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Koninklijke Vereniging - Société Royale

DOSSIER

 

Global sulfur cap and charterparty issues


The forthcoming 0.5% global sulfur cap will doubtless throw up commercial challenges, as well as technical issues.
Contracts and charterparties (c/ps) will likely be impacted unless the new fuel regulations are reflected in the clauses, especially spanning the changeover period of 1 st January, 2020 and beyond.

In a presentation and writing in North P&I Club’s Signals magazine, deputy director FD&D, Tiejha Smyth, outlined the key problems and said that c/ps will require close attention.

In particular, challenges are expected on those vessels whose c/ps span the IMO’ s enforcement date. She said that unfortunately, there is no single magic clause to deal with the issues that might arise.

For example, all bunker clauses will most certainly need to be reviewed but other clauses might also need to be looked at, depending on the owner’s chosen method of compliance.

Some of the key issues were discussed including the carriage of non-compliant fuels come the cut off date. It is likely that the carriage of non-compliant fuels will come into force on 1 st March, 2020 for vessels not fitted with exhaust gas cleaning systems (EGCS) or scrubbers.

Non-compliant fuels will have to be removed to avoid fines and possible vessel detentions. Assuming that this fuel is not used up before the cut-off date, who will be legally obliged to arrange and pay for the removal of the fuel? This will depend upon the wording in the c/p’s clause, so it is important to consider this when the c/p is drafted, Smyth warned.

She added that there maybe significant logistical difficulties in removing the non-complaint fuels and it is likely that the resale value will be less than the original purchase price. Issues might also revolve around who owns the non-compliant fuel and therefore, who has the right to remove it.

At present, vessels burn either 0.1 % maximum low sulfur fuel in ECAs or 3.5% maximum outside. However, in 2020 there will be three levels - 0.1% in ECAs, 0.5% everywhere else, or plus 0.5% by using a scrubber. This raises the question as to what will low sulfur fuel mean come 1 st January, 2020?

She advised moving away from descriptive terms such as low sulfur and high sulfur and instead specify the exact sulfur content of the fuel in the c/p.

Moving onto to ‘bunkers on redelivery’ (BOR), in a c/p, when a vessel is redelivered from a timecharter, it is usually stipulated that the vessel is redelivered with about the same amount of low sulfur and high sulfur fuel on board as at her delivery. The owner will often be required to buy the fuel back at the same price as at delivery.


Little value

However, high sulfur fuel bought back by the owner at redelivery will have little value unless the vessel is fitted with scrubbers. BOR c/p requirements might mean that the charterer is able to redeliver the vessel with insufficient compliant fuel on board to make the next bunkering port, therefore, owners might want BOR clauses to reflect this.

Some c/p bunker quality clauses require that the charterer provides fuel that complies with ISO 8217. However, not all fuels are covered by this standard, ie hybrids, thus the bunker quality clause might need amending to ensure that the charterer supplies fuel of the correct specification, which is safe and suitable for the vessel and is in compliance with MARPOL and other relevant regulations.

Although it is anticipated that there will be enough compliant fuel available to meet the increased demand, it maybe geographically fragmented, A vessel might trade in areas where compliant fuel cannot be supplied or even be unable to trade in such areas, thus the trading limit clauses might need to be reviewed. The same is likely for the use of new hybrid blends, while LNG still has limited availability worldwide.

Bunker tank cleaning will be needed if switching from heavy fuels to hybrids, blends or distillates. Tank cleaning might also be required before switching between different products, depending on the advice given by the fuel supplier. To achieve, this cleaning products will be need, waste will need to be disposed of and tome might be lost during the cleaning. Again responsibility for all of these operations will depend on the c/p’s way  wording.

Different fuels contain different calorific values and energy densities. The vessel’s performance could be affected by any of the chosen compliance methods, so the performance warranties might need to be amended. Smyth advised owners to check with their engine manufacturers.

It is unlikely that existing c/ps will state who will be responsible for installing a scrubber system. If the charterer is likely to benefit from fuel cost savings then there might be a case for a commercial agreement as to who will pay for the system and installation.

Addressing the question of whether owners can be compelled to install scrubbers, she highlighted a Court of Appeal deliberation on a dispute regarding this issue. In 2005, the then new MARPOL regulations came into force, which basically said it was unlawful for any ship to carry fuel oil as a cargo unless the vessel was either double hulled or double sided. Expensive modifications would therefore be required to allow the vessels in the case to be allowed to carry the fuel oil cargo.

The Court found that the owners were in breach of certain clauses in the particular c/p for not having carried out the necessary modifications - namely, a warranty relating to MARPOL compliance and a clause in the c/p requiring the vessel to have on board documents required by any applicable law to allow the vessel to trade.

An EGCS installation is only option for compliance and as is the situation today, it will be possible to meet the new sulfur regulations without installing a scrubber. Therefore, the absence of an EGCS on board will not necessarily mean the vessel is in breach of MARPOL, or impact on the vessel’s documentation.

As for any fines, in the first instance, the owner will be responsible for paying any incurred penalties. However, they might be entitled to indemnification by the charterer depending on the c/p’s terms. It might be less clear who is responsible for lost time and costs should the vessel be detained by Port State Control.

She stressed that early consideration of the above will be key to avoiding future headaches. The solutions will not be the same in every case and maybe best considered in the light of the vessel’s intended trading pattern.

Additional problems could arise as the technologies develop and as the industry gets an idea of compliant fuels availability, etc. These could necessitate c/p terms review from time to time, she concluded.

A BIMCO sub-committee is currently looking at sub-clauses, either to add new ones, or to amend those already in place.

 

 

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