IMO 2020 – A Voyage Charterers Perspective
Not for 175 years, since the first steam powered ships started to appear, taking over from the very green but highly unreliable wind power, has there been such a step change in the shipping industry and we have less than 100 days to go before it starts.
This bulletin provides background on the issues from the perspective of a voyage charterer; this is important as a voyage charterer simply pays for the use of the ship for the designated cargo and voyage and leaves the supply of fuel to the owner; there is little impact to these changes from a voyage charterer’s perspective other than keeping a watching brief on the issues, especially if they have time critical and distance exposed supply chains.
The UN through their maritime arm, the International Maritime Organisation (IMO), have introduced various stages of the International Convention for the prevention of pollution from Ships (Marpol Convention); MARPOL deals with emissions, ballast water and hull growth but we are concerned here with air pollution caused by the burning of fuel.
There are already low emission zones in various parts of the world that have a requirement for ships to burn low sulphur fuel and on 1 January 2020 this is extended to most ships and most parts of the world.
Presently ships can burn heavy fuel oil (HFO) which has a sulphur cap of up to 3.50 % of the total mass. The IMO have determined that shipping must do more to cut its emissions and is now reducing this limit from 3.50 % to 0.50 %.
There are three principal ways of reducing the sulphur emissions from ships:
The use of LNG as an alternative source of fuel would require extensive modifications to a ship’s tanks and pipework. Significant safety measures are also needed. Such a retrofit on a ship would be an expensive undertaking and in practical terms only new buildings will consider this option. The use of LNG is unlikely to impact on the majority of the shipping industry in the short term.
There are various systems but the basic premise is that a ship fitted with a scrubber can scrub the exhaust gases down to a level where the emissions meet the new level. The ship can continue to use HFO, which is cheaper than the alternative distillate, but there is significant capital expense to fitting a scrubber. Less than 5 % of the global fleet have been fitted with scrubbers.
Low Sulphur Compliant Fuel
This is by far the most likely solution to the new emissions limit; vessels will be simply be supplied with low sulphur fuel so that they are compliant by 1 January 2020.
Prospective issues for the shipping market.
There are numerous potential issues looming, our crystal ball is in for polishing at the moment, so we list them in no particular order.
Supply of tonnage
As the date looms the market may see a contraction in tonnage on some routes as owners swop between dirty and clean fuel; given the cost difference most owners and operators will leave this as close as possible to the switch over date. Its not a simple process. HFO is a base fuel and therefore the bunker tanks and fuel lines will need to be prepared for the new fuel.
Supply of Compliant fuel
The refining process for compliant fuel tends to require a different feedstock and sweeter crudes will be needed. These are already used in the aviation industry, so there is likely to be a pricing impact as supply and demand matches in 2020.
Supply of non-Compliant Fuel
HFO which is required for vessels fitted with scrubbers is used pretty universally at the moment but with a small percentage of the fleet using the fuel it may be in shorter supply as refineries and bunker suppliers concentrate on compliant fuel
We have been monitoring the position and most large bunkering ports state that they will be ready with no major impact expected on supply; generally, owners have had time to prepare so we are hopeful that this will not have a major impact on supply.
There is plenty of scope for non-compliance. The IMO have laid down guidelines for what is expected and left it to flag states and local authorities to enforce and determine the level of sanction for non-compliance.
Ships’ engines have been designed for low quality HFO and the change to better quality fuel should not have an impact but the more pessimistic engineers we have spoken to are keeping a watching brief at this stage on engines and their performance with the new fuel.
Compliant fuel costs more and therefore there is likely to be an increase in freight rates to deal with the higher costs.
We would recommend that Charterers include language into their pre-fixture enquiries that deal with compliance. A basic text is included below but this can be adapted for your own operations:
Low Sulphur Fuel
Owners to comment on their preparation for IMO 2020 Sulphur cap
- Number of bunker tanks
- Date they anticipate switching over
- Current adherence
- Future Adherence
- Planned maintenance e.g. fuel tank cleaning
It is Owners’ responsibility to provide suitable fuel for the voyage that they have contracted to perform; we have drafted a clause that makes this clear and the clause below is suitable for voyage charterparties. The clause can be adapted, softened, and shortened as required and our FD&D dept can assist you with this but the main thrust of the clause is to ensure that the consequences rest with owners.
If you have any questions in relation to this clause then please contact the Claims team in London, Dubai or Shanghai.
Air Pollution – Bunker Clause for Voyage Charters
Owners shall have strict liability under this clause and their obligations will not be affected nor reduced by any other provisions of the Charter Party.
For the purpose of this Clause:
“MARPOL Annex VI” shall mean MARPOL Annex VI as amended or revised from time to time; and
“Emission Control Zone” shall mean zones and/or areas as stipulated in MARPOL Annex VI and/or zones and/or areas (applying at sea or in port) regulated by any local, regional and/or national authorities such as, but not limited to, the EU and the US Environmental Protection Agency, the Chinese Ministry of Transport and AMSA.
Notwithstanding any other provision of this Charter Party:
- Owners warrant that the Vessel shall, at their risk, time and expense, comply for the duration of the Charter Party with all applicable rules, regulations and laws relevant to air pollution including without prejudice to the generality of the foregoing MARPOL Annex VI and with all requirements of any emission control zone.
- Owners will ensure the Vessel has a valid International Air Pollution Prevention Certificate along with any other certification required in an emission control zone and that the Vessel keeps records as required by MARPOL Annex VI.
- If the Vessel is installed with an exhaust gas cleaning system (“EGCS”), Owners shall be responsible for ensuring that the EGCS is for the duration of the Charter Party (i) Class approved (where relevant) and meeting all regulatory and certification requirements, (ii) fully operational, (iii) operating at maximum efficiency and (iv) that the Vessel is fitted and operated in accordance with MARPOL ANNEX VI and the requirements of any emission control zones.
- Owners shall be responsible for removing all fuels from the Vessel that do not comply with any revisions or amendments to MARPOL Annex VI (unless they are permitted due to a EGCS being fitted on the Vessel), within a reasonable time prior to the date of any such revisions or amendments coming into force, and Owners shall bear all and any risk, time, loss, delay, fines, costs and expenses in relation to the removal of any such fuels.
Owners shall compensate, indemnify, defend and hold harmless Charterers in respect of any loss, liability, damage, delay, deviation, detention, fines, costs (including additional elevator/carrying charges), expenses or [direct and indirect] consequences whatsoever arising or in any way related to Owners’ failure to comply with any part of this clause.
For the avoidance of doubt, where Owners are in breach of this clause, time shall not count as laytime/demurrage including for any consequential loss of time arising or in any way related to Owners’ failure to comply with any part of this clause.