The
challenges introduced by the global sulphur cap are not exclusively technical.
The new limits are likely to impact contracts and charterparties. Although the
new global sulphur cap will not arrive until 2020, forward planning now could
help to avoid painful charterparty disputes in the future. Time charterparties
will require particularly close attention, with more challenges anticipated for
vessels already in long-term charterparties that span the enforcement date of 1
January 2020.
Unfortunately, there is no single “magic”
charterparty clause to deal with all of the issues that might arise. All bunker
clauses will almost certainly need to be reviewed but other clauses might also
need to be considered, depending upon the chosen method of compliance.
Where
vessels are delivered into charterparties before 01/01/2020 and will be
redelivered after, issues to consider will include:
Ø What will be done, and at whose cost, with any non-compliant fuel on
board that can no longer be used or is not allowed to remain on board?
Ø It is likely that
a prohibition on the carriage of non-compliant fuels will come into force on 1
March 2020 for vessels not fitted with scrubbers. Non-compliant fuels will have
to be removed to avoid fines or the vessel being detained. If non-compliant
fuel is not consumed before that time, who will be obliged to arrange or pay
for the removal of such fuel will depend upon the wording of the charterparty.
The parties may wish to agree in the charterparty that non-compliant fuel will
be used before 01/01/2020 to avoid extensive discharge costs and to maximise
bunker tank capacity for compliant fuels.
Ø What is the definition of 'high sulphur' and low sulphur'?
Ø At the moment, vessels
burn either ‘low sulphur’ (0.1%S max) fuel in ECAs or ‘high sulphur’ (3.5%S
max) fuel outside ECAs. In 2020, there will be three sulphur types (<0.1%S,
<0.5%S and >0.5%S). This raises the question: what will ‘low sulphur’ and
‘high sulphur’ mean in 2020? The meaning of such terms could have a significant
impact on bunkers on redelivery (“BOR”) calculations.
Ø If exhaust gas cleaning systems (scrubbers) are being considered as a
solution, who will pay for the installation and any associated delay or deviation?
Will the vessel need to go to dry dock to fit scrubbers and will this be
allowed under the charter party?
Ø It is unlikely
that existing charter parties will expressly say who is to pay for a vessel to
have an EGCS installed. If the charterer is likely to benefit in fuel cost
savings then there may be scope for a commercial agreement as to who will pay.
Ø Can Owners be compelled to fit scrubbers?
The Court of Appeal considered this type of issue
in the Elli and the Frixos [2008] 2 Lloyd’s Rep. 11 where the Court found that
the owners were in breach of certain clauses in the particular charter parties
for not having carried out the necessary modifications to comply with changes
to MARPOL Annex I. But, the absence of scrubber on a vessel will not
necessarily put the vessel or its owner in breach of MARPOL Annex VI or impact
on the vessel’s documentation, hence it seems likely that the Elli and the
Frixos will not apply but it will depend on the facts of the individual case.
Where
charter parties are entered into after 01/01/20, the issues to consider will
depend upon the chosen solution for compliance:
Exhaust gas cleaning systems (scrubbers)
Ø Vessel fitted with closed loop or hybrid scrubbers - who will be
responsible for waste effluent removal?
Ø Open loop
scrubbers discharge waste into the sea, whereas closed loop scrubbers retain
the waste on board, which then has to be disposed of into shore facilities.
Hybrid systems give the option of switching between open and closed loop. Who
will be responsible for scrubber waste disposal will depend upon the wording of
the charter party.
Ø Will a higher daily hire rate be justified?
Ø Some market
analysts have forecasted the price of HSFO (suitable for use with scrubbers)
will be around US$300 to US$400 cheaper than distillates and hybrid fuels.
Therefore, it is arguable that Charterers will benefit financially from the
installation of scrubbers and some industry observers are predicting that this
will result in higher c/p rates for vessels fitted with scrubbers.
Ø Will performance warranties be affected by the power demands of
scrubbers?
If so, then performance
warranties may need to be reviewed.
Distillates, Hybrids and Blends
Ø
Will the fuel prices agreed in the charter party
need to be changed?
Ø
Who will be responsible for the cost and time of
any bunker tank cleaning required due to switching between certain fuels? Will
the bunker quality clause need to be amended, particularly given that some
hybrid fuels do not fit comfortably into ISO8217?
Ø
Will the performance warranties be affected?
Ø
Will suitable and compliant fuel be available
during the vessel’s chosen trade? If not, who will be responsible for any
additional expenses, fines etc.?
Ø
Will the trading clauses need to be varied in view
of any known fuel availability issues on the vessel’s chosen trade?
LNG
Ø Will availability limit the vessel’s trading options?
Ø Will bunkering operations interfere with cargo operations? If so, at
whose cost?
Ø All clauses relating to fuel will need to be carefully considered in
view of the special characteristics of this fuel and the lack of standard
specifications.
Ø Will performance warranties need to be reviewed?
Ø Will indemnities be required to cover onerous Conditions of Use terms
for bunkering operations?
Ø Some of the above
issues will also apply if emerging fuels are to be used, and may also apply to
existing long-term charterparties.
Almost all ships afloat today
have a diesel engine of some sort on board. Even the LNG carriers that use boil
off gas from the cargo to run steam turbines will have auxiliary engines or
emergency generators and it is only a handful of small battery powered vessels
that do not have to take on fuel at some time.
Diesel engines are very
versatile machines and from the very early days have been capable of running on
many different types of fuel from mineral oils, biofuels, alcohols and even
elemental hydrogen. That said, all fuel types have particular characteristics
that must be coped with in terms of delivery to the ship, storage on board and
treatment prior to combustion.
Over the years, mineral oil
fuels have become categorised and in 1987 were listed under an ISO standard –
ISO 8217 – which has been updated from time to time with the latest version
dated 2017.
Historically motorships have
run on either residual fuel oil or distillate fuels such as marine diesel oil
(MDO) or marine gas oil (MGO). The fuels are listed in ascending order of
price, so it should be no surprise that owners of the vessels consuming the
most fuel generally opted for fuel oil with diesel oil and gas oil being
reserved for smaller vessels and the auxiliary engines of larger ships. It
should be noted that even ships which ran most of the time on fuel would often
switch to using MDO when entering or manoeuvring in port because the fuel
system could better respond to sudden changes in engine direction or power
output when using a lighter fuel.
MARPOL Annex VI – the start of emission controls
Until 1995, there were no
controls on the exhaust emissions from ships but that changed with the advent
of MARPOL Annex VI and its timetable of emission reduction rules. Even then the
controls were not particularly stringent, and it was only with the revised
Annex VI coming into force in 2010 that SOx reduction took on the importance it
has.SOx is associated with the sulphur content of fuels which is typically highest in residual fuels unless the fuel has undergone expensive desulphurisation treatment at the refinery. With the advent of sulphur emission control areas (SECAs) it seemed that distillates would be the way to go but considering the premiums such fuels attract, it is little wonder that exhaust gas cleaning technology – more commonly known as scrubbers – seems to be gaining devotees.
A scrubber may allow a ship to
continue to operate on HFO with a sulphur content well above what would
otherwise be allowed under MARPOL or local regulations but the ship will also
need other compliant fuel on board for auxiliary engines that do not run well
on heavy fuels or for when the scrubber is undergoing maintenance of
inoperative.
There has also been a concerted
effort to promote LNG as the fuel of the future and there are increasing
numbers of other alternatives; LPG, methanol, ammonia, hydrogen as well as
animal and vegetable biofuels also being suggested. On the lube front too,
development is bringing about synthetic and bio-degradable products aimed at
reducing reliance on mineral oils and protecting the environment.
In 2016 the IMO set the date
for the last of the current deadlines in fuel regulation for 2020. The
reduction to an equivalent 0.5% sulphur content in fuels globally combined with
the 0.1% in ECAs and, under local regulations, some ports outside of ECAs will
cause a very expensive time for owners with some suggesting an extra $60Bn bill
for the industry.
The changes in the regulations
for sulphur content have not yet been reflected in the ISO 8217 standard which
still list the sulphur content for distillates as ranging from 1.0% to 1.5%
which is of course far in excess of the 0.1% that applies in ECAs. However, for
residual fuels, the standard says the sulphur content must comply with
statutory requirements as defined by purchaser. The International Standards
Organization is addressing the issue which is expected to become even more
pressing with the 0.50% sulphur limit in 2020.
Some care needs to be taken
when referencing ISO 8217 since some owners prefer to specify a particular
version of the standard rather than the latest when ordering fuels. Although
the basic parameters remain very similar between the different versions there
are subtle differences.
Not all ships burn HFO, but it
is true to say that the vast majority of modern deepsea bulkers, tankers and
container ships are equipped with engines that can make use of fuels with
viscosities up to 700cSt. Even so, most will not regularly use the heaviest
fuels but will opt for something in the 380cSt or 500cSt range. This is
certainly a lighter fuel, but it is still much heavier than the 180cst that
used to be the standard marine HFO.
Demand for distillate fuels by
users from all industries is now so great that the residual fuel from many
refineries is heavier than it used to be. The 2020 sulphur rules will further
increase demand for distillates as the only option for ships that are not
equipped with scrubbers or dual fuel engines.
To make the heaviest residuals
usable it is sometimes necessary to blend them with lighter oils. Blended fuel
may have the superficial characteristics of an oil lighter than the heaviest
residual fuel used in its production, but it does not necessarily behave in the
same way under operational conditions. The main problem is that the lightest
part of the fuel will combust in the engine much earlier than the heavy parts,
which, under some conditions, may not combust at all. This will result in power
loss and engine fouling. Fortunately, there are technologies that can help
overcome this.
Multiple Choices need new skills
The need to carry different
fuel types for operation inside and outside ECAs as well as for main and
auxiliary engines has meant that ships now need more bunker tanks than used to
be the case. The question of tank space is something that needs to be addressed
at the newbuilding stage or for existing vessels by modification of existing
tanks. In addition, fuels such as LNG and ethane which must be stored under
cryogenic or high-pressure conditions need very different handling and
treatment procedures which must be learned by those among the crew and
bunkering personnel responsible for such matters.
Poor quality bunker fuels have
always been a problem but in recent years the number and types of problems seem
to have multiplied. Some of this is due to the refining processes necessary to
meet demand for distillates, some is due to incompatibility of blended fuels –
especially if biofuels are involved and some is because of deliberate acts of
bad practice. The latter involves cases of contamination by chemicals or used
lubricating oils.
Given the cost of bunkers and
the extensive damage that can be caused by contaminated products, it is not
surprising that fuel testing has become an essential tool for prudent ship
operators and this too is an area where great technological strides are taking
place. Fuel testing can be done by shore laboratories but more and more ships
are testing onboard. It is good practice not to use any fuel until it has been
tested and also important not to load the fuel into tanks that already contain
fuel.
When introducing SECAs and as a
consequence of the initial belief that no SOx reduction technology would be
available and therefore no emission measurement necessary, the control system
decided upon by the IMO to prove compliance revolved around the declared
sulphur content being shown on bunker delivery notes. The notes are backed up
by samples to be used only for official investigations into alleged breaches of
the SOx regulations. The IMO has published guidelines for the sampling
procedure which would be familiar to most ships where there is a practice of
fuel sampling laid down for quality purposes.
The format of bunkering
delivery notes is laid down in Annex VI and most official bodies will want to
see the documents in the accepted format. Bunker suppliers in states that are
party to Annex VI are required to provide the documents in the accepted format
but in states that are not there is no such requirement.
It is usual for ship owners,
when ordering bunkers, to at least insert clauses to the effect that the fuel
oil supply process is to be in accordance with the requirements of Annex VI and
with specified maximum sulphur content appropriate to the particular intended
future area of operation.
Annex VI is not the only aspect
of MARPOL applying to bunkering procedures. Bunkering connections for oil fuels
must be fitted with save-alls to retain any spills during bunker loadings and
it is good practice to take further precautions as well. Most safe management
systems required to comply with the ISM Code would recognise bunkering as a key
shipboard operation, a potential emergency situation and a potential threat to
the environment. It would therefore be expected that a written procedure is in
place and pollution control materials ready to hand and scuppers plugged. Crew
engaged in bunkering operations should also be on the lookout for fraudulent
activity such as barge crews introducing air into the bunkers being pumped to
fool flow meters.
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