The expected price differential between fuels with a high sulphur content and ‘compliant’ fuels will benefit owners that have invested or are considering in investing in Scrubber-fitted vessels, with substantial savings in the cost of trading vessels, writes James Kennedy and Fanos Theophani for an article published in Clyde&Co.
The stringent rule
From 1 January 2020, Regulation 14 of MARPOL Annex VI provides that the sulphur content in fuel oil used on board ships shall be reduced from a maximum limit of 3.5% to a maximum limit of 0.5%. The limit in emission control areas remains at 0.1%.
Regulation 4 of MARPOL Annex VI permits equivalent methods of compliance provided such methods are at least as effective in terms of emissions reductions.
Scrubbers the legitimate option
Whilst it is up to individual port state control and flag states to implement and enforce MARPOL Annex VI, the use of Exhaust Gas Cleaning Systems (“Scrubbers”) is widely expected to be a legitimate option as an equivalent method of compliance.
Financial benefit for investors
The anticipated key financial benefit for Owners that have invested or are considering in investing in Scrubber-fitted vessels, is that there will be substantial savings in the cost of trading vessels due to the expected price differential between fuels with a high sulphur content and ‘compliant’ fuels with a low sulphur content.
Options to benefit from the expected fuel differential
Owners have various options available to them in terms of benefit from the expected fuel differential for Scrubber-fitted vessels.
For example,
- If the owners are spot trading their Scrubber-fitted vessels, typically it is owners that pay for the fuel so owners will therefore benefit from the lower costs of burning high sulphur fuels.
- If Owners are time chartering their vessel, typically under a time charterparty Charterers will pay for the fuel so Charterers will therefore benefit from the lower costs of burning high sulphur fuel.
- In consideration for providing this benefit under a time charter, Owners may simply demand a higher charter rate or a ‘scrubber premium’ on the market charter rate.
Other creative options
Alternatively, there are a number of creative ways in which Owners and Charterers can share the benefit of the expected or actual fuel savings for Scrubber-fitted vessels.
By implementing a fuel profit-sharing scrubber clause (“FPS Scrubber Clause”) into the time charter party.
Legalities related to FPS Scrubber Clauses
There are a number of different legal, operational and commercial factors which will have to be considered in negotiating and drafting FPS Scrubber Clauses and so it is unlikely there is a one-size fits all FPS Scrubber Clause that can be applied across the market.
By way of example, the ongoing delay to an intended Bimco industry-standard scrubber clause is illustrative of the complexity and competing interests at play.
Who is responsible?
For example, if the owners are bearing the majority of the capital risk and operational risk of the Scrubber, then should owners be entitled to the majority of the benefit of the fuel differential?
In the event that the Scrubber is not operational for technical or regulatory reasons, who is responsible for providing compliant low sulphur fuel?
What is an FPS Scrubber Clause?
An FPS Scrubber Clause is an innovative way for Owners and Charterers to allocate the anticipated risks and benefits of complying with the implementation of MARPOL Annex VI from 1 January 2020 through the use of Scrubbers.
James Kennedy and Fanos Theophani have been involved in the negotiation and drafting of FPS Scrubber Clauses and are well placed to advise and assist the market on these issues.
Did you subscribe to our daily newsletter?
It’s Free! Click here to Subscribe!
Source: Clyde&Co
