In 2014, a group of concerned shipowners, including Maersk and Wallenius-Wilhelmsen, founded the Trident Alliance (TA) to raise awareness of the potential problem of uneven enforcement of the global cap on sulphur in fuel at 0.5% in 2020.
I participated as a co-founder of TA. In public and at meetings with the various authorities who cared to listen to our concerns, we laid out calculations that the so-called “cheating bonus” for companies or operators who chose not to comply with sulphur regulations in sulphur emission control areas (SECAs) could run into the millions of dollars (US$M) depending on ship type and duration of trading within SECAs.
With the potential money at stake – which might be on the same order of magnitude as the charter rate – there is little doubt that some people in the industry have and will continue to be tempted to try to circumvent sulphur regulations unless a very rigid enforcement regime is established.
And any such regime would need the ability to apply sanctions of a magnitude which would make it very risky for anyone to play fast and loose with the rules.
Again using SECAs within the EU as an example, the Sulphur Directive holds that sanctions must be effective, proportionate and dissuasive. However, it is still the prerogative of each individual EU Member State to decide the scope of the sanctions they impose. Only if the enforcement body for enforcers, the European Maritime Safety Agency (EMSA), deems that the sanctions applied by any member state do not follow the EU principles, can sanctions against that particular member state can be applied.
Thus, the main concern for owners and operators – the vast majority of whom intend to follow the rules – remains the same. Can enforcement ensure a level playing field?
If an owner can operate a fleet on cheaper, non-compliant fuel without getting caught by the Port State Control (PSC) authorities (or if fines are minimal) that owner can basically out-compete other owners operating in the same segment. That is indeed a valid concern for those operators intending to comply.
Some years ago, an industry provocateur said that compliant fuel would be in abundance post-2020 because 30-40% of the industry would not comply with the new sulphur rules, and, instead, keep trading on heavy fuel oil (HFO).
Some years ago, an industry provocateur said that compliant fuel would be in abundance post-2020 because 30-40% of the industry would not comply with the new sulphur rules, and, instead, keep trading on heavy fuel oil (HFO).
Thus far, however, the statistics available on non-compliance within the North European SECA belie that worrying vision. Total non-compliance is around 5%, and most of that number is tied to minor exceedances of the limits (e.g. 0.12% against the 0.10% limit) and messy paperwork. There have, in fact, been very few cases of gross non-compliance (i.e. use of HFO instead of distillate).
When citing these compliance figures, it must be kept in mind that enforcement of the sulphur rules has basically only taken place in Northern Europe and in North America, both regions with well-established PSC regimes. In 2020, when the Global cap (0.5%) kicks in, the situation will change and many fear that circumvention of the regulations will become more commonplace.
For one thing, it is likely to be a huge challenge to educate and train PSC officers in port states outside Northern Europe and North America to be able to detect sophisticated fuel oil swindling schemes. From the outset, potential swindlers are likely to be one step ahead of those policing them. From my perspective, only a global cooperation between Port State Controls can prevent cheating from becoming a commonplace practice.
Having worked on sulphur cap implementation for many years, I have arrived at a conclusion that cheating scenarios basically can be divided into two categories:
Cheating organized and carried out by the ships’ crews without knowledge or consent of the owner.
A potential example for the first cheating scenario (post-2020) could be a bulk carrier given instructions to bunker 1000 tons of 0.5% S fuel in Buenos Aires. The Captain and the Chief Engineer happen to know the bunker supplier (possibly a former colleague) and instruct him to, instead, deliver 1000 tons of HFO, issue a BDN stating the fuel is compliant and send an invoice to the charterer (or owner) for 1000 tons of 0.5% fuel. The price difference between that and the delivered HFO can easily be more than US$200,000, which is then shared in accordance with an agreed formula. As less than a handful of officers need to be involved on board the ship, the bonus could be US$30-40,000 to each. This scenario might be possible several times per year.
The second cheating scenario is possible only when a company’s executive suite – the CEO, the COO, the CTO and the CFO (or whatever their titles may be) sit down and agree to cheat. On first impulse, one would be tempted to imagine this happening in shipping companies paying their own fuel bills, typically container, Ro-Ro and cruise lines. Many such companies operate several hundred ships so the number of people involved in the office, on board the ships (which may have two crews replacing each other) and within the bunker suppliers, will easily run into the hundreds. Each person involved would need to be instructed (verbally, presumably?) and would expect to receive a kick-back from the scheme. The obvious risk in this scenario is that anyone involved who might become disgruntled with the size of the payout, or have second thoughts for any other reason, represents a potential whistle blower. The consequences of having such a case exposed in the media may be devastating for the company. Aside from the fines or sanctions, the commercial consequences could be catastrophic. Imagine shippers having been charged with a Bunker Adjustment Factor (or Emergency Bunker Surcharge) to cover the extra expenses of the more expensive fuel, only to realize that they have been thoroughly cheated. Would they want their surcharge back? Would they remain faithful customers?
Both scenarios listed above represent routes to non-compliance and should be penalized as such. The former, however, would not disrupt the level playing field. It will only make some senior shipping officers extremely rich in a short period of time.
There is little doubt that with the huge amounts of money involved in bunker cheating, some people in the shipping industry will be tempted to try to make some “easy money”. However, to quote the Managing Director of the German Shipowners’ Association (VDR), Dr. Martin Kröger: “With the paperwork involved including BDN, Oil Record Book, Logbooks, double accounts for fuel bills, MRV reporting and so on, cheating on a corporate management level will literally be impossible.”
Ultimately, enforcement will be vital to ensuring fair competition, and the hope is that the various PSC regimes soon will be able to identify which segments will be most prone to circumventing the rules.
Is it realistic to suspect large, blue chip shipping companies to organize and execute cheating from top management level? Are these companies actually doing themselves or the industry at large any favours by suspecting each other of cheating?
Should PSC perhaps focus its efforts on small companies operating on the spot market?
Violations detected so far point to the latter as the most likely place for cheating to occur. Is that picture likely to change after 2020? The author does not believe so.
Niels Bjørn Mortensen is one of the industry’s pre-eminent regulatory experts. He has headed BIMCO’s marine department, served as Maersk Maritime Technology’s director of regulatory affairs and chaired the Danish Shipowners’ Association technical committee. He also sits at the Danish Maritime and Trade Court as an expert judge.
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