Tanker Benchmark Premiums: Test the Commercial Value

Key takeaways

• Establish comparability before calling an offer a premium to a reference.
• Identify the actual benefit purchased by the additional payment.
• Compare complete decision costs, including relevant consequences outside the freight invoice.
• Show how uncertain assumptions could reverse the preferred choice.

The analysis below uses an original fictional procurement model. It does not assert current tanker rates, actual service reliability or probabilities for a real shipment. It illustrates how a cargo desk can examine a proposed premium without confusing a market comparison with the full commercial decision.

Establish what the premium measures

The first question is whether the proposed offer and the reference describe sufficiently comparable objects. A broad market measure may help frame discussion while providing little support for a precise premium calculation on a particular enquiry. Check the unit, scope and relevant period before giving the difference a commercial label.

Then separate the difference from the reason offered for it. A counterparty may describe the higher price as compensation for timing flexibility, a particular employment requirement or a constrained programme. That explanation is a proposition to examine. The price difference itself does not prove that the claimed benefit exists.

The desk should be able to state the benefit in operationally meaningful terms. “More flexibility” is incomplete unless the team knows which decision can change, who may make the change and how the resulting programme remains workable. A vague benefit should not acquire a monetary value merely because it appears beside a premium.

Compare the cost of the complete choice

A cargo interest may face consequences beyond freight if the selected arrangement does not support its receiving programme. Depending on the actual situation, these could include additional storage, changes to onward delivery or an alternative supply response. Establish which consequences genuinely differ between the options.

Exclude amounts that remain identical and unavoidable under both choices when they do not help explain the incremental decision. Include costs that the choice actually changes. A large complete-cost table can be less informative than a smaller, well-defined incremental comparison if the larger table repeats irrelevant amounts.

Do not treat every possible adverse event as an additional cost to add together. Mutually exclusive outcomes need separate cases. Conditional costs should also be distinguished from amounts paid regardless of outcome. Otherwise the premium can appear attractive simply because the lower-priced option has been loaded with incompatible disadvantages.

Illustrative comparison: a premium with uncertain value

ILLUSTRATIVE — invented options, costs and planning probabilities, not real offers or observed reliability. A fictional cargo desk compares options A and B for the same defined shipment. Freight is USD 800,000 for A and USD 860,000 for B. Other base receiving costs are USD 30,000 for A and USD 10,000 for B.

The desk invents a simplified adverse-outcome case for each option. A would incur an additional USD 240,000 if that outcome occurs; B would incur an additional USD 80,000. For demonstration only, the model assigns probabilities of 25% to A and 10% to B. These weights are assumptions, not evidence about either service.

B's freight premium is USD 60,000. Its lower other base cost offsets USD 20,000 of that premium, while the assumed difference in expected adverse cost offsets a further USD 52,000. Under these invented assumptions, B's expected total is USD 12,000 lower.

If neither adverse outcome occurs, A instead costs USD 830,000 and B costs USD 870,000. The more expensive freight option is therefore not cheaper in every realised outcome. Its modelled advantage depends on the uncertain case assumptions.

Holding B's assumptions fixed, A reaches B's expected total when its assumed adverse-outcome probability is 20%: USD 830,000 + 20% × USD 240,000 = USD 878,000. Below that assumed probability, A has the lower modelled expected total; above it, B does.

Read the threshold before trusting the ranking

The threshold is more useful than an unsupported claim that the premium pays for itself. It identifies the uncertain input that determines the ranking. The desk can now ask whether there is a defensible basis for placing the actual situation on either side of that threshold.

If no such basis exists, the model does not establish a preferred option. It still explains the trade-off: lower base expenditure versus a different assumed adverse consequence. Decision-makers may need more evidence, a revised proposal or a clear statement of how they treat uncertainty.

Expected cost also does not describe the largest possible cash requirement or the effect of an interruption on a critical programme. A desk concerned about those outcomes should examine them separately. An average of hypothetical outcomes is not a promise about the invoice that will arrive or the event that will occur.

Keep the comparison within its stated boundary. The example omits many possible real-world considerations and does not value every consequence. Adding a material omitted item may change the ranking, so the conclusion should remain conditional on the defined model.

Verify that the benefit belongs to the offer

Before paying for an apparent advantage, check whether it is actually part of the arrangement being considered. A favourable planning assumption may come from the cargo desk's own expectations rather than a commitment made by the counterparty.

For example, the team might assume that an alternative arrival window remains available. That benefit could depend on the receiver, terminal or another party rather than on the shipowner's offer. The premium should not be justified by flexibility that the relevant party has not confirmed.

Similarly, an offered feature may reduce one exposure while creating another. A different schedule could improve the receiving plan but affect the cargo's readiness requirements. Assess the complete programme rather than assigning value to a feature in isolation.

Use the benchmark to sharpen the discussion. A material price difference deserves an explanation, but the explanation must connect to a benefit the desk can use. The final recommendation should state both the additional payment and the condition that makes it worthwhile.

Common mistakes

Treating a benchmark premium as a verdict. It identifies a difference that needs interpretation, after comparability has been established.

Inventing confidence in uncertain costs. Label probabilities and consequences as assumptions unless they have an adequate evidential basis.

Adding incompatible adverse outcomes. Use coherent scenarios and avoid loading one option with costs that cannot occur together.

Paying for unconfirmed flexibility. Verify which party controls the benefit and whether the proposed arrangement actually includes it.

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