While talking at the first SAFETY4SEA Conference in Hamburg, Mr. Alvin Forster, Deputy Director (Loss Prevention) at North P&I Club, analyzed implications of 2020 sulphur cap regulation from the marine insurance perspective, sharing feedback from specific cases on the challenges being faced through certain compliance methods. North Club has identified areas where charter parties and commercial agreements could be affected by the choice of compliance method.
2020 is approaching but many uncertainties arise with respect to fuel costs, fuel availability, the characteristics of some of these new fuels and how the sulphur cap is going to be enforced. Certainly ship owners and charterers have tough decisions to make in terms of how they’re going to comply with the new legislation on the reduction of the sulphur cap down to 0.5% on 1 January 2020; and these issues aren’t just technical or operational, there are commercial and contractual issues.
Let’s review the commercial and contractual impacts: What can we expect?
An area where there is scope for disputes concerns time charterparties, where the time charterer provides the bunkers.
There’s no transition period after the 1st of January 2020, ship owners have to do their transition before that. The key message we’re getting across to our members is to act now. It’s already getting too late and open dialogue is important. Talk internally, operations and technical and chartering departments need to know what each other’s doing. Chartering departments can’t act on promises from a charterer to supply one type of fuel without consulting the technical department. Then there is the commercial cooperation aspect. It’s quite likely that most charter parties, particularly time charter parties and especially those that span the 2020 enforcement date will need to be amended.
The importance of planning cannot be overstated. There is need to plan for the transition. This and the changeover depend on your chosen method of compliance. If opting for distillates or new VLSFO products, then tank cleaning has to be carried out safely and properly to makes sure future stems aren’t contaminated. All this needs to be planned. Also, you ought to have contingency plans, for example, when there isn’t compliant fuel available or when the scrubber fails.
The big question is which option on method of compliance is the right one and of course there isn’t a right choice. It all depends on the operation, the vessel type, its value and trading areas.
Option #1: Burn Distillate Fuels
Possible issues
As things stand, this seems to be the most popular choice, perhaps shipowners keeping an eye on the development of the new blended fuels. Most of the concerns surrounding the use of compliant distillates, such as MGO, are well known and the most obvious one is its availability from 2020. But distillates are not problem-free and other concerns include
- Fuel pump leakages
- Centrifugal separators – do existing units needs modified?
- Low temperature flow characteristics
- Over-rating of vessel steam generation capacity (no longer any need to heat fuel)
Option #2: Burn ‘Hybrids’ and Blends
The primary concern is that we know so little about the new VLSFO products expecting to hit the market. We know nothing about their characteristics and their composition. Will they consist of VGO, shale oil or be derived from new refinery methods?
Possible issues
- Centrifugal separators – again, do existing units needs modified?
- Difficulties in tracing the source of cutter stocks and blend components (are the recent bad bunker issues a sign of things to come?)
- Will supply meet demand in 2020?
- Some products could fall outside recognised grades in ISO 8217
- New fuels are expected to be largely paraffinic in nature, therefore higher risk of incompatibility between fuels
Option #3: Scrubbers
There has been a recent spike in interest in scrubbers; probably due to some bunker market analysts’ predictions of around $400 per tonne price differential between high sulphur heavy fuel and compliant MGO come 2020. From a purely financial point of view, this makes it an attractive option not only to shipowners but also time charterers where they have an obligation to provide the fuel.
The green credentials of this option are being argued very publically at the moment.
Possible issues
- What to do in the event of scrubber malfunction – the need for contingency plans. If carrying MGO as contingency – ensure safe and contamination-free changeovers
- Is there a drydocking entitlement in charterparties and would it apply?
- At installation, remember the need for safe access to equipment and machinery
- Will C/P vessel performance warranties be affected by the increased consumptions associated with scrubbers?
- Requires lot of space and power
- Could require high levels of maintenance and there are reliability concerns – importance of doing it right and using the right materials
- Impact of future legislation, in particular restrictions on the discharge of effluent from open loop systems
- Unknown availability of HS HFO post 2020
- Time required to plan, purchase and fit system
- Closed loop and hybrid systems – safe handling of chemicals and waste
Option #4: Burn LNG
Possible issues
- Is it a long term solution and how does is fit with IMO’s strategy to reduce CO2 emissions?
- Reliability of DF engines – switching back to MGO during engine load changes
- Lack of recognized commercial quality standards for LNG as a marine fuel
- C/P vessel performance warranties affected?
- High CAPEX – long payback period
- Limited infrastructure means limited trading?
- Ageing and rollover – how much of a risk?
- Uncertainty in quality and quantity disputes
- Loss of cargo space because of size and nature of storage tanks
- Higher risk bunkering, storage and use of LNG
- Crew familiarity
Ship owners and charterers need to protect themselves and this all comes down to charter party clauses. The most obvious clause is the bunker quality clause, but all clauses in a charter party that have any relation with fuel need to be checked. So we’re recommending a full review. This is particularly important for those charter parties that span the 2020 implementation date.
We recommend you be more specific on terminology because they will have an impact on how it’s interpreted. Referring to fuel as low-sulphur or high-sulphur could be misinterpreted from 2020; this then could affect how bunker on delivery and bunker on redelivery clauses will operate. We’ve already mentioned drydocking entitlement clauses and performance warranties in the charter party. All these things have to be taken into account.
Key point here is that there isn’t a single magic clause; the whole contract has to be considered. BIMCO have just drafted a new bunker quality clause but again it’s not the panacea, it doesn’t do everything. However, they’re also working on other clauses to look at all the other aspects.
Above text is an edited version of Mr. Alvin Forster’s presentation during the SAFETY4SEA Conference in Hamburg
View his video presentation here
The views presented hereabove are only those of the author and not necessarily those of SAFETY4SEA and are for information sharing and discussion purposes only.
