Reports from the frontline on the IMO 2020 transition have been surprisingly benign, but is the initial positivity concealing more fundamental problems?
From a legal viewpoint, the main consideration pre the IMO 2020 transition was the impact on charterparty documentation. INTERTANKO held a closed breakfast briefing on the second day of last year’s Tanker Shipping & Trade conference in London to explain to members the latest advice ahead of the transition.
INTERTANKO’s advisors warned that IMO 2020 did not change the basic premise of a charterparty: the charterer provides the fuel and the owner takes responsibility for compliance with the regulations and faces the penalties of fines and detention. INTERTANKO recommended that members match up the risks and liabilities and use the new BIMCO bunker clauses in charter parties. But also pointed out some of the pitfalls that may be in current and legacy charter parties still in use.
The first such pitfall is to be aware of the specification of the fuel listed in the charterparty. It is not unusual for the fuel specification to be listed as ISO 8217:2012. As the name of the specification suggests, this is the 2012 version, which has since been replaced by the 2017 version, ISO 8217:2017.
Is the fuel fit for purpose? Even though the fuel supplied meets the current ISO specification, it may still not be fit for purpose. This was the experience of those vessels caught up in the Houston fuel crisis that affected 150 ships between 1 January and 31 May 2018. In a case that is currently being heard in the US district court in Houston, Valero alleges that Trafigura supplied it with more than 186,000 barrels of fuel oil containing 4-Cumyl-Phenol, a substance used to make epoxy. In at least one instance, a vessel supplied with the fuel broke down and drifted for two days. Trafigura denies the allegation and the case is ongoing.
INTERTANKO also noted IMO 2020 does not change the fundamentals of what happens in a dispute over off-spec fuel. There is plenty of case law in this respect and it comes down to a question of facts. Owners must have a clear procedure in place to gather the facts at the time and in a manner that cannot be challenged.
If the vessel is fitted with a scrubber, then there needs to be a description of the scrubber in the charterparty and the owner has to warrant that the scrubber will perform as per the manufacturer’s specification. The description needs to include if the scrubber is open loop, and if there are any restrictions regarding where it can be used.
There has also been considerable discussion about the retrofitting of scrubbers and where responsibility for performance rests. INTERTANKO recommends that owners view scrubbers as they would any other piece of kit on the ship. Even if new, the scrubber could break down and the responsibility lies with the owner in the same way as if any other equipment failed. The BIMCO and INTERTANKO clauses do provide some provisions for scrubber breakdown and these can be inserted into the charterparty by owners.
INTERTANKO’s technical specialist, who has attended all relevant IMO meetings, warned that Port State Control (PSC) representatives are very keen to inspect vessels fitted with scrubbers. The PSC inspectors will be checking closely to see if the scrubber was in operation while the vessel was crossing an ECA and if the vessel is discharging wastewater from an open-loop scrubber system.
Conversely, he noted that many PSC authorities had yet to undertake training for post-IMO 2020 inspections. Some stated that training would start in December 2019 or even January 2020. This suggests that while PSCs are keen to get onboard, there will be a degree of unreadiness: the result could be discord and a lack of uniformity in how inspections occur.
This concern has been echoed by Don Gregory, director of the Exhaust Gas Cleaning Systems Association: “It was clear prior to the transition date of 1 January 2020, that many administrations were simply not ready. No doubt we will receive the figures for noncompliance in the coming months. It is worth noting that non inspection does not mean compliance avoidance. A thorough forensic check in the future is as likely to detect a non-compliant fuel as an inspection today.”
He also warned of problems about which the shipping industry has little experience: “Perhaps the most worrying issue is the shortage of VLSFO, requiring significant procurement of VLSMGO. An apparently clear and bright gas oil may hold a deadly secret. Invisible wax, especially if the fuel is stored below about 50°C. The wax agglomerates around the main engine and auxiliary engine fuel filter and can quickly block the flow, resulting in loss of propulsion. This is a phenomena which is normally uncommon at sea and therefore engineer officers may be taken by surprise.”
Clean Marine’s chief executive officer Nils Hoy-Petersen explained that from the viewpoint of a manufacturer, the immediate IMO 2020 threshold has been relatively benign. His company is now focussing on post-IMO 2020 issues: “2019 went and 2020 came without much disruption. As we now come to end of the first month of 2020 [at the time of writing], we see that attention is needed to assist crew in operating the systems, to supply consumables like calibration gases and to correct issues [that are] surfacing.”
With regards to ongoing scrubber sales, Mr Hoy-Petersen expects a steady flow of enquiries: “The market [for scrubbers] has shown signs of improving, motivated by healthy fuel spreads. But it is too early to say when the next boom will come – although we believe it will do so very soon. There are more enquiries, but it cannot match what we saw in 2018 at the moment.” He continued: “I believe that there will be a recovery in demand in 2020. There will continue to be a healthy demand for scrubbers going forward. There are still 20,000 - 30,000 ships in the market that will have a clear financial benefit from installing scrubbers.”
No serious incidents – so far
In the run up to the IMO 2020 fuel transition there were dire warnings of main engines failing a minute after midnight on 1 January, but a straw poll of tanker owners highlights that in the first two weeks of January, IMO 2020 had passed off without any serious incidents.
Many stakeholders confirmed the fuel switchover took place many weeks before. One owner reported that the transition could not have gone smoother, and attributed this to the months, if not years of preparation.
Another tanker owner reported two small issues among its large fleet, something that could have been expected given the number of vessels it operates. Another noted that it had one vessel with 20-30 tonnes of high-sulphur fuel remaining onboard. This will be removed by the high-sulphur fuel carriage cut-off date of 1 March 2020.
But it has not all been plain sailing, and some anomalies have been reported with compliant fuel. Tests run by Fobas, a unit of Lloyd’s Register (LR), flagged up samples ordered as VLSFO grades where total sediment potential results were above the ISO 8217:2017 limit of 0.10% m/m. The results ranged from 0.16% to 0.21% m/m.
Fuels with high sediment can result in excessive sludge in tanks, which can lead to engine fuel starvation due to blocked filters.
An advisory notice from LR said attempting to use such fuels could result in highly compromised combustion, leading to engine and turbocharger damage. LR also cautioned shipowners to seek assurance that the fuel grades they had secured were compliant with the ISO standard for marine fuels.
Following Fobas’ warning, The International Chamber of Shipping (ICS) issued a statement in which ICS secretary general Guy Platten said: “This is a pressing issue. Shipowners rely on many other stakeholders in the marine fuel supply chain, particularly bunker suppliers and oil refiners, to ensure we are all able to fully comply with the new regulations. We need the supply side to fully contribute to a smooth changeover so that we do not have any incidents due to incompatible fuels and we can ensure safe operations for our seafarers.”
But this was a relatively isolated issue given the huge switch in sales. In the final quarter of 2019 there was a massive decline of HSFO sales, as the industry transitioned into compliance with the sulphur cap. In Singapore, the world’s largest bunkering hub, the bunker sales landscape saw significant change, as sales of high-sulphur fuel oil dropped massively in a matter of months. In contrast, the sale of low-sulphur fuels skyrocketed in the final quarter, according to a report issued by BIMCO’s chief shipping analyst Peter Sand.
In the report he notes that preliminary estimates from The Maritime and Port Authority of Singapore indicate that 4.4M tonnes were sold in December 2019, a 4% increase compared to December 2018 and the highest sale of bunker fuel sold in Singapore since January 2018. Sales of low-sulphur fuels, including LSFO and MGO LS, rose by 51% month-on-month in December to 3.1M tonnes, compared to the 1.3M tonnes of HSFO sold in the same month.
“The shipping industry has been riddled with market uncertainty in recent months, but the bunker sales in the port of Singapore provide one of the first readings as to how the industry has transitioned into compliance with the IMO 2020 regulation,” said Mr Sand. “We have now surpassed the first wave of IMO 2020 and hopefully the accompanying market uncertainty will diminish as we proceed into 2020,” he added.
The shift in sales was most noticeable in December 2019, when 2.6M tonnes of LSFO was sold, accounting for 59% of total sales, compared to 1% of total sales in the last couple of years.
He also noted that HSFO still accounts for 28% of total sales, driven by bunkers purchased for scrubber-fitted ships. Many of the scrubber-fitted ships are also the largest ships, consuming relatively more fuel, which will surely facilitate stable demand for HSFO.
At the time of writing we are two weeks into IMO 2020 and the fuel price spreads between LSFO and HSFO are narrowing, but it is very port dependent. Mr Sand notes that at current price spreads, fuel oil costs have effectively doubled, putting heavy financial pressure on companies that must bear the cost burden themselves. The first-mover advantage associated with scrubbers seems to hold true for the time being.
“Almost from one day to another, IMO 2020 has resulted in a massive increase in bunkering costs for shipowners and operators,” said Mr Sand, “costs which for many companies cannot be sustained for a prolonged period. Shipowners are trying to pass on the additional costs of bunkering to customers, but if the underlying supply and demand fundamentals are not balanced, their efforts may prove futile.”