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Allianz: IMO 2020 to be ‘game-changer’ for the shipping industry

09 Jun 2019

Allianz Global Corporate & Specialty (AGCS), a global corporate insurance carrier and business unit of Allianz Group, has published an article entitled ‘Climate emissions cap challenges shippers’ which discusses the challenges ship owners face with the upcoming IMO 2020 regulation:

Regulation limiting sulphur oxide emissions from 2020 is likely to be a game-changer for the shipping industry, with wide-ranging implications for cost, compliance and crew. It even brings the potential for an increase in the number of machinery damage claims and incidents, if not well-managed.

On October 26, 2018, the International Maritime Organization (IMO) officially adopted its pollution prevention treaty, MARPOL Annex VI, which will cap sulphur oxide emissions for shipping to just 0.5%, down from today’s 3.5%, effective January 1, 2020. The mandatory rules require ship owners to switch to low-sulphur fuel or fit an approved exhaust gas cleaning system (EGCS), also known as a scrubber, to remove the emissions before they are released into the atmosphere. If used, the EGCS must be approved by the ship’s Flag Administration and evidenced in the ship’s International Air Pollution Prevention Certificate.

With time running out to prepare for compliance with the cap, the shipping industry faces a number of major challenges and uncertainties. There is real concern, for example, about the availability of compliant low-sulphur fuel, as well as its impact on engines and machinery. There are also questions around the capacity of ship yards and installers to fit enough scrubber systems before the 2020 deadline.

“The sulphur cap is one of the key issues facing the shipping industry today,” says Captain Rahul Khanna, Global Head of Marine Consulting at AGCS. “It is important that shipping plays its part in achieving a more sustainable environment, but this needs to be done in a way as to not overburden an industry already under pressure. Despite the fast approaching deadline of January 2020, there is still a lack of clarity, with little in the way of international standards as well as concern over the availability and compatibility of low-sulphur fuel. This is a complex and technical problem that creates risk and liability for ship owners, raising questions about compliance and which option would be the best for their fleet. The recent banning of open loop scrubbers by many member states has further limited the options for ship owners.”

Some guidance on the use of low sulphur fuel is available, although at this point there is no clear international standard guaranteeing the consistent quality of 0.5% fuel.

IMO has published ship implementation planning guidance to help ship owners prepare for the new rules while the Oil Companies International Marine Forum and the International Petroleum Industry Environmental Conservation Association Industry have been developing guidance on handling, storing and using low-sulphur fuels [1]. The International Organization For Standardization has also established a working group and is identifying methodologies for testing long-term stability and compatibility between different fuel batches.

Penalties for non-compliance are down to individual port states, but include fines and potentially the arrest and seizure of the vessel. However, enforcement of MARPOL Annex VI could prove challenging as Flag States and Port Control Authorities would need to monitor vessels on a continuous basis. There is talk of so-called “sniffer” drones being used in territorial waters to check ships are compliant.

Failure to comply with the MARPOL regulation on the 0.5% sulphur 2020 cap could affect the vessel’s classification status, which would subsequently null and void insurance cover. Non-compliance could also give rise to contractual disputes [2] between ship owners and charterers, including the bunkering of compliant fuel and the installation and maintenance of scrubbers.

The move to low-sulphur fuel is expected to cost the shipping industry up to $60bn annually, a cost that ship owners may try to pass on to customers. Hapag-Lloyd [3], which estimates that the increased cost of low-sulphur fuel will be around $1bn in the first years, has developed a transparent mechanism to recover the additional costs from cargo owners. Maersk [4], which estimates its extra fuel costs at more than $2bn, introduced a similar fuel adjustment surcharge from January 2019.

Machinery damage is one of the most common causes of loss in marine insurance, and underwriters worry that the frequency of such claims could increase with the introduction of low-sulphur limits. “The worry is that we could see an increase in the frequency and cost of machinery breakdown claims related to IMO 2020,” says Justus Heinrich, Chief Underwriter Marine Hull, Central and Eastern Europe at AGCS. “The increased cost of fuel and the extent to which this can be passed on via higher freight costs, may also influence cost-saving in other areas, like crew training or maintenance.”

Even more concerning is that technical problems resulting from the use of low-sulphur fuel could cause a vessel to lose power or control, which could lead to collisions and groundings. According to the International Union of Marine Insurance (IUMI), statistics from the California Department of Fish and Wildlife show that switch-overs between heavy fuel oils and distillate fuels increase the risk of vessels losing power.

“We know that poor quality fuels can result in machinery damage, especially if cat fines are present,” says Khanna. “There are questions about the ability of refineries to produce enough low-sulphur fuel to meet the needs of the industry by 2020. Even were enough low-sulphur fuel to be available, the quality standard of some of the blended fuels may not be easily ascertained and there could be an impact on the engine and operation of a vessel. The results could be increased machinery damage, which can in turn cause maritime accidents.”

The industry has limited experience with using low-sulphur fuels, which differ from high sulphur fuels – for example, low-sulphur has a lower flashpoint and requires additional storage capacity and increased tank cleaning between bunkering.

There may also be potential issues with fuel quality, stability and contamination. For example, the composition and blending of fuel differs by region and port, which can directly affect engine performance. Low-sulphur fuels are also likely to contain higher levels of catalytic fines, small particles of metal introduced to fuel in the refining process that can cause engine and equipment damage. There is also the potential for voyage disruption and delays, if there is a lack of compliant compatible fuel at a bunker port.

Many of these issues will need to be managed by the crew, requiring effective fuel management and filtration processes, as well as training and close adherence to manufacturers’ standards. “The switch to low-sulphur fuel will require operational and engineering actions, which, if not done properly, can have a wide-ranging impact. The switch will also have wider implications for the fuel supply chain, including the availability and cost of fuel,” says Captain Andrew Kinsey, Senior Marine Risk Consultant at AGCS.

[1] Oil Companies International Marine Forum, IMO Sulphur 2020 update, May 2018
[2] Clyde & Co, A Practical Overview of the IMO 2020 Sulphur Cap, October 2018
[3] The Maritime Executive, Hapag-Lloyd Announces Sulphur Fuel Charge, October 2018
[4] Maersk To Change Fuel Adjustment Surcharge Ahead Of The 2020 Sulphur Cap, September 2018

Source: Allianz Global Corporate & Specialty
Published: 10 January, 2019


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