IMO 2020: Including A Hong Kong Perspective.
Legal News & Analysis - Asia Pacific - Hong Kong - Shipping Maritime & Aviation
19 September, 2019
The global sulphur cap is coming into force on 1 January 2020 following the amendments to Annex VI of the International Convention for the Prevention of Pollution of Ships (MARPOL). This requires marine vessels to consume fuels with a maximum sulphur content of 0.50% m/m against the current limit of 3.50% m/m which is a significant reduction. The existing 0.1% m/m limit for emission control areas will remain unaffected.
The IMO’s Marine Environment Protection Committee (MEPC) in its 73rd session in October 2018 confirmed that there will be no grace period, meaning that the shipping industry will have to be ready by 1 January 2020. Given the limited time remaining, preparations should be well underway.
There are effectively two main options available for compliance: either using compliant fuel or adopting so-called approved equivalent methods, including the installation of exhaust gas cleaning systems (scrubbers). A third option is the use of LNG/alternative fuels.
This note considers various key questions that have arisen in anticipation of the introduction of the new regime.
Will the market have the ability to meet demand by the deadline?
This shift from high sulphur fuel oil (HSFO) to 2020 compliant fuel has raised concerns within the industry that there may not be sufficient compliant product available when the cap comes into force on 1 January 2020. However, it is not clear what the actual position is: a study consortium instructed by the IMO to conduct an assessment of the availability of fuel oil with a sulphur content of 0.50% m/m or less by 2020 has concluded that there will be enough available fuel produced to meet the increased marine demand. By contrast, BIMCO and other stakeholders funded a supplementary independent study which concluded that it is unlikely that there will be sufficient availability in 2020.
How are marine fuel prices likely to behave?
Unsurprisingly, there is uncertainty as to how the markets are likely to behave, though it is expected that the price of low sulphur compliant fuel is likely to increase (and then stabilise) and that of HSFO to decline.
There is a risk of fuel price volatility generally at switchover. Price fluctuations are likely to be most acute in more remote locations (as opposed to bunkering hubs, such as Singapore, the US Gulf or Rotterdam) and where there are fewer (or one) bunker supplier(s) only.
The fact that the uptake of scrubbers has not been as extensive as initially expected, coupled with the shift towards compliant fuels after 2020, make it possible that there may be HSFO availability issues for ship owners that will be using scrubbers which might in turn move HSFO prices higher than originally anticipated.
Are the shipping industry and refineries doing enough for the new sulphur cap due on 2020 to allow a smooth transition?
As with every transition, some teething problems are to be expected. Refiners and oil majors have indicated already that they will be rolling out compliant fuel oil before the 2020 deadline, query however the scale of availability prior to 1 January 2020. Further, the current sixth edition of ISO 8217 – the most widely used standard in the shipping sector specifying the requirements for fuels used in marine diesel engines and boilers – will not be updated before 2020. On July 2018, ISO issued a statement on the ISO 8217 standard in relation to 0.50% sulphur fuels to deal with anxiety in the industry and to advise that 0.50% sulphur fuels are capable of being categorised within the existing standard and that in the meantime a working group has been tasked with the development of a Publicly Available Specification (PAS) which will provide guidance on the application of the existing standard to such fuel oils.
Are there any other concerns in relation to compliant fuels?
New compliant fuels will be coming into the market by various providers. Given that compliant fuels may differ in their composition from supplier to supplier and port to port, consideration should be given to issues of compatibility between them. The safe storage and handling of the bunkers is likely to require monitoring, segregation and tank cleaning between different types/grades.
Further, the impact of these new fuel types on machinery systems is currently unknown. Under English law, where compliant fuel is supplied, but it causes damage to the engine, time charterers will normally be responsible for the damage (subject to the question of causation) as the fuel was not ‘fit for purpose’ – However, the parties can modify the default allocation of risk by specific language in the charterparty entered.
Whose responsibility is it?
Most (time) charterparties contain a general compliance clause according to which owners are to comply with all relevant national and international laws and regulations, making compliance with MARPOL Annex VI a matter for owners. However, since under a time charter, charterers are to supply the bunkers and in light of the uncertainty that the implementation of the new regime is likely to cause, it is recommended that express provision is made under the charter, so that any responsibility/liability is allocated clearly between the parties. This will avoid disputes and save costs and time.
What will be done, and at whose cost, with any high sulphur fuel on board that can no longer be used or is not allowed to remain on board?
This will depend on the terms of the charterparty in question and whether it is a time or a voyage charter. Under the latter as, owners are responsible for supplying the fuel, the responsibility for compliance with MARPOL Annex VI will be on them and the scope for disputes limited.
Under a time charter, express reference to owners’ compliance with MARPOL Annex VI (apart from the general compliance clause, usually encountered) and allocation of responsibility between the parties is important in minimising any disputes.
The position regarding bunkers on redelivery will also require careful consideration. Charterers will be well accustomed to owners purchasing the bunkers retained on-board on redelivery. However, owners are likely to dispute this going forward if the bunkers retained are non- compliant and have to be removed. Similarly, owners will have little incentive to purchase the bunkers retained on redelivery, if they are of dubious provenance and quality. Amended bunker (re)delivery clauses need to ensure that each party’s obligations and liabilities are expressly set out.
What about the Carriage Ban on non-compliantfuel from 1 March 2020?
In October 2018, the Marine Environment Protection Committee (MEPC 73) confirmed that from 1 March 2020 onwards ships will be banned from carrying non MARPOL compliant bunkers onboard, unless they are fitted with scrubbers.
Relevant considerations for time charters regarding the proposed ban can include the following:
- whether the non-compliant fuel is designated as ‘waste’ or whether some residual value is assigned to it; this will be of particular interest to charterers who will have paid for these bunkers and will want to minimise losses by possibly selling the non-compliant fuel
- allocation of responsibility for off-loading (or selling) the bunkers, including on whose time and at whose cost such operations are to take place and any allocation of liability in case issues arise
- allocation of liability in case of non-compliant fuel remaining on board post the deadline with respect to associated fines/detention/delay Commercial and logistical
considerations will be relevant to ensure de-bunkering as necessary and compliance in advance of the 1 January 2020 deadline.
Is there a future for LNG as a credible fuel alternative to reduce emissions?
LNG as fuel has also been considered as an option for 2020 compliance given that its use can drastically reduce SOx emissions in comparison to HSFO. A further advantage is that the relevantly consistent specification of LGN at the available ports is unlikely to cause any issues compared to switching to new products which could be unstable or incompatible with other fuels. However, there are concerns regarding access and availability of suitable bunkering facilities in all trading routes and the prohibitive cost of retrofitting vessels makes the use of LNG a real option only for new builds. Due to these practical limitations many in the industry envisage LNG as a medium to long term alternative.
If scrubbers are being considered as a solution, who will pay for the installation andany associated delay or deviation?
Given that owners are responsible for the seaworthiness and maintenance of the vessel, it will almost certainly fall upon them to pay for the installation of a scrubber system. Any consequent delay/deviation will also, in all likelihood, result in the vessel being off-hire for the period of dry-docking, depending on the wording of the charterparty.
Whilst charterers are unlikely to be responsible for any capital cost relating to scrubber installation, they may suffer indirect losses as a result of the timing of any dry-docking (for example, by losing out on a profitable sub-charter or lucrative cargo opportunity), so planning ahead or a dialogue with owners may be required, always keeping in mind the wording of the charterparty.
Will the vessel need to go to dry dock to fit scrubbers and will this be allowed under the charterparty?
In order for scrubbers to be installed, a vessel will inevitably need to go to dry-dock. Under a standard form off-hire clause (such as clause 15 of the NYPE 1946) the vessel will be off-hire for this period.
What is allowed will obviously depend on the terms of the charter. Suitable wording could require owners to warrant that the vessel is not scheduled for dry docking during the period of the charter, other than as expressly advised to charterers prior to entering into the charter. In any event, charterers should ensure that the dry-docking clause allows a degree of discretion as to when and where a dry- docking takes place. If possible, the clause should include express wording regarding any time/delay/deviation and associated costs for any installation of scrubbers.
For charterparties already concluded, it will be a matter of interpretation of the relevant clauses to assess what is permitted and at whose time and cost.
Commercial considerations are also relevant, since particularly in long-term charters, charterers may want to have scrubbers installed, so as to benefit from the likely reduced prices of HFSO or alternatively charterers may be better served by delaying any potential dry-docking to take advantage of a profitable cargo or favourable sub-fixture.
Can owners be compelled to fit scrubbers?
Again, this will depend on the charterparty terms, but the general answer is no. Owners are under the obligation to ensure the vessel is both physically maintained and legally fit for service during the course of the charterparty. Unlike for example in circumstances such as in the Elli and Frixos  EWCA Civ 584 (where the ship owners were found to be in breach of the respective time charters following the coming into force of new MARPOL regulations relating to double-hulled vessels, with which the vessels did not comply, due to the ship owners’ failure to do so), there are alternative methods of complying with MARPOL Annex VI (i.e. the use of compliant fuel) that do not require the fitting of scrubbers.
In the absence of any express charter terms, it is unlikely that owners can be compelled to fit scrubbers. It could be the case that charterers wish to have the contractual option to request (or even demand) that owners install scrubbers. If so, provision should be made in the charter. Accordingly, even though in such circumstances charterers might have to agree to be responsible for (some of) the cost / time associated with the fitting, especially if they are to have decision making powers, for example, with regard to the type of scrubbers to be installed.
What about voyage charters?
Under a voyage charter, owners are responsible for supplying bunkers and they will face the impact of the expected increased cost of compliant low sulphur fuel, though it is likely that that cost will also be reflected in increased freight rates. As mentioned, the charter is also likely to contain a general compliance clause making owners responsible for complying with MARPOL Annex VI.
The use of scrubbers is unlikely to present issues in the context of a voyage charter. The voyage will be fixed with full knowledge of whether the vessel has a scrubber installed and the freight rate will likely be adjusted accordingly.
However, issues may arise in circumstances where the scrubber system stops operating and time is lost for repairs/maintenance etc. It is important for charterers to ensure that suitable clauses are in place so that laytime (and maybe even demurrage) do not to count in such circumstances and charterers are indemnified for any associated damage/loss suffered.
What is the position for Hong Kong specifically?
In Hong Kong, the Air Pollution Control (Fuel for Vessels) Regulation (Cap. 311AB) (the “Regulation”) came into effect on 1 January 2019 so as to reflect the change in sulphur content of fuel brought by the amendment to Annex VI of MARPOL.
In gist, the Regulation requires that:
- All vessels must use compliant fuel within Hong Kong waters (except certain exempted vessel types), whether sailing or berthing
- Ocean-going vessels (“OGV”s) that use heavy-fuel oil must switch to compliant fuel before entering Hong Kong waters
- An OGV must keep records about its fuel switching operations
- The sulphur content of fuel must be determined in accordance with the test method set out in the following documents:
- EN ISO 14596:2007: “Petroleum products – Determination of sulfur content–Wavelength-dispersive X-ray fluorescence spectrometry” published by the European Committee for Standardization
- EN ISO 20884:2011: “Petroleum products– Determination of sulfur content of automotive fuels–Wavelength-dispersive X-ray fluorescence spectrometry” published by the European Committee for Standardization
If a vessel uses non-compliant fuel, the owner and the master of the vessel each commits an offence. They are liable on conviction to a fine of HK$200,000 and to imprisonment for 6 months (see section 5 of the Regulation).
The available defences for the owner and the master in respect of a breach of the Regulation are:
- They have exercised all due diligence to prevent the contravention but were misled as to the sulphur content of the fuel by the supplier of the fuel; or
- They have exercised all due diligence, from the beginning of the vessel’s voyage to hong kong until the material time, to obtain low sulphur marine fuel for operating the vessel’s specified machinery in the waters of hong kong; but failed to obtain the fuel; or the vessel was in an emergency situation such that it is was unable to comply with section 5(1) at the material time.
Most existing charterparties do not yet set out the allocation of risk and responsibilities between the parties regarding compliant low sulphur fuel. It is foreseeable that parties
to a charterparty may dispute:
- Whether the owner or the charterer is responsible for removing the non-compliant fuel and cleaning the tanks?
- Whether the owner or the charterer is responsible for installing scrubber and the installation expenses?
- Whether the compliant fuel is compatible with the engine? A continuous use of low sulphur fuel may leadto damaged engine from catalytic fines. Who is liable for the engine damage? Does this amount to a breach of speed and performance warranty?
- Whether the vessel is off-hire if she deviates route for installing scrubbers or a cleaning tank?
- Who is liable for the delay, loss of use, detention, action by port authorities, etc.?
- Who is liable for non-compliance due to undetectable technical failure of scrubbers?
- Who is liable for non-compliance due to unknown mixture of low-sulphur fuel and high-sulphur fuel which may not be discoverable by exercising due diligence?
- What standard of due diligence should be exercised in order to ensure compliance with the new sulphur cap requirement?
- Force majeure if there is an unforeseen and dramatic incident disrupting availability of low sulphur fuel?
This covers the costs and expense incurred by an insured engaged in a disputes. However, FD&D cover is discretionary and only available if the Club considers that there is a reasonable prospect of success or recovery from the opponent. It may cover the costs and expense in respect of a claim by the owner/ the charterer against:
- the scrubber manufacturer for providing a malfunctioning scrubber
- the fuel supplier for off-specification fuel
Penalties for non-compliance are likely to include fines, conviction and detentions. P&I insurance covers liabilities for fines and third party risks. Such cover is normally described by the Clubs as being provided on a discretionary basis. For example, there is prima facie cover for fines arising out of accidental escape or discharge of oil or other substances. This may include non-compliant emissions. However on any analysis the member must show that it has taken reasonable steps to avoid the event leading to the fine.
Charterers may take out cover from the Club to cover claims arising from engine or equipment failure due to supply of fuel which is not fit for purpose. Non-compliant fuel could cause engine or equipment failure and lead to collisions, cargo loss and damage, wreck removal etc.
Under a time charterparty, it is the charterer’s obligation to supply fuel of reasonable general quality that is suitable for use of the relevant engine. Will there be a different standard of due diligence to be exercised by the owner under a voyage charterparty, as it is the owner’s duty to provide bunkers in that context?
What is next?
It is likely that the new global sulphur cap will give rise to a spike in disputes between parties to charterparties. In order to safeguard the respective interests of the owner and the charterer in the event of a dispute or incident, parties should carefully review their insurance coverage.
Owners and charterers should also consider engaging solicitors to comprehensively review and revise template charterparty documents for 2020 compliance.
Such a comprehensive review is necessary in light of the various clauses that may need tailoring (including those dealing with tank cleaning, fuel segregation, monitoring, blending, speed and performance, scrubbers/dry-docking), especially if the charterparty is to be entered before the new regime commences.
It is also essential that each party plans ahead for 2020 compliance by reviewing the geographic areas in which they operate, identifying any potential risks (such as fuel shortages) and considering ways to mitigate any negative impact. This includes speaking to suppliers early on and if possible negotiating terms in advance, though the latter will depend to a high degree on the negotiating powers of the parties and the availability of alternative options.
For further information, please contact:
Damien Laracy, Partner, Hill Dickinson Hong Kong