The first year of the sulphur cap is likely to see a number of teething troubles, including contractual disputes over non-compliant fuels
As regulators, port authorities and lobby groups tighten their grip on emissions throughout 2020, there are legitimate fears of what one law firm described as a “perfect storm” of litigation over how the 0.5% sulphur cap will be implemented and how breaches will be punished.
Uncertainties over fuel quality in particular, could trigger disputes between owners, charterers and bunker suppliers in cases of non-compliant fuel, warns Beth Bradley, a partner at international commercial law firm Hill Dickinson. “There are increasing concerns about the practical and contractual challenges presented,” she says.
Hill Dickinson is not alone in these concerns. Citing surveys that suggest over 45% of industry figures believe shipping is “unprepared or little prepared” for the sulphur cap, the executive director of fiduciary and corporate adviser Ocorian, Gary Bowman, reported back from London Shipping Week in mid-September 2019 that: “the major mood point centred on whether or not IMO 2020 will result in an uneven playing field” because of the unpredictable level of enforcement.
Insurers share these anxieties. In a mid-December report by the UK P&I Club titled New IMO regulations present unique challenges for 2020, loss prevention director Stuart Edmonston saw the sulphur cap bringing “unique challenges in terms of compliance, enforcement and managing the new type of fuel on board.”
It is known that the consequences of any breaches of IMO 2020 will be substantial in some jurisdictions. Singapore, for instance, has promised imprisonment for violators within its territorial waters. And from 2020 an offence includes the carrying of fuel with a sulphur content above the 0.5% limit.
Nobody is quite sure however what kind of sanction a violation in China’s domestic emission control areas might incur, especially as in late 2019 Beijing was debating whether to further tighten its regulations to include the carriage of illegal fuels. The exception would be if the vessel is equipped with scrubbers; since the start of 2019 Chinese regulations have prohibited discharges from open-loop scrubbers in ports along the coastline, into its vast inland waterways and into the Bohai Bay.
In short, uncertainty reigns. “It will be interesting to see how the beginning of 2020 unfolds,” said Ocorian’s Mr Bowman in something of an understatement. “It is clear that enforcing the new regulations will require expertise and additional resources that enforcement authorities in some of the poorer flag or port states simply cannot afford. Therefore, as many feared, there is unlikely to be consistency across the world; inconsistency puts some at a significant financial advantage.”
For instance, countries such as Egypt, Pakistan, Mexico and Argentina are dragging their feet on the sulphur cap and taking a passive stance as they wait to see how its implementation unfolds.
There is an optimistic voice however – IMO’s head of air pollution and energy efficiency, Edmund Hughes – who, in the organisation’s latest publication points out: “The industry has had three years to prepare for IMO 2020 … there is every reason to be confident [it] is ready.”
On the big issue of fuel availability and quality, it is certainly true that much has been going on behind the scenes. Major refineries and bunkering ports are increasingly confident that compliant fuel is plentiful. Vessel tanks have been cleaned in readiness. All ports, member states and international organisations know what is expected of them. And there has undoubtedly been a lot of discussion time since the 0.5% limit was confirmed more than three years ago, in October 2016.
“My view is that there has been sufficient time for preparation,” summarises Mr Hughes.
But if things do not go smoothly, shipowners in particular are in the firing line. As Hill Dickinson’s Ms Bradley pointed out in the analysis titled IMO 2020 is setting stage for a perfect storm of litigation: “[They] would bear the responsibility for complying with the global sulphur cap and would be the target for enforcement by port state control authorities.”
The report cited a daunting number of practical issues. For instance, there is a dearth of available guidance on what attitude national authorities will take in the event of marginal breaches of the sulphur cap and fines associated with breaches are likely to be uneven.
There is also the highly significant issue of liability. “What happens where you have ordered a compliant fuel [and] it looks like a compliant fuel but when it’s tested, it’s just off-spec, just slightly over the 0.50%,” Ms Bradley speculates. “Whose responsibility is that?”
Ultimately this comes down to the quality of the bunkering, a notoriously litigious area that routinely triggers disputes between owners, time charterers and bunker suppliers. “There is always a fight about whether the problem arose from the fuel supplied or how it was handled on board,” she adds.
And if the relevant authority rules the fuel does not comply, a number of other complications arise; for instance, who will pay the costs of the de-bunker, the cleanliness of the lines and tanks, and contractual disputes over samples?
Inevitably insurers will become embroiled in these issues. In a somewhat dire warning, the UK P&I Club’s Mr Edmonston says: “The shipping industry needs to be prepared for not just the initial and inevitable disruption that IMO 2020 will cause, but also be ready for the related elevation in threats, such as blackouts and associated engine breakdowns.”
Despite the teething troubles, nobody is saying the sulphur cap is unworkable – or unnecessary. Rather, it is widely seen as putting shipping on a virtuous path.
In a detailed study entitled On course towards carbon-neutral shipping?, the Decarbonising Transport Initiative, a division of the International Transport Forum, warned: “If no drastic action is taken, CO2 emissions from international shipping could increase between 50% and 250% by 2050.” But the action taken on the sulphur cap is forecast to slash sulphur emissions between 2020 and 2024 by 77%.
And although Hill Dickinson’s Ms Bradley highlights the legal complications because of the sulphur cap, she has high praise for the industry’s response so far. “The shipping industry has come a long way in terms of preparing for the introduction of the global sulphur cap,” she says. “A lot of the risks can be managed contractually.”
The oil and gas industry has risen to the challenge too. As Corcorian’s Mr Bowman acknowledges: “Initial concerns over the undersupply of viable alternatives, such as low sulphur fuel oil and marine gasoil, seem to have subsided.”
And the finance industry sees virtue in the direction IMO has taken. According to Switzerland’s UBS bank, the green shipping market could be worth at least US$250Bn over the next five years. And all that investment in low- or zero-carbon technology could boost the value of the fleet because the coming wave of energy-efficient ships may, estimates UBS, hold their value better.
As soon as 2030 and certainly by 2050, IMO’s Mr Hughes predicts that zero-emission ships will be coming down the slipways. Perhaps then, these post-2020 concerns will be long forgotten.
It will rapidly become difficult or even impossible for ships with illegal emissions to evade detection. Ahead of the CO2 deadlines, the Port of Rotterdam has installed an air quality sensor at its Maas Entrance that provides real-time readings of vessel emissions as ships enter or leave the port. Known as a ‘sulphur sniffer’, the device was installed by the government’s Human Environment and Transport Inspectorate.
Under guidance from IMO, ports everywhere are installing similar devices to identify ships which may be in violation of emissions rules. Some port authorities are sending up drones to perform the same function.
In the case of the Port of Rotterdam, which has nearly 29,500 sea-going ship visits a year, the sniffer was originally installed at the Hook of Holland, but was relocated to the light on Splitsingsdam in the centre of the approach channel. “The previous location was too far away from the area in which the largest vessels enter the port,” a port release said. At Splitsingsdam, the detection ability will be much improved.
Highly conscious of emissions in the North Sea, where the maximum permitted sulphur level since 2015 is 0.1%, the inspectorate has been using a small plane to monitor emissions since 2018. Supplied by the Belgium coastguard, the aircraft has a sensor installed below the fuselage that extracts air and measures a vessel’s nitrogen and sulphur emissions. The aircraft also flies far out to sea to monitor incoming and outgoing ships. About 95% of all vessels arriving in Rotterdam comply with the sulphur regulations, the Rotterdam inspectorate has found.
The good oil
One of the most important documents in the post-2020 era will be a form called Fonar. Short for fuel oil non-availability report, it is like a get-out-of-jail card. If a ship cannot find compliant fuel oil in a port, Fonar is where the master provides evidence that, essentially, he did his best. However, Fonar only goes so far. As IMO points out, shipowners should remember that Fonar does not provide an exemption, once and for all, but should be seen as a once-only. Under regulation 18.2 of Marpol Annex VI it is the responsibility of the authorities in the destination port to “scrutinise the information provided and take action as appropriate”.
And if the Fonar fails to provide sufficient evidence that the operator tried hard enough or if the shipowner makes repeated claims that it was not possible to source compliant fuel, this is a red light for the authorities who will probably demand much fuller details. Repeated claims could also tie the operator up in more extensive inspections or examinations while in port.