Will the Cost of 2020 Compliance be on the Owner or the Charterer?

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  • The cost of compliance will badly affect the shipping industry if proper measures aren’t taken, warns the deputy director of the North P&I Club, Tiejha Smyth.
  • 0.5% compliant fuels will lead to additional charges.
  • The unavailability of skilled crew to operate on modern equipment and the unequal distribution of compliant fuels will be a potential threat to cost efficiency.

Tiejha Smyth, the deputy director (FD & D) of the North P&I Club expressed her concerns about the 2020 fall out. According to her, the situation is quite volatile and as we are nearing 2020, the bunker scene is expected to experience significant change, says a report published in VPO Global.

Vessels are expected to run on different fuel blends leading to additional pressures on the crew who will have to operate on even more technologically advanced equipments. All of this will incur further costs, but there is still uncertainty as to where these costs will lie.

Bunker Price Rise

Changes in bunker prices are inevitable and it is likely that the availability of compliant fuel will affect vessel trading routes and options. Although there is enough 0.5% compliant fuel available in the market, it isn’t available everywhere. The distribution is quite haphazard. This could lead to availability issues for ships trading in particular areas and affect vessels’ trading route options.

Compatibility Issues

Furthermore, bunkering vessels with different blends of fuel from various ports could lead to serious compatibility and stability issues. This has been a major problem recently in the US Gulf as VPO recently reported. Alerts from the International Bunker Industry Association (IBIA), United States Coast Guard (USCG), FOBAS, Veritas Petroleum Services (VPS), and others, indicate close to 100 vessels have been affected by contaminated marine fuel oil in Houston and the US Gulf region. The main issue is with a compound, 4-Cumyl-Phenol that is not typically present in marine fuels but has made its way into the fuel oil supply chain, causing fuel plungers to stick, pumps to seize and engines to malfunction.

Alternatively, marine scrubbers may be installed on-board, but they will require additional maintenance and knowledge of operation by a vessel’s crew. Smyth says that teething problems with training may need to be smoothed out before 2020. Especially when it comes to the more complex scrubbers.

Significant Changes

Bilal Ahmed, Business Consultant – Marine at Charlton Morris agrees that the more significant changes for the industry will lie in adapting and operating technologies for compliance. He told VPO Global “big changes will come from vessel owners.”

“I think adapting technology like scrubbers will be more common. Alfa Laval have reported in the second quarter of 2018 orders for scrubbers have increase massively.

However, from an economic perspective does it make sense? Additionally, I think there are alternative fuels as well such as LNG which has been proved to be feasible. The big question is, is there enough supply for alternatives?”

Whether the additional costs of 2020 lie with finding compliant fuels, dealing with contamination, or installing and operating scrubbers, it is vital to know who will take responsibility for the costs.

The Bigger Question

All of these changes will mean an increasing cost, but there is uncertainty as to where this cost will lie. Will it be to the owner, to the charterer? That’s the big question according to Smyth.

Smyth says that it is vital for the allocation of responsibility between charters and owners to be clearly distinguished. If this responsibility has not been considered in plans or been agreed or if charter party clauses are ambiguous as to what issues will be covered by owners and which ones will be covered by charterers, then that’s when disputes will arise.

Clauses relating to bunkers and charter parties will need to be reviewed and in particular terminology used in charter parties will require careful consideration. Smyth explains that charter parties and shipowners will use LSFO and HSFO as the generally accepted terms, both with a clear definition that describes their sulphur content.

LSFO is considered to be fuel with less than 0.1 per cent sulphur content and HSFO is up to 3.5 per cent. However, come 2020 there will be three commonly used fuel blends containing either 0.1 per cent, 0.5 per cent, and above 0,5 per cent sulphur. Above 0.5 will be reserved for those operating with scrubbers.

Countering Challenges

“We might see a move away from LSFO and HSFO or clearer definitions” Smyth explains.

Smyth says that this presents an additional challenge to owners and charterers. A time charterer will buy the bunkers from the vessel that the vessel needs to use. When they redeliver the vessel, they will sell the bunkers back to the owners.

There is a usual provision in the charter party that deals with the quantity of bunkers used on the vessel and what price should be paid. There are many different clauses that deal with this, but the common one being that the price of bunkers should be the same when delivered and redelivered. However, a charter party that spans the implementation date could be at an economic disadvantage and this creates potential for dispute.

Depending on how HSFO is defined, the market price of fuel could mean there’s a significant difference in value of 0.5 per cent and 3.5 per cent sulphur fuel when the vessel is delivered and redelivered. Essentially this means that the cost to charterers of buying the fuel and the price the charter party will receive for bunkers once the vessel is redelivered could be very different, leaving them at either an economic disadvantage or advantage, creating dispute between the charterer and the shipowner.

Smyth says that in 2015 this was a clear problem when the 0.1 per cent sulphur limit in Emission Control Areas (ECAs) entered into force. “In 2015 there was a difference in opinion of what low sulphur fuel was with ECAs. Fuel previously classed as LSFO up to 1 per cent became HSFO because the sulphur cap went down to 0.1 per cent. The potential effect for economics of this is huge. Charter parties need to clarify and owners need to think ahead. Otherwise there could be a big loss for owners or charterers that span the 2020 implementation date.”

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Source: VPO

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