Emission Control Areas and Low Sulphur Fuel

October 2015

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Enquiries in relation to the requirements for the consumption of low sulphur fuels in Emission Control Areas (ECA) are not uncommon. Many of the enquiries received by the Club have concerned disputes, or potential disputes under time charterparties.

Under MARPOL Annex VI the International Maritime Organisation (IMO) can establish ECAs where vessels have to comply with mandatory measures for the control and reduction of nitrogen oxides (NOx) and sulphur oxides (SOx). There are currently four ECAs, comprising the Baltic Sea, the North Sea, North America and the United States Caribbean Sea areas[1].   From 1 January 2015, vessels have been required to consume fuel with less than 0.1% sulphur content while operating in these ECAs (unless the vessel is fitted with equipment such as scrubbers to reduce the sulphur in exhaust fumes, or is operating on alternative fuel such as LNG, or has a dispensation conferred by Reg. 14.4.4).

Most vessels can consume low sulphur fuels, or can be adapted to consume such fuel relatively cheaply, so there have not been many disputes involving significant costs for conversion or adaption of ships, as happened in the case of the “Ellie”/“Frixos” which reached the House of Lords. In that case, when new MARPOL regulations effective from 2005 required that oil tankers be double-hulled, and when both vessels were in long time-charters which required that they be in every way fit to carry oil, and which required Owners to maintain the vessels in that condition, it was held that the Owners had to adapt the ships, at a cost of about US$600,000 per vessel, to comply with the charterparty requirement.  See Due Diligence - Obligation to Maintain III.

Before the lower 0.1% sulphur content requirement came into effect at the start of 2015, there were concerns that there would not be sufficient low sulphur fuel available at bunkering ports in or near to ECAs. However these concerns proved to be unfounded, and low sulphur fuels have been readily available in these areas, but at a higher cost than the higher sulphur fuels. While a shipowner is obliged to comply with the MARPOL regulations, it is the time-charterer who pays for the fuel consumed, and a time-charterer will usually want the ship to perform as efficiently and economically as possible, by consuming the more expensive low sulphur fuel only when the ship is required to do this, within the ECAs.

MARPOL requires vessels to be in compliance at all times when sailing in the ECA, therefore a vessel needs to have compliant low sulphur fuel onboard, and to have changed over to low sulphur fuel in sufficient time to ensure that compliant fuel is being consumed before the vessel enters the ECA. If a charterer gives an order to sail to an ECA, then the Charterer will need to ensure the ship has enough low sulphur fuel onboard to use while in the ECA, or will need to supply low sulphur fuel before the vessel reaches the ECA. Any Charterer’s orders to sail into or through an ECA on high sulphur fuel are probably unlawful since that order would require an Owner to break international and national regulations, and an Owner would be entitled to call on the Charterer to provide fresh orders which, dependent on what quantities of low sulphur fuel were onboard, might require the vessel to divert to stem low sulphur fuel before the ECA.

Even if a vessel is not calling at any port in an ECA, the vessel must still comply with its requirements when passing through an ECA: for example a ship sailing from Brazil to a port in northern Norway, north of the ECA limit, would either need to be consuming low sulphur fuel while passing through any part of the North Sea ECA, or would have to take care to navigate outside of the outer limits of the ECA if consuming high sulphur fuel.

While the time charterer is obliged to provide compliant fuel, the care and management of fuel onboard remains the responsibility of the Owner. In one case a port state control inspector took a sample of fuel from the vessel’s engine room, at a point immediately before the fuel entered the ship’s engine. The sample was found to contain more than 0.1% sulphur. In contrast the bunker delivery note for the fuel, supplied by time-charterers, indicated that the fuel had less than 0.1% sulphur content. Further investigation and analysis of samples taken at the time of bunkering confirmed the fuel had less than 0.1% sulphur content when supplied to the vessel. However, the fuel had been stored in a tank on board that had previously contained higher sulphur fuel, and residues of the higher sulphur fuel had increased the sulphur content above the 0.1% limit. Whilst Owners faced a fine for breach of MARPOL, and the additional cost of obtaining compliant fuel to sail out of the port and out of the ECA, they had no claim against the time-charterers, who had supplied compliant fuel.

Many vessels, whether or not operating under time-charter, are expected to change over from low sulphur fuel to cheaper high-sulphur fuel and back to low sulphur fuels on a regular basis as they leave or enter ECAs. Whilst the vessel ought to be able to do this, the vessel’s engine might need different lubricating oils, to be compatible with the different fuels and advice should be sought from the engine manufacturer. Most time charters require charterers to provide and pay for fuel, but the provision of lub oil usually remains the Owner’s responsibility.

The vessel’s staff can face other technical challenges in changing between different fuels, with different temperatures, viscosities, or other incompatibility between fuels. Again, under a charterparty that describes the vessel as capable of worldwide trading, or trading to or through an ECA, absent a clause to the contrary, the risks of operating the vessel on different fuels rests with the Owners.

Many vessels trading under the new regime were built before it was necessary to have both low sulphur and high sulphur fuel onboard and, therefore, have been adapted to trade under the new requirements by having some of their fuel tanks dedicated to low sulphur fuel. This might reduce the range of the vessel, with the effect that the time-charterer has to arrange more bunker stems. For example, if a vessel originally had four 500t capacity fuel oil tanks, and one such tank is now dedicated to low sulphur fuel, then the vessel might be limited to carrying a maximum of 1,500t of high-sulphur fuel. As such Owners should be careful to ensure the vessels’ tank capacities are carefully described in the charterparty to avoid disputes.

It is probably uneconomic to change storage tanks from low sulphur to high sulphur oil on a regular basis if the vessel is frequently employed in trades through or in and out of ECAs (with the corresponding risk of contaminating low sulphur fuel discussed above). However, the Club is aware of cases where Owners and Charterers have agreed to apportion the risk and cost of converting a “dedicated” tank from one grade to the other, when the vessel’s employment has been changed to trades encompassing regular transit of ECAs to trades where there are no requirements for low sulphur fuel.

Most timecharters include a clause which states the quantities and, agrees the prices of both high and low sulphur fuels for bunkers on delivery into the charter, and on redelivery. It is not unusual for charterparties to require that the vessel to be redelivered with approximately the same quantities onboard as on delivery. Whilst low sulphur fuel is widely available in ports in or near ECAs, it can be difficult to source in other parts of the world, such as China and in the Indian Ocean, where there is no significant market for low sulphur fuel. A charterer redelivering a vessel in these areas might not be able to supply bunkers such that the ship redelivers with the same quantities of low sulphur fuel as on delivery. In these circumstances Owners cannot refuse redelivery but would have a claim for damages under the charterparty which, dependent on the actual wording of the relevant clause(s) in the charterparty, should be resolved by an adjustment of the final hire statement to take into account the actual bunkers onboard and prices. The vessel is unlikely to have an immediate need for low sulphur fuel in those areas, but Owners should be careful to describe accurately the bunkers onboard on delivery into the next timecharter so the next Charterer is aware that low sulphur fuel will need to be supplied before ordering the vessel to an ECA.

Article by Bill Kirrane, Syndicate Manager and Danielle Southey, Syndicate Associate

[1] MARPOL Annex VI Reg. 13 deals with NOx and specifies (in Reg. 13.6) three ECA. Reg. 14 deals with SOx and particulate matter and specifies (in Reg. 14.3) four ECA) but also allows for “any other sea area, including any port area, designated by the Organization in accordance with the criteria and procedures set forth in appendix III to this Annex.