Moving toward cleaner fuels: Complications, controversy and (some) confusion

Moving toward cleaner fuels: Complications, controversy and (some) confusion

The debate over emissions from commercial ships is based on Annex VI of the MARPOL Convention, pushed forward by the recent global Paris Accords on reduction and elimination of global warming. Included in these agreements is a requirement that the amount of sulfur in marine fuels be reduced to a fixed level. An entry into force date, realistically, must be arrived at to provide legal and investment certainty, and to reduce the amount of sulfur emissions in many parts of the world. However, government policy, reflected in the discussions at the International Maritime Organization (IMO), has been anything but uniform, or even coherent.

The IMO will soon set a global sulfur cap of 0.5% on marine fuel from 2020; the IMO’s Marine Environment Protection Committee will meet from October 24 to October 28 to decide the sulfur cap’s implementation date, either 2020 or 2025. Today, there is a limit of 3.5% within emission control areas (ECAs) in Northern Europe and North America.  Contentious issues are however unresolved: concern has been raised that a recent IMO study on the availability of suitable fuels may be incorrect in some of its allegedly optimistic conclusions. BIMCO, the largest international shipowners’ organization, argues that “it is not possible to determine from the study that there would be sufficient fuel available to meet the emissions cap by 2020. On that basis, our opinion is that it would be irresponsible for IMO to make the decision to go for 2020 at MEPC in October.” BIMCO contends that there should be additional analysis to ensure the supply chain for global trade is not seriously disrupted, and that developing nations are not damaged by a lack of affordable energy. Another allegation made by the shipping association with a 2020 introduction date is that the low flashpoint fuel required to meet the 0.5% emissions cap may, unlike current fuel oils, be unsafe to be carried on board existing vessels, as they are currently structured. Although a report commissioned for IMO seems to have found that attainment of the 0.5% cap by 2020 will not be a major problem in terms of supply, the BIMCO report makes the claim that the drop in the sulfur cap will have a major cost impact.

It appears that major centers for bunkering (fueling) such as Singapore or Fujairah will be able to supply 0.5% and even 3.5% sulfur fuel oil, but smaller or local ports may not have the infrastructure and blending capacity to follow suit. While the US West Coast has significant production capacity in reserve, its low-sulfur output may not be readily available, at first, in large quantities. On the US East Coast, there is a significant amount of low sulfur (LSFO) capacity. That said, even after expert analyses, it is difficult to predict the availability of LSFO on a port or regional basis, immediately after 2020. In addition, ships which continue to have fitted scrubbers on board may encounter difficulty continuing to obtain 3.5% sulfur fuel oil, if refineries switch largely to production of 0.5% sulfur fuel oil. Firm production commitments are hard to find. It is likely that non-upgraded refineries in Russia, Latin America and elsewhere will continue to produce the high-sulfur product in a post-2020 world, and scrubber-equipped shipowners will need to identify ports where this grade of fuel can be obtained. Could this provide a loophole, for the benefit of rule-breakers?

It is clear that the European Union is not inclined to wait beyond this year for a deadline decision at IMO; while the EU has indicated a desire to align its marine fuel regulation with that of the IMO, it will not wait beyond this year, and if the deadline is pushed beyond 2020, international waterways that lie within the European Exclusive Economic Zone (EEZ), including the Strait of Gibraltar and the Danish Straits, may be subject to an EU-imposed low sulfur cap.

Meanwhile, in the United States, California, in the exercise of its prerogatives under U.S. law, is moving ahead with its own rules on sulfur emissions, regardless of the United States’ federally imposed ECAs on the Pacific coast. Accordingly, California has set up its own EEZ of about 24 nautical miles, where ships are required to burn .01%. The compliance issues that have resulted are, to put it mildly, interesting.

Policing the new 0.5% sulfur cap on the high seas will be largely dependent upon flag state authorities and their recognized organizations, mainly classification societies.  This may be a questionable proposition, particularly where there is, to express it politely, a scrupulous lack of uniformity of enforcement by the national flag states or registries themselves.

Enforcement of a global sulfur cap will be an interesting departure for the international community; some proposed detection methods, such as drone-based “sniffers”, are likely to be costly, and lacking in reach on the high seas, while onboard monitoring equipment has, in the opinion of experts, not yet reached the required level of reliability. Noncompliant operators may therefore, at least at first, face slight risk of being caught, and could unlawfully save large sums if they continue to burn heavy fuel. Even if violators are caught, it is felt that, as experienced in existing sulfur emissions control areas, operators may face fines that seldom, if ever, exceed the savings that ship operators make by not complying with the regulations. Possible solutions may include international harmonization of requirements for liquefied natural gas bunkering, shore power and scrubbers, as well as the introduction of sufficiently rigorous penalties and prohibitions on ships from carrying heavy fuel. Regulatory gaps and inconsistent requirements mean that the global cap will be a major concern for carriers that are forced to comply, either by law in their own country of registry, or because of banking covenants. Without strict enforcement, these shipowners are staring at a large competitive gap, compared to operators that choose not to comply.

Any vessel that trades within California state waters will have to comply with the California Resources Area Board (CARB) requirement. Ships using scrubbers approaching from 200 nautical miles to California will have to switch to compliant low-sulfur fuels, scrubbers or not, unless the shipowner has applied for a temporary extension before entering California waters. As noted, it is likely that if the IMO extends the deadline to 2025, the EU is unlikely to conform.

The “good news” is that this complicated regulatory burden may well provoke increased scrapping of containerships and other vessel types, thereby reducing the current tonnage glut. So, in the end, like the newly in force ballast water management convention, the sulfur cap may actually benefit those shipping companies that manage to survive. The existing disagreement within the shipping industry promises to make the next few years an interesting time for planners and engineers during a particularly difficult economic climate. Shipping has been bumping along the bottom of a major economic downturn since 2008, and the pressure of an impending global cap on sulfur emissions may have a profound effect on operating costs during the next decade.

Clay Maitland

Clay Maitland has worked in the shipping industry since graduation from law school in 1968. Clay has been employed by International Registries, Inc. for 39 years and is now a managing partner of the company, which administers the Marshall Islands Ship Registry – the third largest registry in the world. He is President of the Trust Company of the Marshall Islands (TCMI), the statutory Maritime Administrator of the Republic of the Marshall Islands. Prior to the year 2000, Clay held similar positions with regard to the maritime administration of the Republic of Liberia.

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