel delivery. It doesn't apply to tank-to-tank transactions where no vessel is involved.

How Demurrage Works

Understanding the demurrage mechanism helps you see exactly when costs start accumulating and how to avoid them.

Step 1: Laytime is agreed in the contract. When you sign the Charter Party Agreement or purchase contract, it specifies exactly how much time is allowed for loading at the origin port and unloading at the discharge port. For example, "72 hours laytime at discharge port" means you have three full days to unload the cargo. This is your "free" time included in the freight rate.

Step 2: The vessel arrives and issues Notice of Readiness (NOR). When the ship reaches port and is ready to begin operations, the captain formally notifies the port authority and relevant parties: "We're ready to load/unload." This NOR triggers the laytime clock. From that moment, your 72 hours starts counting down.

Step 3: Operations proceed. Loading or unloading begins according to port schedules and capabilities. Every hour that passes counts against your laytime allowance. If everything goes smoothly, operations complete within the allowed time.

Step 4: Two possible outcomes. Either you finish on time or you don't, and the financial consequences are dramatically different.

On-time completion: Operations finish in 60 hours, well under the 72 hours allowed. No demurrage is charged. The freight rate you already paid covered this time. Everyone's happy, the vessel departs, and the transaction closes cleanly.

Overtime (exceeding laytime): Operations take 96 hours – a full 24 hours beyond the 72 hours allowed. Now demurrage kicks in. You're charged for those excess 24 hours at the demurrage rate specified in the contract. If the rate is $25,000 per day, you owe $25,000 for that one-day delay. The party responsible for the delay (usually the buyer for discharge delays, seller for loading delays) pays this penalty.

Typical Demurrage Rates

Demurrage rates scale with vessel size because larger ships have higher operating costs and charter rates. Here's what you can expect across different tanker sizes:

Small tankers (5,000-10,000 DWT) typically charge $8,000-15,000 per day in demurrage. These are used for regional deliveries and smaller quantities.

Medium tankers (10,000-30,000 DWT) run $15,000-30,000 per day. This is the most common size range for many petroleum spot trades, carrying quantities between 10,000-30,000 metric tons.

Large tankers (30,000-50,000+ DWT) command $30,000-60,000+ per day. At this size, every day of delay becomes extremely expensive. A three-day delay on a large tanker costs $90,000-180,000.

Supertankers carrying 100,000+ DWT can charge $80,000-150,000+ per day in demurrage. These are typically used for crude oil and massive refined product shipments where delays can easily cost half a million dollars per week.

Let's walk through a realistic example. You've chartered a 25,000 DWT medium tanker at a demurrage rate of $25,000 per day. Customs documentation issues cause a three-day delay beyond your laytime allowance. Your demurrage bill: 3 days × $25,000 = $75,000. That's a 1.5% cost addition on a $5 million cargo, eating directly into your profit margin.

This is serious money that accumulates fast – and it's completely avoidable with proper planning.

What Causes Demurrage?

Demurrage results from delays, but the source of those delays determines who pays. Understanding common causes helps you prevent them or at least prepare for the financial responsibility.

Port-side causes are beyond any single party's control. Port congestion where multiple vessels wait for available berths can add days to your schedule. Equipment breakdowns at the terminal – pumps failing, pipelines rupturing – halt operations until repairs complete. Sometimes customs or port authority delays slow everything down. Bad weather that makes operations unsafe also extends the timeline. These neutral causes are typically negotiated between buyer and seller regarding who bears the cost.

Buyer-side causes put financial responsibility squarely on you. Payment delays are common – if your wire transfer takes an extra two days and the vessel can't unload until payment is confirmed, those two days of demurrage are yours to pay. Documentation problems on your end (missing certificates, incorrect paperwork) can hold up the vessel. If your storage tanks aren't ready to receive the cargo, the vessel waits at your expense. Inspection delays where you're slow to conduct or approve quality checks add up fast. Customs clearance issues at your destination port – missing permits, incorrect filings – keep the vessel stuck.

Seller-side causes shift the demurrage burden to them. If the product isn't actually ready when the vessel arrives at the loading port, that's the seller's delay. Loading equipment problems at their terminal or facility fall on them. Missing documentation from the seller that's required for loading creates delays they'll pay for. Quality issues that require resolution before loading – contamination, off-spec product – keep the vessel waiting on the seller's dime.

Force majeure events like strikes, natural disasters, or unexpected government actions are typically treated as exceptional circumstances. Demurrage costs from these events are often shared between parties or negotiated case-by-case since neither party could have prevented them.

Who Pays Demurrage?

Demurrage responsibility should be clearly specified in your Charter Party Agreement, but the general principle is straightforward: the party responsible for the delay pays the penalty.

The general rule is simple cause-and-effect. If the buyer causes delays at the discharge port (your destination), the buyer pays demurrage. If the seller causes delays at the loading port (origin), the seller pays. If the delay stems from port issues or neutral causes beyond either party's control, costs are often shared or negotiated based on the specific circumstances and contract terms.

In CIF transactions, understanding responsibility can be tricky because the seller arranged and paid for the shipping. But here's what matters: even though the seller chartered the vessel and handles shipping logistics, if you cause delays at the discharge port when the cargo arrives at your destination, you pay the demurrage. The seller brought the cargo to you as agreed. If your customs issues, documentation problems, or tank delays keep the vessel waiting, that's on you financially.

In FOB TTV transactions, you arranged and paid for the vessel charter, so demurrage responsibility generally falls on you throughout the voyage – unless the seller specifically causes delays at the loading port. If the seller's product isn't ready when your vessel arrives, or their loading equipment fails, those delays are their financial responsibility. But delays at your discharge port are yours to pay.

Laytime Calculation

Not all laytime is calculated the same way, and the method used in your contract significantly affects how much time you actually have. Make sure you understand which calculation method applies.

Fixed laytime is the simplest method: "72 hours total laytime" means you have exactly 72 hours from Notice of Readiness to complete operations. Clear, straightforward, and easy to track. This is what most buyers prefer because there's no ambiguity.

Rate-based laytime calculates time based on loading or unloading rates. If the contract states "Loading rate: 3,000 MT per hour" and you're loading 10,000 MT, your laytime is 10,000 ÷ 3,000 = 3.33 hours. This method assumes operations will proceed at a certain pace, which can create disputes if actual rates are slower due to equipment limitations or port constraints.

Weather working days means bad weather doesn't count against your laytime. If operations shut down for 8 hours due to unsafe weather conditions, those 8 hours don't tick off your laytime clock. This is common for open berth situations where weather genuinely affects operations. However, "bad weather" needs to be clearly defined to avoid disputes.

Running hours or "working time" calculations only count actual operational hours. Nights, weekends, and holidays are excluded unless operations actually occur during those times. This can dramatically extend your calendar time while keeping laytime usage low, but it requires careful tracking of exactly when operations are happening.

Understanding your contract's laytime calculation method is critical because it determines when you're at risk of demurrage. A "72-hour fixed laytime" is very different from "72 running hours excluding weekends" – the latter might give you an actual week of calendar time.

How to Avoid Demurrage

Avoiding demurrage comes down to planning, preparation, and fast execution. Here's your action plan:

1. Negotiate realistic laytime in your contract. Don't agree to impossibly short laytime just to get the deal. If normal unloading at your port takes 60-72 hours, don't accept 48 hours of laytime. Factor in normal port operation speeds, add buffer for typical delays, and ensure the time allowance is achievable under normal conditions.

2. Prepare everything before the vessel arrives. This is the single most important step. Have all shipping documents ready and reviewed. Ensure payment is ready if it's required before unloading begins. Start customs clearance processes early – don't wait for the vessel to arrive. Prepare your storage tanks to receive the cargo. Arrange inspection services in advance with scheduled slots. When the vessel issues Notice of Readiness, you should be ready to start operations immediately.

3. Coordinate actively with the port. Confirm berth availability well ahead of the vessel's arrival. Schedule unloading slots with the terminal. Verify all port equipment (pumps, pipelines, hoses) is operational and reserved for your use. Have backup plans if the primary berth or equipment becomes unavailable.

4. Monitor vessel ETA religiously. Track your vessel's position using marine traffic websites like MarineTraffic or VesselFinder. Know exactly when it's arriving – not just the estimated date, but watch its actual progress. Prepare intensively as the vessel approaches. Don't wait until it's already at port to start scrambling.

5. Make decisions fast when issues arise. Inspection results come back showing a minor quality issue? Decide immediately whether to accept, reject, or request a price adjustment. Don't spend two days deliberating while the vessel sits at port accumulating $50,000 in demurrage. Fast decision-making during operations is critical.

6. Have contingency plans for everything. Backup payment method if your primary wire transfer gets delayed. Alternative storage tanks if your first choice has unexpected problems. Fast-track procedures with customs brokers for urgent clearances. Every contingency you plan for is one less potential delay.

Laytime vs Demurrage Terminology

Understanding the terminology helps you read charter agreements and avoid confusion during operations.

Laytime is the free time allowed for loading or unloading operations. It's included in your freight rate and doesn't cost extra as long as you stay within the allowed time.

Demurrage is the penalty you pay for exceeding laytime. Once your allowed time runs out, every additional hour or day costs money at the demurrage rate.

Despatch (or "dispatch money") is a bonus payment some contracts provide if you finish operations ahead of schedule. This is less common in petroleum trading than in other cargo types, but occasionally you'll see it as an incentive for fast operations.

Notice of Readiness (NOR) is the formal notification from the vessel's captain that the ship has arrived, is properly positioned, and is ready to begin loading or unloading. The NOR triggers the laytime clock – from that moment, your allowed time starts counting down.

Excepted periods are times that don't count against your laytime allowance. Contracts might specify "Sundays and holidays excepted" or "weather delays excepted." If operations can't proceed during these excepted periods, that time doesn't eat into your laytime.

Demurrage vs Storage Fees

These are two different types of delay costs that buyers sometimes confuse, though they apply in different contexts.

Demurrage is specifically a vessel delay penalty. You pay $10,000-60,000+ per day (depending on vessel size) when a ship is held beyond its laytime allowance. This only applies to transactions involving vessel transportation – TTV, CIF, or FOB with vessel delivery.

Storage fees are charges for keeping petroleum product in storage tanks beyond the initial included period. These run $500-2,000 per day typically and apply to tank-based transactions or tank-to-tank transfers where the product sits in terminal storage.

Here's where it gets expensive: both can apply simultaneously. If you're receiving product via vessel that will discharge into rented storage tanks, you could face demurrage for delaying the vessel unloading AND storage extension fees if the product then sits in tanks longer than your storage agreement allows. You're getting hit twice – once for the vessel delay and again for the tank extension.

Red Flags

Watch for these warning signs in charter agreements and contracts:

❌ Very short laytime in the contract sets you up for guaranteed demurrage. If you see "12 hours laytime for 10,000 MT" when normal port operations take 48-72 hours, you're being trapped into paying demurrage. This might be incompetence or intentional – either way, don't accept unrealistic laytime.

❌ Excessive demurrage rates way above market norms suggest fraud or exploitation. A $100,000/day rate for a small 10,000 DWT tanker is ridiculous when market rates are $8,000-15,000/day. Either someone's trying to profiteer from delays or the whole deal is fake.

❌ Unclear laytime calculation methods create dispute potential. If the contract uses vague terms like "reasonable time for operations" without specific hours, rates, or calculation methods, you're heading for arguments when demurrage gets claimed. Insist on clear, specific laytime terms.

❌ Seller demands demurrage payment upfront is absurd and suggests scam. Demurrage is a penalty for actual delays that haven't happened yet. It's not payable in advance. If someone asks for demurrage payment before the vessel even arrives, you're dealing with fraud.

Demurrage Claims and Disputes

When demurrage is claimed against you, don't just pay automatically. Follow these steps to verify the claim is legitimate and determine actual responsibility.

1. Verify the claim's accuracy. Check when Notice of Readiness was issued and accepted. Confirm when operations actually completed. Calculate laytime used based on the contract terms. Review what caused the delay and when it occurred. Get documentation from the vessel, port, and your own records. Sometimes claims are inflated or calculated incorrectly.

2. Determine responsibility clearly. Who actually caused the delay – was it buyer-side issues, seller-side problems, port delays, or force majeure? Review your contract terms on responsibility allocation. Check if the contract specifies how different types of delays are handled. Don't automatically accept responsibility without confirming the delay source.

3. Negotiate if the situation is disputed. If responsibility is genuinely unclear or shared, negotiate a split. If force majeure events caused the delay, argue for shared costs or waiver. If rates seem excessive or calculation methods are disputed, push back with market comparisons. Many demurrage disputes get settled at 50-70% of the claimed amount through negotiation.

4. Pay promptly if the claim is legitimate. If you caused the delay, the calculation is correct, and the rate was agreed in the contract, pay up. Demurrage is a legitimate cost of doing business in vessel transactions. Trying to dodge a valid demurrage claim damages your reputation and makes future transactions harder.

Demurrage disputes are common enough that you should plan for them. Having clear, specific contracts with unambiguous laytime terms and responsibility clauses minimizes disputes before they start.

Bottom Line

Demurrage is the penalty you pay when vessels are delayed beyond the agreed laytime for loading or unloading operations. It's not a scam – it's a legitimate cost built into charter agreements to compensate vessel owners for keeping their ships waiting.

The typical cost ranges from $10,000-60,000+ per day depending on vessel size, with small tankers at the lower end and large tankers commanding premium demurrage rates. Supertankers can charge $80,000-150,000+ per day. These aren't theoretical numbers – a three-day delay on a medium tanker easily costs $75,000, turning a profitable deal into a marginal one.

Demurrage applies to any vessel transaction: Tank-to-Vessel, CIF shipments, FOB with vessel delivery. It doesn't apply to tank-to-tank deals where no vessel is involved. The party responsible for the delay pays – buyer for discharge delays, seller for loading delays, negotiated or shared for neutral causes.

Avoiding demurrage requires realistic laytime in your contract (don't accept impossibly short allowances), preparing everything before the vessel arrives (documents, payment, customs, storage), making decisions fast when issues arise, coordinating actively with the port, and having backup plans for common problems.

Even with perfect planning, you should budget for risk. Add potential 1-2 days of demurrage to your cost analysis on vessel deals. Sometimes delays happen despite your best efforts – port congestion, weather, unexpected customs issues. Building this buffer into your pricing ensures one moderate delay doesn't eliminate your profit.

Monitor vessel arrivals closely using marine tracking, prepare intensively as the ship approaches, and act fast when it arrives. The laytime clock starts with Notice of Readiness and doesn't care about excuses. Speed and preparation are your defenses against demurrage.

Take demurrage seriously in vessel transactions because it can genuinely turn profitable deals into losses. A $50,000 demurrage bill on a deal where you expected $100,000 margin cuts your profit in half.

Take Action

Understand all cost implications including potential demurrage before committing to vessel transactions. Submit an RFQ on CommoditiesHub and discuss delivery terms that match your capabilities.