International law firm Clyde & Co on Wednesday (30 January) published the final of a three-part series of articles explaining the legal issues surrounding IMO2020 for owners and charterers:
Part 1 and Part 2 of the series explored the scope of Regulation 14.1.3, provided an analysis of the contractual, penal and coverage risks which face owners and charterers, and explored the challenges to compliance and enforcement faced by different parties. Part 3 explores the different compliance options available to shipping companies. It also discusses a number of funding methods that companies might consider in order to meet the considerable costs of compliance, and provides concluding recommendations.
What options are available to shipping companies?
For owners, the appropriate solution will depend, among other things on the size of their fleet, the age and efficiency of their vessels, their trading pattern and sector, their time in ECA zones (Emission Controlled Areas) and their operating costs. Larger companies should explore combined solutions (for example combining scrubbers with LSFO (Low-Sulphur Fuel Oil) as part of an overall fuel strategy), to maximise efficiency. Tough calls may also need to be made if the age or efficiency of a vessel does not merit the heavy investment required; scrapping remains a final option.
Low Sulphur Fuel Oils
Purchasing LSFO remains an attractive short-term solution for many companies, the main advantage being the absence of an initial investment, in contrast to the retrofitting of scrubbers or alternative fuel engines. The disadvantages of using LSFO are set out in Part 2 of this series, and include the ongoing issues of compatibility, quality and availability facing the industry, especially in light of the IMO’s refusal to consider an experience building phase.
Risk management is therefore vital. While no mandatory bunker licencing scheme currently exists for ratifying states, owners and time charterers should avail themselves of information published by an increasing number of port states, confirming the identities of licenced bunker operators. IMO best practice guidance published in 2018 recommends not only that purchasers ensure that suppliers are included on the register of local suppliers maintained by ratifying states, but also that they carry out their own due diligence in respect of the supplier. Further, as of 1 January 2019, an amendment to Annex VI now requires bunker delivery notes to include a signed and certified declaration by the supplier that the sulphur content of the fuel supplied either does not exceed Annex VI-stipulated limits, or alternatively the purchaser's specified limit value, where the owner has notified the supplier that it is using an equivalent means of compliance (e.g. a scrubber). As clarified by the IBIA, owners should, however, note that the amendment does not impose any additional obligation on suppliers to ensure that owners are complying with Annex VI, so long as notification is given. The risk when bunkering non-compliant fuel, therefore, remains firmly with owners.
BIMCO have recently published two standard-wording clauses: the 2020 Fuel Transition Clause for Time Charter Parties (the “FTC”) and the 2020 Marine Fuel Sulphur Content Clause for Time Charter Parties (the “Content” clause), discussed in Part 2. The two clauses are not intended by BIMCO for vessels fitted with scrubbers.
The FTC is a "single-use clause", and is recommended by BIMCO for ships delivering before and redelivering either immediately before or after 1 January 2020, or simply where deemed useful to owners' implementation plans. The clause is not overly prescriptive about the amount of cleaning required to prepare tanks to receive compliant fuel. Owners and charterers should therefore ensure that they review the allocation of risk and cost set out in the FTC, and amend accordingly. By default, the obligation to dispose of non-compliant fuel is for charterers, while owners must ensure that tanks are fit to receive Compliant Fuel. BIMCO notes that the fuel switchover is a process that owners and charterers should start before 1 January 2020, to ensure a smooth transition.
The Content clause replaces the BIMCO Fuel Sulphur Content Clause 2005. It is a straight-forward compliance provision covering the sulphur content requirements before and from 1 January 2020, and is intended to work together with existing BIMCO time charter bunker clauses. It may, therefore, be inserted into time charterparties now, and will not require amendment of other bunker clauses in relation to sulphur content alone. Owners and charterers should review and if necessary amend the clause wording. By default charterers must warrant that any bunker suppliers, craft operators, and surveyors used by them will comply with the Sulphur Content Requirements set out in Annex VI, and indemnify owners in the event of breach; owners must warrant compliance in respect of the vessel.
Burning Liquid Natural Gas (“LNG”) is a third viable alternative. Advantages include a more consistent fuel specification for bunkering purposes, and the production of 25% less carbon dioxide and negligible amounts of sulphur oxides, rendering LNG compatible with IMO 2050 commitments. The main disadvantage is the initial cost of retrofitting LNG-burning engines, which is around USD 25 – 30 million (roughly 5 – 10 times more than traditional fuel engines) with an estimated payback of four to seven years. It is, therefore, seen by many as a mid-term solution, which will not yield an immediate return. Additionally, and despite recent state initiatives by Singapore, South Korea and China, global LNG infrastructure is still comparatively underdeveloped, with a dearth of supply sources and time-chartered LNG vessels. Further, LNG has a lower energy density than petroleum, requiring higher volumes to propel a vessel, while being susceptible to “methane slippage”, the occurrence of which would negate all environmental benefits of using it in the first place. As discussed, owners should investigate installation time and yard capacity, before placing an order.
Methanol is another viable alternative fuel. Its advantages are that it can be transported in chemical product tanks at atmospheric temperature and pressure, easily stored, and may be produced from a range of products including natural gas, coal and renewables. However like LNG, methanol suffers from a lower energy density than petroleum, requiring the burning of higher volumes. Additionally – like Liquid Petroleum Gas, hydrogen, ammonia and Biofuel – relatively little has been invested into developing methanol as a commercially viable fuel source; as such there is little global bunkering infrastructure. Owners may wish to consider retrofitting duel-fuelled engines capable of burning the alternative fuel, as well as LSFO.
A number of wind propulsion models, including rotor sails and rigid wings, are currently being piloted within the industry. Advantages include the potential for carbon-neutrality, low fuel costs and minimal greenhouse gas emission. Wind-power can also be combined with other low-emission solutions such as hydrogen fuel-cells, slow steaming and improved hull design, to achieve sufficient power while significantly reducing emissions output. Presently, however the cost remains too high to render wind power commercially viable (with conversion to a three-rig sail system estimated at USD 10 million). Structural limitations also exist for certain types of vessels.
Sale or Scrapping
Given the significant investment required, it may be that vessels nearing the end of their lifespan are not worth retrofitting. Owners should consider a fleet renewal plan, failing which the sale, or if necessary, the scrapping of older vessels.
Where cash or the sale of assets is not available to meet the initial investment required for retrofitting, owners may wish to explore additional debt capacity on existing vessels, in addition to their eligibility for green loan facilities and localised port authority subsidies and incentives. Larger shipping companies could consider the issue of bonds (termed by some as "green bonds"). Unit leasing or financing agreements also exist.
Time charterers should consider the inclusion of a fuel cost recovery mechanism (also known as a bunker adjustment charge) in their freight rate calculations, using variables such as fuel price, load factors and trade imbalances to calculate a surcharge. To ensure customer retention, carriers should strive to make calculations as transparent as possible (ideally using mechanisms capable of external validation); criticism has already been voiced by shippers, to whom the cost will be passed. Owners in voyage charter fixtures may wish to negotiate bunker adjustment factor clauses into their charterparties.
Concluding thoughts for Part 3
Regulation 14.1.3 is now less than one year away, and is likely to have a dramatic effect on the shipping industry. As explored above, owners and charterers can best protect themselves best by:
We hope that this series has been useful. At Clyde & Co, we have experience in assisting owners, charterers and fuel suppliers with drafting well-structured, clear and balanced clauses, and providing concise coverage advice.
Source: Clyde & Co
Published: 30 January, 2019
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