Issues Predicted Over 2020 Transition

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According to BIMCO’s latest publication on their website, Tiejha Smyth deputy director in the Freight, Demurrage and Defence (FD&D) department of the North of England P&I Club says, the industry will see the first “live issues” between charterers and ship owners over the switch to low-sulphur fuel in the last quarter of 2019.

Help and support

Tiejha Smyth predicts that the industry will see operational and logistical issues that end up with significant impact on charter parties and commercial positions.

Smyth along with the rest of the North FD&D team is advising and helping club members to prepare for the uncertainties.

What issues are predicted?

“As we get into the final quarter and move into next year, I think we will start to get involved in live issues. For example, I foresee there will be situations where charterers want to take advantage of the predicted fall in high sulphur prices and try to stay on this type of bunkers later on in the year, but owners won’t want to take those bunkers because it is getting close to the deadline,” she says.

She thinks there may be situations where a vessel is there, the bunker barge is there, and there is a standoff – because the owner doesn’t want to accept the bunkers. Unfortunately, the bunkers have already been labelled for export by the port state, which makes it impossible for the supplier to take it back to the port. This would be a tricky situation to resolve.

Loss-prevention approach

Overall, however, the club is taking a loss-prevention approach. Ideally, members should think ahead and make sure the charter parties anticipate issues and deal with them.

“I think there will still be issues, there will be disputes, but, hopefully, not quite as many as there might have been without our work over the past 18 months,” Smyth says. 

She highlights that it will be the FD&D team, which helps with legal advice, that will be particularly engaged with the transition, as the commercial or contractual issues aren’t covered by P&l or hull and machinery insurance.

Cleaning disputes 

The two primary issues foreseen are:

  • Long-term charter parties where charterers and shipowners need to agree when to clean the tanks
  • Current charter parties where the ship is redelivered late in 2019

Tank cleaning presents a challenge, especially for ships with only two tanks, as it is very likely that the ship will have to be taken out of service to get the cleaning done and low-sulphur fuel supplied instead.

She adds that it has the potential to interfere with the charterer’s operation of the vessel, and if there isn’t an agreement about when, where and how that is done, then some discussion between owners and charterers are foreseen.

Conflicting interests 

Even with more than two tanks on a ship, the charterers and shipowners may have conflicting interests that can result in clashes. Because of the fuel price difference, the time charterer, who pays for the fuel, will want to keep using the cheaper option as long as possible.

“But the owner needs enough time to carry out the bunker tank cleaning before the end of this year. And that needs to be done correctly in the right place. So, there will be a time when the owner wants the charterer to stop supplying the high-sulphur fuel, which will be much earlier than the end of this year. It might be November, it might be October, it depends on the vessel and how it’s traded,” she says.

That said, the common interest will be to ensure that the vessel will be able to continue to carry cargo around the world without delays or additional costs, and that common interest should, hopefully, reduce the number of disputes, according to Smyth.

Discharge trouble 

But the common interest between shipowners and charterers may not hold up for ships that are redelivered in late 2019.

“I think the bigger issues will be where there are vessels on charter now, which will be redelivered in the final quarter, and the charterers won’t have any interest in what happens to the vessel on 1 January 2020,” Smyth says.

In such a case, they might be able to redeliver the ship with the same amount of high-sulphur fuel as it was chartered with – as per the contract – and not have to care about the problems caused to the owner, who needs to burn all the high-sulphur fuel before 1 January.

Complex discharging

“If they don’t consume it all by the end of this year, they have to discharge it from the vessel, which is a complex process. First of all, it is not possible in every port. It is also very expensive,” she says.

Smyth explains that ships aren’t designed to discharge fuel. The problem is further complicated by the fact that the fuel could be seen as a waste product in some ports and it might be subject to customs duties.

Cost to discharge fuel

“You could be looking at as much as $200,000 in bills to discharge a reasonable amount of fuel from a vessel, and there will also be the cost of lost time because of the discharge operations. The value of that fuel will almost certainly be lower than the charter party value, so the owner will end up paying a higher price to the charterers than the market value of the fuel,” she says.

If two parties have an ongoing commercial relationship, she is confident that they will be able to agree sensibly, but the situation is complicated by the uncertainties.

Discussion to avoid disputes

The best approach is to consider the issues well in advance and have the discussion now to avoid disputes, according to Smyth.

“You almost have to have an agreement to agree, which has a limited value. But you might say bunkers on redelivery are to be agreed in advance, or as per owners’ reasonable request. So, you don’t fix the quantity. As we have done in the BIMCO transition clause, you might say that there will be enough bunkers on board of compliant fuel, to reach the next bunkering port,” she says.

Agreeing upon market price

However, when it comes to agreeing on costs, the uncertainty of the future bunker prices is a sticking point.

“What I’ve seen some parties do, and what I think is very sensible, is say they will agree on the price actually paid at the time. So, they’ll agree on the market price – which is fair. It might be by reference to Platts or the actual bunker price paid,” she says.

Smyth hopes that it will soon be clear which fuel is available in the different ports.

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Source: BIMCO

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