UK: IMO 2020 And Liberia's Stance

Last week, the Liberian flag state called for the IMO to issue a resolution or circular requiring early reporting of low-sulphur fuel availability by member states.  From the flag state's point of view, littoral states should be doing more to assist shipowners and, by extension, time charterers in planning for compliance with the 1 January 2020 deadline for the global reduction of sulphur content (down to 0.5 per cent m/m) in marine fuels.

The timing coincides with the widespread understanding that unless an owner has already committed to fitting approved abatement technology (in accordance with the carve-out at Reg. 4 of Annex VI to MARPOL), it is almost certainly now too late to complete the installation and approval process before the 1 January 2020 deadline.  In other words, for such owners, there is no avoiding a compliant fuel strategy come that deadline.

The availability of compliant fuel is ultimately a balancing act of the commercial interests of the owners and time charterers of ships on the one hand and the refineries on the other.

When considering whether to consume Reg.14 compliant low(er) sulphur content fuel oil(s) or embrace the Reg. 4 carve-out, so as to continue to consume the (as of 1 January 2020) non-compliant fuel oil(s), owners or (if applicable) their long-term charterers must assess more than merely the questionable availability of compliant fuel oils in the short term.  They must also take into account a number of other short- and long-term uncertainties, including: (i) the long-term price differential between compliant and non-compliant fuel oils, after the inevitable initial spike; (ii) the initial lack of ISO standards for, and questions over (blended) stability of, compliant fuel oils; (iii) the high short-term capital cost (capex) of fitting abatement technology and the additional operational expenditure (opex) of relying upon the same; (iv) the questionable long-term acceptability of any such method of equivalence (where already, the acceptability of open-loop scrubbers is being called into question); and (v) in the context of long-term charters, the allocation of time, risk and expense as between owners and their charterers for the capex and opex.

On the other hand, for the refiners to make a business case for the necessary improvements to their assets, they must also consider not only the underlying price of crude but also the future demand for compliant and non-compliant fuels.  This is largely dependent on the conclusions that the shipowners (and long-term charterers) reach as to which fuel strategy to adopt.  However, there is also the question of how many ships will be built (and to a lesser extent retro-fitted) to permit the consumption of alternative (IGF Code) fuels, such as LNG.

If the capex of fitting abatement technology to ships seems considerable to a shipowner, so too does the capex of upgrading or repurposing refineries so as to rebalance their output towards compliant fuel as opposed to non-compliant fuel production.

The most up-to-date information suggests that less than 10 per cent of the global fleet will have fitted abatement technology or be in the process of doing so by 1 January 2020.  So, as of, if not before, such date (as an earlier change-over is needed to flush systems), compliant fuel oil will have become the default marine fuel for shipping.  Leaving open the question as to whether enough vessels will have been converted globally by 1 January 2020 for the refiners to meet the initial demand, the available information is to an extent conflicting.  Thus, it would be prudent to assume that in the first few months not only will compliant fuel oil prices be considerably higher, but obtaining such fuel, or an acceptable (more expensive) distillate equivalent, will be more challenging and perhaps, during such period, impossible in certain locations. Although the transitional period will present challenges, these were anticipated and legislated for by the Annex VI (at Reg. 18) and the information requested by the Liberian flag state could provide easily accessible evidence, mitigating some of these challenges.

In addition, as touched upon above, before ISO standards are established in respect of blended compliant fuel oils, the offerings in different geographical locations may be of varying stability, leading to an increased risk to the operation and reliability of ships' machinery.

In a long-term time charter context, the above issues also create potentially difficult considerations for both the owners and charterers.

The fundamental issue is the allocation of responsibility for the time, risk and expense of any modifications – for example, the fitting of scrubbers or who has the obligation for paying for the compliant fuel.  Resolution of this issue will depend upon the characterising of the modification as either one that the owner must make so as to continue to consume non-compliant fuel (if that is what the owner is obliged to do) or one that the charterer may request, in order to continue supplying non-compliant fuel.  The difference would most likely link to whether the IMO's revisions were anticipated or known at the time of entering into the charter.  In other words, the older the charter, the more likely that the issue will be contentious, as it is unlikely to have been clearly addressed.

There are also a number of other important follow-on issues for any time charter.  For instance, some standard forms oblige charterers to redeliver the vessel with sufficient quantity of fuel oil for the vessel to reach the "nearest main bunkering port" (or similar wording).  Arguably, the question of whether a port meets the definition might have to be read with compliant fuel availability in mind.  Similarly, will the owners be obliged to buy back any unused and remaining non-compliant fuel?  Further, until the IMO clarifies when ships can no longer carry (as opposed to consume) non-compliant fuel, will a charterer be required to remove the same and replace it with compliant fuel, to meet its redelivery obligations?

To a lesser extent, voyage charters are also likely to be impacted.  While Reg. 18 (as mentioned above) provides that owners need not deviate from the intended route or unduly delay the performance to achieve compliance, the exception is dependent on the owner demonstrating that it took "reasonable steps" to comply.  The Paris MOU guidelines on Reg. 18 state that such steps include planning to procure compliant fuel, both prior to commencing the voyage and en route.  Questions could arise between owners and charterers as to whether there is a minimum deviation that could be justified in order to achieve compliance.  Owners may wish to discuss this point further with their P&I insurers to ensure that such deviation would not prejudice their cover. Further, for future voyage charter fixtures, owners may wish to amend their contracts to offer more flexibility and address the costs of making any deviation.

To conclude, the Liberian flag state's proposal for early submissions of information as to the availability of compliant fuel in different ports is a positive step that will aid owners, and time charterers, in planning their fuel strategy and allow for early discussions to take place between owners, charterers, bunker suppliers and refiners.  If adopted, this could only assist a smoother operational transition and perhaps translate into a reduced number of disputes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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