Update on IMO 2020
13.08.2019 | Maritime
Ships typically burn heavy fuel oil (“HFO”) in their engines. This produces emissions containing carbon dioxide, nitrogen oxide, sulphur dioxide and particulate matter which contribute to air pollution. Whilst limits on the maximum sulphur dioxide content of vessels’ emissions have been in place for some time, both globally and locally, on 1 January 2020 the global maximum threshold is going to reduce significantly as a result of IMO regulations. This article will look at what those regulations require and the impact they will have on the shipping supply chain.
MARPOL Annex VI, regulation 14
The key IMO instrument governing sulphur dioxide emissions from vessels is MARPOL Annex VI, Regulation 14 (the “Regulation”). It provides that as of 1 January 2020, all vessels (registered with flag states that have ratified Annex VI or vessels passing through or calling at port states which have ratified Annex VI) will be subject to the following requirements:
- The limit for the sulphur content of fuel used on board a vessel operating outside one of the four Emission Control Areas (“ECAs”) decreases from 3.5% mm to 0.5% mm. Within the ECAs the limit remains 0.1%.
- Compliance with other operational requirements such as:
- Vessels must produce a bunker delivery note stating the sulphur content of any fuel oil stemmed;
- Vessels must carry an International Air Pollution Prevention (IAPP) certificate;
- Vessels must have onboard a written procedure for fuel oil changeover when entering/leaving an ECA; and
- Vessels must maintain a log (as prescribed by their flag state) recording adherence to the changeover procedure.
In addition, from 1 March 2020 vessels will be prohibited from carrying non-compliant fuel unless they have scrubbers fitted.
Implementation
The Regulation is fairly simple, requiring compliant fuel to be burned and appropriate records kept. However, the difficulty with the Regulation, and what is subject to a significant amount of debate at the moment, is its practical implementation. The debate is caused by the fact that shipowners have a choice as to how they comply with the Regulation, as long as the methods they choose are as at least effective at reducing emissions as that required by Annex VI. This has meant that a number of solutions are currently being implemented, with different solutions being adopted by different owners and even different solutions being adopted for different ships in the same fleet of ownership.
The three main methods of compliance and their advantages / disadvantages are summarised below.
| Method of Compliance | Advantages | Disadvantages |
| Low sulphur fuels | The most obvious solution, and the one which ships and crew are most familiar because low sulphur fuel oil has been the fuel used in ECAs for some time. Low sulphur fuel oil can either be HFO that has been de-sulphurised, or distillate fuels such as Marine Gas Oil (MGO). | Uncertainty regarding the availability of LSFO / MGO in the volumes required come 1 Jan 2020. The switch from HFO to LSFO / MGO by what is expected to be the vast majority (circa 90-95%) of the world’s fleet also requires a shift in production in refineries, with some estimating a production shift of up to 4 million barrels per day being required. Future supply volumes remain uncertain, despite announcements by oil majors such as Exxon seeking to reassure customers that they will have sufficient stocks, and with some of the large lines announcing that they have already secured supplies. Concerns over quality, safety and compatibility as refiners seek to create new, untested blends of fuels which meet the new emissions standards. There is as yet no international standardization governing blended fuels, raising concerns about increased dangers to crew and vessel damage. Concern regarding the effect of LSFO / MGO on engines designed to run on thick, viscous HFO. LSFO / MGO has a much lower viscosity and can cause operational issues if appropriate advice is not taken from engine manufacturers. |
| Alternative fuels (Gas / Methanol) | The most obvious solution, and the one which ships and crew are most familiar because low sulphur fuel oil has been the fuel used in ECAs for some time. Low sulphur fuel oil can either be HFO that has been de-sulphurised, or distillate fuels such as Marine Gas Oil (MGO). | Limited bunkering infrastructure, although LNG bunkering is growing. |
| Exhaust gas cleaning systems | Exhaust gas cleaning systems or “scrubbers”, “clean” the emissions before they are released into the atmosphere. If scrubbers are installed, the vessel can continue to use HFO. | The time and cost of installation and maintenance. Retrofitting a scrubber system is no small task – it takes around 6 weeks and at least a few million dollars. Recent estimates are that around 10% of the world’s container ship fleet will be fitted with scrubbers come 1 Jan 2020 although that is likely to increase as newbuilds are delivered. Recently, some jurisdictions have banned the discharge of wash water from “open loop scrubbers” including, China and Singapore, raising operational questions. The need to retain some stores of LSFO / MGO onboard for operations in ECAs or in the event the scrubber breaks down. Uncertainty regarding ongoing supply and price of HFO, as refineries switch production to meet the increased demand for LSFO / MGO. |
Sanctions for non-compliance
The IMO’s position is that come 1 Jan 2020, all vessels must comply and there will be no grace period for the transition. The IMO itself however has not set out what the sanctions for non-compliance are to be, but this is left to each individual state member to determine.
By way of example, in Hong Kong, the master and owner concerned of any vessel using non-compliant fuel within the waters of Hong Kong will be liable to a maximum fine of $200,000 and imprisonment for six months. Shipmasters and ship owners of ocean going vessels who fail to record or keep the required particulars will also be liable to a maximum fine of $50,000 and imprisonment for three months.
Impact on Shippers
As is the norm with IMO regulations, the obligations are imposed predominantly on shipowners, with additional obligations on contracting states (e.g. promotion of availability of compliant fuels, maintaining a register of local fuel oil suppliers and requiring them to provide the bunker delivery note and sample as required by the Regulation).
Nevertheless, the Regulation is relevant to all users of shipping services because it is likely to have a negative impact on shipping services, at least in the short term. Some anticipated impacts of the Regulation include:
- Possible vessel detentions for non-compliance.
- Delay for a multitude of reasons - non-compliance, to remove non-compliant bunkers, as a result of engine failures, lack of available fuel, fuel incompatibility, deviation for compliant bunkers, slow steaming.
- A change in trade routes, with shorter sea routes favoured and slow steaming leading to possible increases in transhipment.
- A possible surge in freight demand immediately prior to the implementation of the regulations in 1 Jan 2020.
- Increased costs.
LSFO and MGO already trade at a premium to HFO. Following the switch to LSFO / MGO by the majority of the world’s fleet on 1 January 2020, demand is expected to outstrip supply pushing up LSFO / MGO prices even further. In addition, shipowners who choose to install scrubbers have additional capital expenditures that they will be looking to recoup. Shipowners / operators will be seeking to pass these costs down to shippers either through result of surcharges or bunker adjustment factors, and some lines have already implemented this.
In addition, the extra demand for MGO or LSFO blends which use distillates, is also expected to have an effect on other transport modes such as air and road transport. These modes already use distillate fuels, so as the demand for distillates rises due to the increase in marine demand, it is expected that airlines and road haulage companies will also see increased fuel costs which they too will be seeking to pass on to customers. It is however expected that supply and costs issues will ease in the medium term as new supplies of LSFO / MGO come on line.
What can I do to prepare?
Although the Regulations do not come into force for a further seven months, shippers should be preparing for the impact of their implementation now. Some practical steps you can take to seek to mitigate the impact of the Regulation include:
- Understanding how your key carrier partners are choosing to comply with the Regulation;
- Reviewing your service agreements / rate agreements with carriers, to ensure they contain adequate clarity and transparency on bunker adjustment factors calculations, including what indexes are being used, the application of the BAF and terms regarding its modification;
- Pushing for transparency from carriers on all additional surcharges related to IMO 2020 compliance;
- Optimising freight across modes, to account for potential delays in ocean carriage in the later part of 2019 / Q1 and Q2 2020;
- Securing ocean carriage space now to avoid the expected surge in demand in late 2019.
This is a fast-developing area and as the implementation date approaches, we expect to see further developments in how the Regulation will impact not only the shipping industry but its customers too. If you have already been affected or consider you will likely be affected by the Regulations and wish to discuss this further, please do get in touch.
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