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Lloyd's List Business Briefing: London

 

Topic video - Global sulphur cap 2020: enforcement and compliance

 

The global sulphur cap 2020 raises lots of questions around compliance and enforcement. Will there be a grace period after the switch before punishments are handed out by the IMO? Who is responsible for ensuring that the fuel on board ship is compliant? And what will be the insurance implications? In this video, our panel of experts provide perspectives from the energy, insurance, legal and class perspectives to offer their advice and thoughts on how to prepare for a multi-fuel future.

 

Don't have time to watch? See the full video transcript below.

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Video transcript

 

In terms of compliance after 2020, what does the panel think about how tight compliance is going to be. How can we be sure that some ships aren’t just going to be burning lighter fuel oil in ports and when they get a few miles offshore, switching to the dirty stuff, how are we going to monitor this?

 

Philip do you know anything about compliance?

 

The previous questioner said, ‘Is there going to be a grace period?’ And I don’t think there will be in relation to regulations. There may well be in relations compliance but of course, we don’t quite know how that’s going to work because the IMO have said that it's up to their member states, to their administrations to work out how they're going to ensure compliance and the penalties that will be imposed if compliance isn’t achieved. I know the next panel is about compliance and how that’s going to be policed, so I don’t want to spend too long on it. But it doesn’t seem to me to be an enormously difficult problem to solve in relation to, are you using Sulphur fuel? Or are you scrubbing? Because you can't hide scrubbers, you can't hide high Sulphur fuel. So, if you are there and you come into an EU or Japanese or Australian port and you have high Sulphur fuel on board and you don’t have a working scrubber, then it's going to be quite difficult to explain that away, say to the port’s control inspector.

 

But there are going to have to be some compliance graces given and I think Iain has touched on a couple of those. You are going to find that you stem some low Sulphur bunker somewhere and you're going to find that they're not very compatible with what you had in previously. I think scrubber technology is quite a difficult technology to make work long-term. And so, there are going to have to be, as we do have in the United States at the moment, the 59:36 Phoneards, where effectively the ship pre-warns the US authorities that they're going to arrive in non-compliant state. And I think there's going to be a period and I think national authorities, ports they control are going to have to take that into account where the instream is trying to grapple with this and to start with they might not be very successful.

 

In our earlier panel, we were thinking about West Africa and the challenges that are facing West Africa. We’ve got a completely different set of challenges with Joe Walsh, with California, which on the scale is right off the other end, isn’t it? Tell us your perspective on this issue.

 

Well I think, first of all, thanks for the opportunity to be here and if I could just jump in on one of the questions that was asked at the last panel and that was are there opportunities. And you hear Tim speak and I would think that for the lawyers in the room, there may be plenty of opportunities for us down the road.

 

Obviously, these are interesting time and there have got to be significant legal implications, there is going to be the commercial contractual issues that are going to come out with respect to clauses and with respect to indemnities. Even with respect to some of the fuel qualities. I think it will be, there will be bunker quality claims, in terms of incompatibility and those types of things. So those will get sorted out but it’s going to be a painful process.

 

But I hail from California, as Richard mentioned, and quite frankly rather boastfully and unapologetically, we find ourselves in that state to be market leading when it comes to environmental compulsion and environmental risks. And we tend to beat ourselves up, sometimes against our own market forces. And so, if we were to compare and contrast some of the underdeveloped countries with California, which I understand is about the same size economically as France, we are rather unapologetic and we kind of push forward regardless, because we figure most of the coming to North America, 43% or so, for example, come through Loss Angeles and Long Beach.

 

We’ve actually had a 0.1% distillate requirement now since 2014. We started with a 0.5% low Sulphur fuel distillate requirement in 2009. So, what’ the big deal? Well what’s interesting about that from an enforcement standpoint and looking at compliance is, we’ve had a steep learning curve, not only just for shipowners to learn how to switch over at the 24-nautical mile limit and training of crews on how to do that. But we’ve also had a steep learning curve for inspectors and for the enforcement laboratories going through to determine whether or not the fuel is compliant or not? You may buy fuel that’s compliant, but what are you actually burning? What’s actually in the sample line? What’s actually in the tank? And we’ve learned things like it could be a difference between cycling between heavy fuel oil and a low Sulphur fuel requirement on your fuel filters. It could be just the fact that you’ve let a particular product sit in your tank for so long that it tends to stratify; it tends to become a little more sedimentised towards the bottom where your Sulphur content, if not mixed, could actually be a bad reading depending on the sample process.

 

Want more expert advice on the global sulphur cap 2020? Topics include risks and challenges, environmental impact and fuel management. Just click here!

So, as we’ve raised these defenses in response to some of the enforcement actions, the enforcement agencies have gotten a little bit more educated as to how these things go. And I think there is something that can be learned on the bigger picture and that is, as we go forward, as we look to sampling and as we look to testing, the question earlier was asked about compliance and I think those lessons will come up quickly. I think we will have both the port state control inspectors learning a lot and ship owners learning a lot as well. The question will be at what price and at what cost?

 

In California, its $45,000 per event, on your first event and then it doubles after that. and doubles after that, and doubles after that. And so, you can see why it does get people’s attention when you call it in California. And so that’s kind of my take on it at the moment and I think that we are in for some interesting times when it comes to enforcement and compliance. And it is really going to be up to the ship owners, that their crews and officers are properly trained in fuel systems management and the fuel requirements.

 

So, are there lessons that you learned in California which can now be taught to the rest of the world, which is having to go through some of the same pain that you have already suffered?

 

Well I don’t want to give all of my secrets away because we may have to defend one day down the road. But there are, there are lessons which can be learned, for those ship owners, for those who are operating in the EQA 16:32 of North America or any EQA for that matter, who have had enforcement actions. Take a quick look to see how your crews deal with on-loading, storage, and then consumption of those Sulphur fuels. And there is opportunity for cross- contamination. I mean we’re talking 0.1%; I mean we’re are not talking a lot of difference here. And so, in the new regulations of 2020 it will be 0.5, so a little bit more margin of error. But you’ve got to take a look at how those things are being done now? How your crews are reacting to that? If you don’t trade on those routes perhaps you should consult with someone who has, to see what types of processes and what types of training and what type of problems that they have had in the last couple of years, to see how you might adjust your own practices.

 

Thank you. Joe Hughes, from the insurance world, does this present challenges that you haven’t come across before?

 

It probably does but before I go on to that, I want to say what a pleasure it is to be here this afternoon in such august company, particularly London International Shipping Week. Thank you very much indeed for inviting me to be here and I bring fraternal greetings from New York; London’s friendly rival in the accolade of being ‘The pre-eminent maritime cluster of the world’.

 

It was very interesting this actually as I was interested in hearing what Iain and Henrietta Brent-Petersen said earlier in their session; and what Tim has said just now, from the point of view of risk looked at generally. I should say by way of general introduction I don’t think that the insurance industry as such, by which I mean principally on the marine side, hull and P&I insurers, really have a very coherent view of what’s necessarily going to happen after this particular rule comes into force in due course. Certainly, we have been telling the industry about it. The P&I clubs have been pretty active in informing their members about the new rules and as they’ve applied in California, elsewhere in the United States, and increasingly in China as well in the last couple of years or so. So, we have been conscious of them and behind the dissemination of information to our members from the P&I club side.

 

Looking at it from the point of view of risk, what Henrietta said earlier in regard to the regulations having the effect of perhaps increasing the scrapping of older vessels and encouraging more new building perhaps to come into the industry. From an insurance perspective for the future should be a good thing, in the sense that the age profile and so on of the fleet should improve and that in the ordinary way connotes lower levels of claims for both hull underwriters and P&I underwriters going forward.

 

But the down side that Ian referred to earlier today and which Tim has just explained as well, of course, is the very wide range of different kinds of fuels that may be available from port to port. Involving blending of different kinds of original base fuels with distillates and all the rest of it. And my goodness I’m no expert on these technical issues but that could create, I suppose, circumstances where engine breakdowns become more frequent as a source of loss for both hull underwriters and P&I clubs.

 

Looking to the issue of compliance, obviously all underwriters on viewing a risk would require that the assureds in relation to that risk are fully compliant in every respect with what they are required to do by way of regulation and so on. P&I clubs, and in this context, it is fundamentally P&I club or a liability insurer issue but looking at P&I clubs specifically, there is only a relatively limited range of fines and penalties that clubs, in the ordinary way, will pick up: oil pollution, smuggling, short and overlanding cargo and immigration where you have stowaways.

 

Any other kind of fine or penalty would require, in the ordinary way, the approval of the board of directors, were it considered to be the sort of claim deserving the exercise of their discretion in a given set of circumstances. And that could arise I suppose where a fine or a penalty has been imposed on a shipowner member of a club, where clearly some egregious behaviour on the part of a fuel supplier had taken place and in those circumstances, it would be right to indemnify the owner in respect of his expenses regarding the circumstances leading to the fine and possibly the final penalty itself. Those are going to be fairly few and far between I suspect.

 

But other than that, I think the main impact on the risk landscape going forward, may be in relation to claims arising, as I said earlier, from both Hull and P&I perspective, caused by engine breakdowns where improper fuel has been used. But I don’t think that, at least the Marine insurers that I’ve spoken to in the last 12, 18, 24 months as these regulations become more at the forefront of things, I don’t think that there is necessarily a coherent view of how Marine insurers are going to deal with all this stuff going forward, other than being aware of the fact that it is inevitably going to take place.

 

So, it’s a risk management issue, like any other risk management issue in shipping?

 

Yes, I think it is in the final analysis.

 

Can I go to the floor now, are there any questions? One at the front please.

 

From a shipowners’ point-of-view, the scrubbers are very expensive and the cost of retro fitting them, apart from them being, I think, six million, and it also takes apparently three months. So, it’s our view that owners are going sit and wait until 2020 and see what happens. If the fuels are available, or burn them low Sulphur and marine gas oil. So, what can owners do until this time? You are mentioning crew training for the fuel management; that seems to be the most important thing, getting the crew ready and trained. Or what other things can owners prepare for?

 

Joe Walsh.

Well I guess in some respect when you look at… Let’s just talk about enforcement for a second. I think it was a question asked earlier that: What are you going to do to make sure that people do this? Because it’s got to be a level playing field. If shipowner A is not doing it and shipowner C is not doing it, then shipowner B looks like the dummy, because he or she’s spending the money for these requirements.

 

So, a couple of thoughts. One is I’m reminded of the story between myself and my good friend Bob, we were out hiking one day and came across a mother bear on one side and her cubs on the other side of us on out trail. I reached over and started to re-lace my tennis shoes. And Bob said to me ‘What are you doing? You will never out run the bear?’ And my answer was, ‘I don’t have to out run the bear, I just have to out run you.’ My point being, you don’t want to be the first SOB who goes through this process with somebody like, for example, the USEPA, who is going to grind you up. You might get away with it, in a particular jurisdiction because that particular flag state, perhaps as Iain mentioned before, may also have a State-run refinery and is not too keen on compliance or getting with the program in the first instance.

 

I guess it is going to be a risk analysis that a particular shipowner will have to take. Do I take the risk in being able to outrun the bear, or the other shipowners in the area? You don’t want to be that shipowner that falls below the accepted standard of care, just to use of legalese for you. You want to make sure that you’re moving at the same, the same or better, pace in that evolving standard as it comes into play.

 

So, I think crew training is important. I think that the technical assessment needs to be done as well in keeping abreast of what best practices are. I think having a nice file in your corporate records, hopefully under privilege but certainly something you can pull out if you need to, that gives your board of directors and governance something in which to actually do an assessment. And it’s okay to be economically prudent and to say we’ve done a cost benefit analysis and this is the answer, we are going to wait and we are going to wait for the following three reasons, or four reasons. At least it is an informed decision and it’s something we can actually use, hopefully, in helping to mitigate any kind of penalty. But not just be willfully, or we were blindfully ignorant of the process.

 

So that, so that’s the best I got for you. I can’t give you that business advice; I can tell you what the legal process would probably be.

 

Can you add to that Joe?

 

Well I think I can actually, it’s very interesting, I think that… Well as a basis for Marine insurance cover (Hull and P&I), there are certain things that must be fulfilled. The vessel must be in class and have its class maintained; it must have a proper ISM code compliance, ISPS, etcetera. And those are conditions precedent, effectively, again to use a bit of legalese, that apply to all kinds of marine insurances. But going further, and consequent on what Joe Walsh has just said, it may be as a matter of underwriting parameters, generally, that marine insurers will look to the level of compliance on issues like this, even if they might not be enforceable in a larger context by reference to an IMO code or convention.

 

Nonetheless look to this, as an element of judgement as to the acceptability of that particular risk and also how it should be priced, which of course is an important thing too. In which case, you will be looking at the best operators in this particular context, for, as recipients of your insurance product and at the best price, from their point-of-view.

 

Richard, if I may, I’ll give you another question from a shipowner’s perspective. I think, for us, compliance isn’t a question; it’s a given, it’s a must and its always beyond compliance, so that’s not an issue. And I think, actually, I disagree with Tim slightly. You said that there is a risk of non-compliance in the early days. When we saw the EQA levels drop to 0.1 in Europe, we monitored very closely as to what they were finding as regards non-compliance and the levels were very low. The actual levels of non-compliance because people wanted to be non-compliant were, I think, 1.2% of all the samples they took over that initial monitoring period.

 

There were issues where laboratory testing would then, because of the 0.1 being so difficult to measure, you would measure the same fuel three times in the same laboratory and you’d get three different answers as to what the actual Sulphur levels were. You’re familiar with that of course. So, I think, that is one of the things we need to look at whereby the sampling has to be reliable and we need to work with the levels of tolerance, effectively, that we are dealing with. I think with 0.5 because it’s an awkward blend, and because it is a negotiated number anyway, why do we ever go for 0.5 I don’t know, I’ll never understand that but this is where we are. So, we will always have to be mixing fuels, it’s going to be difficult.

 

I fully agree that crew training is a big thing and we actually have, a number of our members have training programs where they monitor everything, from the viscosity of the fuel through to the throughput rates, to make sure that they actually get recorded. And they learn how to do this properly, the switch over, which, of course, at the moment, is harder. When we get to 0.5 it won’t be quite so difficult but it will still be something quite involved, something quite technical, I agree with you.

 

But what we shouldn’t start from is the assumption that people are trying not to comply; that’s definitely not an issue, I think. That’s not what shipowners do and ultimately for us, it’s about a level playing field. Because if you are looking at who’s actually paying for the fuels, if I’m on a time charter, it’s not even me as a shipowner who supplies the fuel, it’s my charterer usually. So, I don’t have any influence on that. So, great I agree with you, lets tell all the charterers that three months before, they should put us on clean fuels and we’ll see what they say.

 

Any response on that – Tim?

 

Thank you very much for that feedback and you’ve hit something we haven’t really touched and that the sampling – I’ll come back to you on that. The reason that we believe that 0.5, initially, will be a big problem for some ships to comply with, is the huge financial benefit to take the risk. For ships crossing the Pacific, crossing the Atlantic, who’s going to stop them? Unfortunately, enforcement is tightening down fast. I’m working with the European Sustainable Forum and we are looking at the enforcement aspects. We are doing a study round Europe and that is growing; they’re building a very good infrastructure since 2015, with their new decision act that they’ve come out with.

 

But there really is still a risk out there on that. But I agree with you, that most shipping companies have a very good attitude. They want to comply and there is the forum called Trident, with many shipping companies part of it. They are very keen that enforcement is extremely strong and that those that are caught being non-compliant, and grossly so particularly, are heavily penalised to the point that next time it is not worth the effort for it and I agree with you on that.

 

One other problems with the blends is that it will be a blend as opposed to 0.1 which is almost a refined product. These blends, they are going to be blended, we heard earlier, between four to five to one ratio, in a lot of cases. Some will be coming from the Rolls Royce of suppliers, of Exxon and Shell and BP and others, that will have their refined very nicely produced products. But they, unfortunately, will be not covering the whole globe and we’ll be seeing all sorts of practices with a total focus, ‘I’ve got to meet 0.5, how close can I get it?’

 

The issue of the interpretation of the test result, and we can go in for a long debate on this but that needs to be addressed at IMO. There is still some ambiguity, there is still some confusion out there. The limit is the limit. If we go to ISO 4259, which is the statistical standardization for the interpretation of the results and where it allows for the test method reproducibility and repeatability. What is supplied by a supplier? They cannot exceed the limit of 0.50; and that’s a supplier sample and essentially the MARPOL sample is the supplier sample. If an enforcement agency takes that supplier sample and sits with a supplier and gets it tested, it must not go at all above the 0.50 or the 0.10.

 

Well this is the legal thing and I agree it’s not fair. And if we think a little bit, as well, into the future, ships will just be burning 0.5; put away scrubbers for now. If I have a ship I decide to put 0.50 out there and I have something over 0.5, is that my fault? No, I’ve never taken anything above 0.5 all my BDMs say, ‘It’ 0.5.’ ‘So, it’s the supplier’s fault, where did I get it from?’ Well I’m in Rotterdam, I bought it in South America. So actually, as an enforcement agency, and here is the legal challenge, you need to talk to the supplier in South America. It’s not the ship’s fault. He’s bought it in good faith, he’s got a certificate to say 0.50 but now you are measuring it at 0.70.

 

There will be, I believe, tendencies that some suppliers will issue fuel that is off spec, on the basis that it won’t get checked and the ship doesn’t know because he believes that you have given him 0.5. Now that is criminal for the ship, because there are implications on lubrication and other aspects if they’re given a high Sulphur fuel and they think it’s 0.5. So, there are some legal risks in that area.

 

Over time, once the enforcement gets on top of it and they realise its not worth it but there is an area we need to address and I am actually working with IBI and others to put more submissions into IMO to try and iron out some of these issues. If you look at MARPOL Annex 6, Sulphur is not defined anywhere in that regulation. It’s in a footnote and that is not a legal statement. So as a recommendation that it goes into Regulation 2 which is a definition for Sulphur, which will define the test method, which defines the way its reported. And that definitely needs to be put there, so there’s a uniform level playing field on how enforcement goes through. So happy to work with you more on this but I’m not sure if that answers it but yes there are some issues there.

 

Can I just ask Joe Walsh, I mean, you’re further down the road than many of us are, when a ship arrives and it has fuel that is supposedly 0.1 and it isn’t, what is the legal side?

 

Well let me be specific to your question in California – we don’t care. You’re a shipowner, you’ve got the responsibility to burn the proper fuel. We don’t care what you buy. And quite frankly, what California is trying to do is to regulate the emissions, which is the whole purpose in the first instance. Under our convoluted system of federal law and pre-emption and what not, California cannot, as a matter of federal law, regulate the emission. But they can regulate - and there’s a Supreme Court Case that came out – that they can regulate the fuel that you can use out to 24 nautical miles. So, it doesn’t matter, the statute in California that we’re dealing with is, ‘You will burn this’, ‘you will use this fuel’.

 

So, that’s one issue.

 

I think the question though on the example of having a supplier in South America versus a ship that gets caught in California, it’s going to have to be a marketplace-driven resolution, I think, or some sort of international certification, that this particular lab has been certified by a group of approved folks to say, ‘These guys sell good fuel’, versus ‘Those folks who are not reputable’. Something like that, I imagine, will emerge.

 

If I can, on the enforcement side, one of the things that strikes me and this will also be a US angle on it but don’t hold me to this too much, is that on the high seas… So, the 2020 standard provides some sort of certainty now, whether it’s arbitrary 0.5, or 0.45, or whatever the scientific piece behind it is, it’s immaterial. It’s 0.5, that’s the standard. That has certainty and certainty assumes uniformity. But here the uniformity falls apart, in my view, because (a) we’ve left it to the Flag State and we’ve seen how that gets handled. I’ll come back to that in a second; and then, (b) as Iain and the other panel mentioned, this is a multi-faceted resolution. So, you’ve got LNG opportunities; you’ve got a petro fuel energy. So, there’s no uniformity in the actual compliance of what you decide to use to propel your ship. It will be different ships, different markets, different refineries as Iain also pointed out.

 

To go back, if I can, to the Flag State component of this. Flag States if you are the United States Coastguard, you take the view that if, for example, you fly the US Flag, we’re going to enforce the rules of the United States wherever that ship maybe found. And then any ship coming in to our ports and our Port State Authority, they will enforce the same mechanism. I don’t know that necessarily all Flag States have that same bent. I mean there are flags of convenience and while they are very reputable folks out there, there is a bit of an inherent conflict. I’ll just say that out loud and probably get in trouble from all my good friends but there is an inherent conflict with trying to service the shipowner with your registry and trying to enforce the rules at the same time.

 

Now in the US, we know, for example, if it’s MARPOL, we’ve domesticated that under our Flag State rules, into the act preventing pollution from ships. That sounds like MARPOL 1, that sounds like magic pipe cases. If you come into the United States with inaccurate logs, or inaccurate records, you have failed to maintain a record book, for example, you have just now violated other provisions of the US law by providing a false statement, or obstructing justice to investigation, or to an inspector. I suspect, at least as far as this particular requirement goes, if we didn’t have the ether in place, that the US would have used some mechanism of domestic law to enforce what happens on the high seas. So, I just throw that out there… I see a lot of similarities between the two. We’ve got two years and a couple of days to think about it but that’s how I look at that.

 

Thank you for that Joe. Just a quick question to each of you. 2020 is definite, Tim and we are looking at two years of challenge, what is going to happen in 2020? Quick, quick.

 

It will be chaotic, but we have a chance to manage that chaos as from one port to another, availability will vary. Crews will become, will very quickly have to become used to the fact that these various bunkers will be coming on board. And there will need to be tolerance from the enforcement working with ships, looking to those ships that are sincerely trying to comply and working with that. The limit is the limit but there needs to be understanding of the reality for ships to take this over. This came about with 2015, there was a lot of information and direction to the enforcement agencies, to understand the complexity of the switch over for the crew and I think there was a lot of that. There is going to be a lot more inspections on board and there again the inspectors need to understand where the crews are. So, is the intent of the crew to comply? And that is one of the first things to do.

 

The other thing with 2020 to minimize the chaos, then it is important for ships to plan, and the changeover needs to start, we need to start seeing that happening in August/September of 2019. Because barges need to clean up, storage tanks need to clean up, ships tanks need to clean up. So, I think the concept of being a number one lead green ship, the marketing concept with big traders that carry all their cargo. So, let’s be first. But that can only come about by discussion, co-operation and planning needs to be there. And preparations for even light scrubbers, for example, there is an intermittent step and that is to prepare your ship for putting in a scrubber in the event that that will be financially viable, or more clear to the management. Certainly, with Class, we have a scrubber ready notation as others do, to help ships go forward on that. But talk to us, come to us, there are a lot of consultancies and we are taking information for training and if you are not sure there, we provide courses etcetera to help companies see through it.
But 2020 will be chaotic, I do believe. There will be ships coming in, ‘Oops made a mistake, still got 500 tons of high Sulphur fuel oil, what do I do with it?’ I’m challenging one or two in the EU Commission on that one, come on let them burn it. ‘Oh, no, no, no, its 0.5.’ So, we have to have/see what questions need to be addressed. Hopefully, we’ll come out with the implementation plan from PPR, with some of these questions addressed and scenarios, so there is clarity to the market.

 

So, communication is key to this isn’t it?

 

Communication, co-operation and integration as an industry.

 

Thank you so much for that. Thank you to Tim, thank you to Joe, and to Joe and to Iain and before that you heard from Philip Roche and Henriette Brent-Petersen and Dele Adewale. Thank you so much for your time, I think we have learned a great deal but what we have learned, as always, is that communication and collaboration is key to getting this issue right.

 

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