Incoterms 2020 for petroleum buyers: FOB, CIF, DDP

Every petroleum contract rests on three letters. Incoterms 2020, published by the International Chamber of Commerce, are the shorthand that tells a buyer and a seller who arranges the ship, who pays the freight, and exactly where the risk in the cargo passes from one hand to the other.

The three questions every term answers

An Incoterm is not the whole contract, and it is not a magic word. It answers three questions and no more: who pays carriage and, where relevant, insurance to a named place; where the risk of loss or damage passes; and who clears the goods for export and for import. Notice what is missing from that list. Incoterms say nothing about when ownership, the legal title to the barrel, moves. That belongs in the sale contract and has to be written separately.

The named place is the other thing buyers underestimate. A term without a port is meaningless. FOB Novorossiysk and CIF Rotterdam are complete instructions; FOB on its own is an argument waiting to happen. Get the term and the named place right, and half the disputes in a cargo file never occur.

FOB vs CIF vs CFR

These three are the backbone of seaborne trade, and all three are for sea and inland waterway transport only. Under FOB, Free On Board, the seller delivers when the cargo is loaded on board the vessel at the named load port, and the buyer arranges and pays for ocean freight and insurance from that point. Under CFR, Cost and Freight, the seller pays the freight to destination, but, and this is the trap, risk still passes at the load port. CIF, Cost Insurance and Freight, adds one thing to CFR: the seller also buys marine insurance for the buyer's benefit.

• FOB: risk and cost pass to the buyer once the cargo is on board at the load port.
• CFR: seller pays freight to destination, but risk still passes at the load port.
• CIF: as CFR, plus the seller arranges marine cover the buyer can claim against.

An Incoterm answers who pays and who bears risk; it never, on its own, says who owns the barrel.

When DDP makes sense

DDP, Delivered Duty Paid, sits at the far end of the scale and places the maximum obligation on the seller. The seller carries the cargo all the way to the named destination and pays everything on the way, including import duty and customs clearance in the buyer's country. For a buyer with no import desk of its own, DDP is the simplest deal it can sign: the product arrives, cleared, at the agreed place. For the seller it is the heaviest, because it means owning risk to the buyer's gate and clearing customs in a jurisdiction it may not operate in. We quote DDP where the value of that simplicity to the buyer is priced honestly into the deal.

Tank terms: TTO and TTT

Spot trades that happen inside a storage terminal use a vocabulary Incoterms never defined. TTO, tank to tank, describes a transfer of the cargo between holders within the same terminal, often executed by re-titling the contents of a tank rather than moving a drop of product. TTT, tank to truck, describes loading out into road tankers. These are useful market shorthand, but because the ICC does not standardise them, they mean only what the contract says they mean. We spell them out in full, every time, so that gauging, timing, and cost of the transfer are not left to custom.