IMO 2020 Sulphur Cap
Introducing the issue
Few will be unaware that the IMO 2020 Sulphur Cap will come into force on 1 January 2020. As of this date, the global sulphur limit under MARPOL Annex VI will be reduced from 3.5% to 0.5%.
There are clear concerns that there will not be enough compliant bunkers available in some areas when the regulation goes live. Others are concerned about how Port State Control (PSC) and other authorities will verify the sulphur content in bunkers and how the limit will be enforced.
In the meantime, many owners have already installed, or are contemplating installing, scrubbers or LNG fuel equipment. Scrubbers could arguably result in savings or increased time charter equivalent (TCE) earnings, given the likely significant price difference between low and high sulphur bunkers. Scrubbers will require a significant investment. One would also need to consider the type of scrubber to be installed, mainly whether to install with an open, closed or hybrid loop, and perhaps with an eye on other potential changes in this area.
The sulphur regime application
The new sulphur regime is set out in MARPOL Appendix VI and, more specifically, in regulations 14 and 18 therein. The 2020 IMO Sulphur Cap will apply worldwide, to all fuels, whether used in the main or ancillary engine, boilers or for lubrication. It applies to all ships, as well as many offshore installations. Certification will be arranged by or through Flag States, which may have delegated responsibility from Classification Societies to issue valid International Air Pollution Prevention Certificates (IAPPC) to ships being 400 GT or more. Importantly, the sulphur regulation in designated areas under the Sulphur Emission Control Areas (SECA), with mainly 0.1% limits, still applies. Even if you trade only between non-MARPOL Appendix VI countries, you may risk falling foul of the regulation if a ship has to divert and the right of a vessel's innocent passage comes into sharper focus. For illustrative purposes only, the following bicoloured map shows countries (in grey) which have ratified the IMO 2020 Sulphur Cap. More countries may follow suit.
The Bunker Delivery Note (BDN) will state whether compliant bunkers have been supplied, but the BDN may say less on how, or under what protocols, this has been ascertained. This and appropriate testing might however be stipulated in the bunker supply contract, or by proxy through a time charter party. In some cases, particularly in the months after the implementation date, if there are no compliant bunkers available, one option will be to submit a Fuel Oil Non-Availability Disclosure document (FOND). If there are compliant bunkers available but these are too expensive, a FOND would not help, but questions would be raised as to where compliant, affordable bunkers have to be available. In Singapore, it is understood that the Maritime and Port Authority (MPA) plans to publish a list of licensed bunker suppliers that have low sulphur fuels. The MPA may also roll out a pilot for electronic BDNs in light of the new sulphur regime.
Ramifications and preparation
In the months leading up to 1 January 2020, terminals and other stakeholders need to ensure that there are sufficient low sulphur bunkers available. Clearly, there will be a massive shift in marine fuel production, up to 2020 and beyond. There may be a significant change in trade patterns, including crude oil and product ship movements. New refineries may need to be constructed/updated and pay heed to any geographical shift in production. Overall, the marine industry has a small share in the use of most oil production, which may potentially delay the new refinery installations/modifications so that more low sulphur fuels are produced in the refineries. Initially, or in some ports, marine gas oil (MGO) or distillates may be the first choice, depending on the availability of low sulphur blends or until these new blends are better understood.
MGO has already been used in designated SECA. Insights from SECA, and the resulting changeover of fuel, may be useful for practical matters leading up to the 2020 regime. MGO would, however, be the most expensive option. Many will be looking for the new low sulphur blends that are underway. In any event, owners will need to carry out ship implementation plans and, for example, review bunker tanks, pumps and piping arrangements, and plan the change over and cleaning of tanks. Many of these issues and preparations have been outlined by the International Chamber of Shipping (ICS).
It is advisable for owners to assess how these new low sulphur bunker blends operate in engines and to consult with the engine makers and classification societies. Certain ISO bunker standards exist, but these may be reviewed as new bunker fuels emerge. There are concerns that some fuels may not be fully compatible with engines - in which case, a fuel's viscosity, lubricity and flashpoint are aspects that require consideration.
Enforcing the sulphur regime will be the responsibility of each state, but administered by the port state control (PSC). The flag state will also have a role but, by and large, the PSC and the authorities in the state where the ship is inspected will decide on compliance, fines and potential criminal charges. Fines may vary considerably from country to country so the parties to a charter party would be wise to regulate this contractually. BIMCO has already produced clauses to address this.
It is not certain how verifying sulphur contents will be carried out. A MARPOL sample may be tested, the sample may be from a bunker tank or an in-line sample may be drawn. "Sniffers" may also be installed to monitor the fuel exhaust. By comparison, the EU has specific guidelines on implementation and testing with regard to SECA, which may indicate what can be expected for the IMO 2020 Sulphur Cap.
Future disputes and charter party clauses
FD&D insurance will come into sharper focus as potential disputes on issues such as cleaning of tanks and removal of non-compliant bunkers are anticipated within this area. Other issues will revolve around the value of bunkers when the ship is redelivered around January 2020. Furthermore, there could be engine damage from new bunker blends, with some issues boiling down to whether or not the bunkers, in fact, caused the damage. An obligation to provide bunkers that do not exceed the 0.5 % sulphur cap does not in necessarily extend to the fitness of the main engine. The description clauses in the charter parties may also need re-working. In this respect, maintenance provisions in the charter and whether the ship is fit for service will be focal areas.
More off-hire and performance related disputes are also anticipated. Other contested areas may be liability for diversion or delays. The bill of lading should contain, or incorporate, charter party terms that allow for certain delays and deviations. As a time charterer, you would also try to obtain back to back charter parties. A time charterer or an owner on a voyage basis must also consider recovery prospects against bunker suppliers.
Many potential disputes can be regulated in the charter party. Associations BIMCO and Intertanko are working on several clauses in four phases. The first is a "compliance clause", outlining the time charterers' obligations and liabilities in providing compliant fuel, with owners remaining responsible for fuel management. Further clauses will follow, relating to the transitional period (e.g. tank cleaning and disposal of residual fuel), on scrubbers and lastly a review of the existing time charter bunker clause. Of course, bespoke clauses can be tailored to the scenario, particularly for a new long-time charter fixture lasting into 2020. For existing long-time charter parties, it may be necessary to renegotiate some areas.