In this article, crude oil sludge formation during storage was at the center of a dispute over lost volumes of oil by a crude terminal operator. Baker & O'Brien provided expert opinions on industry practices for dealing with and minimizing sludge, reasonable quantities of sludge, and industry accounting for sludge accumulation. Our written expert report enabled parties to settle early in the process.

When crude oil is stored for an extended period of time, a mud-like deposit referred to as "sludge" will often form at the bottom of the storage tank. This sludge is typically a mixture of heavy, long-chain hydrocarbon molecules (mostly paraffins), solid sediment, and water. The quantity of sludge that can form depends on numerous factors, including how long the oil is stored, the crude oil quality and composition, and any inherent sediment and water contamination - as well as how the oil is handled and mixed. Storage tanks are commonly equipped with discharge nozzles above the tank floor to avoid the intake of sludge, which must be physically cleaned from storage tanks on a periodic basis.

A storage terminal stored crude oil for multiple crude oil owners-both for transfer to a nearby refinery and to meet regulatory requirements for "strategic" storage. No physical distinction was typically made between volumes available for processing or for strategic storage. When regulations governing strategic storage volumes were changed to require their physical segregation, such volumes were transferred to another long-term storage facility. However, the volumes transferred were less than the crude oil owners had originally delivered into the terminal as strategic stock. The terminal operator alleged that the volume reduction was due to non-pumpable sludge - a standard loss that must be shared by the crude oil owners. The crude oil owners filed suit to recover the lost volumes. Baker & O'Brien was engaged to review the issues in dispute and offer expert opinions on: (1) how sludge forms in crude oil tanks; (2) industry practices for dealing with and minimizing sludge; (3) how sludge is measured; (4) whether the quantities of sludge at the subject terminal were reasonable, based on the crude oils stored and the terminal's practices; and (5) how the industry typically accounts for sludge accumulation. The case was settled.