The following article is written by Eleanor Midwinter and Ina Lutchmiah of international law firm Wikborg Rein, and shared with Singapore bunker publication Manifold Times:
Using LNG rather than fuel oil is one of a range of options available to owners seeking to comply with IMO 2020. Given that shipbrokers have long predicted the emergence of a two-tier shipping market with 'greener' ships commanding a premium over older less eco-friendly vessels, what then is the future for LNG bunkering and what challenges does it present?
The shipping trade press initially took a somewhat pessimistic view of LNG bunkering as a solution to the IMO 2020 problem with forecasts suggesting that high costs and technical difficulties would present a commercial barrier to LNG bunkering being adopted across the industry. Despite the forecasts however, in the past year we have seen an interesting series of "world firsts" for new-build and retro-fitted LNG powered vessels in different sectors including cruise ships, ferries and more general commercial carriers. For example, Maritime Executive reported in March of this year on the retrofitting of the "SAJIR", which will be the first mega-container vessel to be converted to a dual-fuel system. Various innovations are also underway, including Cryo Shipping's conversion of platform supply vessels into LNG tankers for STS supplies, which may help ease congestion at LNG bunker ports or provide supplies in areas not serviced by such ports. These reports, together with commitments from large owners such as CMA CGM and MSC, suggest that owners may be more receptive to LNG bunkering than was initially expected. The world fleet of LNG powered has jumped in size since 2017 from 118 vessels to 143 vessels, with around 135 LNG-powered vessels also on order (Source: Maritime Executive as previous).
Whether owners choose to adopt LNG bunkering as a solution to the IMO 2020 problem or adopt one of the other available options such as using low sulphur fuel or installing scrubbers depends on a myriad of factors with owners adopting different solutions, sometimes even within their own fleets. This is essentially because there is no perfect solution. Owners have needed to be sensitive to trading patterns and available infrastructure. Using low sulphur fuel leaves owners at the mercy of oil and freight volatility. Scrubber retrofits may not provide a fully predictable outcome – with new geographical restraints having emerged since their introduction – including the ban on open loop scrubbers in Singapore, China and Fujairah, and the anticipated ban in the Norwegian fjords. Likewise, given the high cost of LNG retrofitting, it would not make sense to undertake it on vessels close to scrapping age or those operating without ready access to LNG bunkering ports. LNG bunkering is therefore best suited for owners ready to invest in new vessels, or for retrofitting less elderly vessels which will operate in areas where there is existing LNG bunkering infrastructure, such as Northern Europe.
A report from Jack Sharples of the Oxford Institute for Energy Studies had this to say in his 2019 report on LNG bunkering: "…the introduction of more stringent environmental regulations can solve the ‘chicken and egg’ dilemma of energy companies not wishing to invest in LNG bunkering infrastructure until there is substantial demand for LNG as a marine fuel". This seems to be reflected in the increased activity in projects to support LNG bunkering not only in areas traditionally supplying LNG but across many major transport hubs. This means that LNG fuelled vessels will likely become far more attractive to owners.
But for vessels already on the water, what issues does a retrofit present? One perhaps unforeseen issue is that IMO 2020 has added to tightening of availability at shipyards for retrofit solutions. The resulting pressure to move quickly to secure slots leads to negotiating constraints. This impacts on timing and cost and can also create legal problems. Often, there is a shift in bargaining power from owners to the yard in times of high demand and less attention is paid to the finer points of contract drafting. We see the effects of this in an increasing number of disputes and difficulties under retrofit contracts and related charters. Owners should therefore keep in mind that a retrofit contract requires consideration of similar issues to a full shipbuilding or conversion contract with special attention needing to be paid to items that are likely to impact on earnings under associated vessel charters, such as the warranty for the work (including where warranty work can be done), the amount of liquidated damages and related delay provisions. Clarity, as always, is key. Where there needs to be flexibility, such as for modifications and regulatory change, this must be supported by appropriately drafted triggers for change, remedies and dispute resolution procedures. Any existing charter obligations must be reviewed and added to as needed, for example, to deal with anticipated unexpected loss of use of the vessel.
There will also be different safety procedures to take into account, for example, ISO 20519:2017 (Ships and marine technology – Specification for bunkering of liquefied natural gas fuelled vessels) and the IGF Code (International Code of Safety for Ship Using Gases or Other Low-flashpoint Fuels). Both are designed to provide standards for ships operating using gas i.e., as a fuel, whether newly built or converted, rather than being aimed at more traditional gas carriers.
Finally, owners/charterers will need to be prepared for reviewing new bunker contracts. Traditionally, contracts for the sale and purchase of LNG are more detail oriented than say, heavy fuel oil contracts. One option is to adapt existing bunker agreements that owners/charterers are already comfortable with, but this does require specialist drafting. Specifications and tolerances will need to be updated. Attention also needs to be paid to LNG-specific terms, such as transfer of title for return vapour, commingling considerations, the effect of off-specification gas, and related operational issues. Help may soon be at hand however from BIMCO, who announced that they would be working on a new LNG Bunker Purchase Contract and LPG voyage charter for the Asian market as of January 2019. This is expected to be ready for publication within 18 months. Whether or not an owners' organisation can create a form that finds favour with brokers and suppliers has yet to be seen. In the meantime, we have specialist trading and LNG lawyers available to assist with bespoke solutions and contract reviews.
We will be watching with interest to see the extent to which LNG bunkering continues to be adopted by the industry and the impact this has on spot trading of LNG and of course hire rates for LNG carriers and LNG fuelled vessels and will report back on this in further issues of Update.
Source: Wikborg Rein
Published: 12 July, 2019
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