Sulphur Emissions: The Clock is Ticking

August 2018

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As Members will be aware, the Marpol Annex VI Regulation 14.1.3 will come into force on 1 January 2020 requiring vessels to comply with the 0.5% SOX emissions limit worldwide other than in Emission Control Areas [ECA] to which the existing 0.1% limit will continue to apply. With less than 18 months to go before implementation of one of the most wide-ranging measures to affect the majority of the world’s merchant fleet, it may be helpful to identify some of the potential issues arising in consequence.

There are two principal methods available to achieve compliance:

1. To “clean” a vessel’s exhaust gases so as to be able to continue to burn high sulphur fuel oil (HSFO) ; or
2. To change over to the use of clean fuels, Low Sulphur Fuel Oil (LSFO), distillates or liquefied Natural Gas (LNG)

The first requires the installation of an exhaust gas cleaning system or scrubber. Amongst potential considerations are:

  • Feasibility. Does the vessel’s design and structure permit this?
  • Cost-benefit. Will the vessel’s remaining service life and price differential between HSFO and LSFO enable the significant costs involved to be amortised?
  • Availability. There are a limited number of manufacturers of such equipment and facilities where it can be installed. Will suppliers be able to manufacture, deliver and install a sufficient volume of scrubbers to meet demand?
  • Efficiency. Will scrubbers work effectively? What will their effect be on main engine performance and fuel consumption?
  • Operation. In the case of closed system scrubbers, will there be facilities for the disposal of the residues? In case of open systems the intake seawater needs to meet alkalinity requirements and some countries have limited overboard discharge of wash water. Crew will require training in maintenance and operation.

Whilst the second alternative avoids the issues identified above, it potentially may lead to other issues. Perhaps the most significant is the availability of LSFO. There is no guarantee that refiners will be able to produce sufficient quantities of LSFO, or that wide enough distribution can be achieved so as to meet anticipated demand. This may result in diversion becoming necessary to obtain bunkers leading to voyage deviation and delay. Alternatively, it may be necessary to slow steam to conserve bunkers.

Other potential issues include:

  • Bunker quality disputes. The likelihood is that these may increase due to the critical importance of sulphur content and risks of contamination due both to the failure to ensure the supply chain infrastructure is sufficiently segregated, and the presence of catalytic fines causing damage to propulsion systems.
  • Compatibility issues with main engines and other machinery.
  • Changeover procedures.

Some of these will have been partially addressed on vessels trading to existing ECAs where changeover to the use of low sulphur fuels has formed a mandatory operational procedure and going over to sole use of these will result in simplification, the one-off final changeover inevitably raises some issues. How are HSFO tanks and systems to be cleaned for future use for LSFO? How is unused HSFO remaining on board going to be disposed of?

Many of the above issues are primarily technical or operational, they may have legal ramifications. Whilst is not possible to anticipate every issue that may arise or provide other than general pointers since much will depend on the precise terms of existing contracts, Members may wish to give consideration to the following.

New-Buildings.
Whilst it is likely that compliance will have been given careful consideration in this context, where vessels are being constructed with scrubbers:

  • Does the building contract address responsibility for/ consequences of delay in delivery or installation of the scrubber?
  • What is the scope of the manufacturer’s warranty?
  • What level of customer support is available?

Sale and purchase - (particularly where delivery will take place in the second half of 2019)
In the case of scrubber-equipped vessels:

• Is the manufacturer’s warranty transferable?
• What warranties will the seller give as to the performance and operation of the scrubber?

In the case of vessels intended to use clean fuels:

• Will delivery be with conversion to the latter having been accomplished?
• If not, who is to be responsible for the changeover, cleaning costs, HSFO bunker disposal and the time used?

Time charters extending beyond 2019.
Many of these may not have been drafted to address the issues identified above. A fundamental consideration is the decision as to which route to follow to achieve compliance post the implementation date.

  • Can an Owner unilaterally decide to fit a scrubber and take the vessel out of service to do so?
  • Conversely, can a Charterer require an Owner to do so? It is not hard to envisage Charterers attempting to argue that generalised terms requiring the vessel to comply with all regulatory requirements oblige Owners to fit scrubbers.
  • If an owner declines to fit a scrubber, can a Charterer recover additional fuel costs incurred in consequence?
  • Which party will be responsible for the costs of changing over to clean fuel?
  • If an Owner declines to fit a scrubber how, if at all, does this impact on a Charterer’s obligation to provide bunkers? In the event of unavailability, can Charterers claim for diversion costs and delay?

Voyage charters are less likely to be impacted although it may be worthwhile reviewing the ambit of liberty clauses in bills of lading to ensure diversion to obtain bunkers of the requisite quality fall within these.

It is likely that the majority of any disputes arising will fall within the scope of Defence (FD&D) cover. The most obvious potential area for engagement of P&I cover is recovery of fines imposed for breach of the emissions limits. Whilst there appears to be no prospect of the commencement date being deferred, there are ongoing discussions regarding a pragmatic approach to enforcement during the initial implementation period. The present focus is on the role of on board ship implementation plans in compliance verification. It ought to be borne in mind that there is no guarantee that such discussions will prove fruitful and individual Port State Control authorities may in any event adopt a “zero tolerance” approach. Any coverage for fines for non-compliance under Rule 25 xvi e would be discretionary and subject to the Member satisfying the Directors that it took reasonable steps to avoid such non-compliance.

However, it is not difficult to envisage other potential P&I impacts. For example, were a scrubber to fail in service, this may result in possible deviation and delay and give rise to seaworthiness issues.

To the extent that planning for meeting the requirements has not already commenced, it would be prudent to start preparation for compliance now so as to ensure potential issues are identified and appropriate plans made to address these, in advance of the implementation date.

The Managers will continue to monitor developments and issue further guidance as necessary but, if Members wish to raise any issues arising from this article, your usual Club contact will be happy to assist.

Article by Charles Brown
Director