In just a few months’ time, one of the International Maritime Organization’s most ambitious and far-reaching regulatory amendments shall enter into force. Back in October 2016, the IMO’s Marine Environment Protection Committee (MEPC) confirmed 2020 as the deadline to introduce a new global limit for sulphur emissions in shipping.

While restrictions on sulphur emissions from ships have existed for quite some time in specifically designated regions (known as emission control areas), the envisaged transition on a global scale is proving to be quite daunting. As at January 1, 2020, the permissible sulphur content in marine fuels consumed by all ocean-going vessels will drop overnight from the present 3.5 per cent m/m (mass by mass) to just 0.5 per cent m/m in accordance to Annex VI to the International Convention for the Prevention of Pollution from Ships.

From an environmental point of view, the 2020 Global Sulphur Cap is literally a breath of fresh air. The decision to steam ahead with the 2020 deadline highlights IMO’s willingness to implement more environmentally friendly policies. Sulphur emissions from ships are considered as a major component of air pollution. They are harmful both to the environment as well as to human health – for instance they can lead to respiratory diseases and contribute to acid rain.

Ships generally need to burn fuel products (bunkers) to navigate from one port to another. Consequently, the combustion of these fuels releases sulphur emissions into the air. Heavy fuel oils used by ships are presently permitted to have a sulphur content of 3.5 per cent, making them amongst the dirtiest transport fuels in the world. This is extremely alarming given that 90 per cent of world trade is transported by sea. In 2018 alone, the demand for the bunker fuels was circa 3.5 million barrels per day, which translates into around 5 per cent of the total global fuel demand of that year.

The need to radically lower ships’ sulphur emissions was highlighted in a study submitted by Finland in 2016 to the IMO, which estimated that if the 2020 deadline had been postponed by just five years, the air pollution from ships would have contributed to more than 570,000 additional premature deaths between 2020 and 2025.

As of next year, therefore ship owners and operators must ensure that the fuel being burned in both their main and auxiliary engines has a maximum Sulphur content of 0.5 per cent. This will help to significantly reduce the impact of ship emissions and should contribute to improving air quality.

However, as stakeholders prepare for this imminent stricter regime, they have to also come to terms with the escalating operational costs and new challenges which they must overcome in order to ensure compliance. The impact of IMO 2020 has had a rippling effect throughout the shipping and energy sectors effecting not just ship owners and charterers but also fuel refineries, bunker suppliers, storage facilities, flag administrations and port state control. S&P Global Platts Analytics have estimated that the global impact of this new sulphur cap will cost in excess of one trillion American dollars over the span of five years. Whilst this is indeed a staggering figure, environmentalists argue that the impact of shipping pollution is far costlier.

Ship owners have identified three principal avenues to pursue compliance with the new 0.5 per cent limit. First, a ship owner may opt to switch from heavy fuel oils to low-sulphur distillates (MGO, VLSFO or other low sulphur fuel blends). Second, a ship owner may resort to using alternative fuels such as LNG. This second option is perhaps more suitable for new builds. The third option available to ship owners is to continue to use heavy fuel oil (HFO) and to install emission abatement technology (‘scrubbers’) on board the vessel.

Each option has its own advantages and setbacks

Each option has its own advantages and setbacks. There does not yet appear to be all encompassing solution and thus each ship owner must pursue the route which is most feasible and cost-effective for it to achieve compliance. Ship owners must weigh a number of different considerations such as the age of their vessels and the number of receiving tanks on board, their trading patterns and the locational availability of different fuel products. Some prudent ship owners have already started re-organizing their bunker supply chains and networks to ensure that come January, they will be able to source compliant fuel. Cautious of the anticipated hikes in fuel prices and possible shortage of higher specification marine fuels, numerous ship owners are holding out for as long as possible before deciding how to proceed. As stated earlier, ship owners are however, not the only maritime stakeholder with a vested interest in IMO 2020.

On the other side of the supply chain, fuel refiners and bunker suppliers are also having to adapt to ensure that they can keep up with the market demand. Bunker suppliers and refiners have already started developing and experimenting with new fuel blends. For example, oil majors such as BP and ExxonMobil have both already also started producing very low sulphur fuels that comply with the 0.5 per cent requirement.

Apart from compliance, the effectiveness of IMO 2020 will be dependent on proper monitoring and enforcement. The expected price differential between compliant 0.5 per cent fuels and high sulphur fuels may tempt unscrupulous ship owners to risk non-compliance. This temptation could become a more realistic threat should the new regime fail to be adequately enforced. As a specialized agency of the United Nations, the IMO has no authority to enforce the new limits. Thus, enforcement will depend predominantly on flag States and Port State Control.

Port States are expected to conduct initial inspections based on documents and other possible materials, including remote sensing and portable devices. For instance, port State control officials will need to examine the vessel’s certification such as the International Air Pollution Prevention (IAPP) Certificate as well as the copies of the bunker delivery notes for the last supplies furnished to the ship. As from January 1, 2019, these bunker delivery notes must include a declaration by the bunker supplier confirming the sulphur content in the fuel it is supplying. It is also anticipated that a number of port States shall be deploying “sniffer drones” in major ports in order to identify any violations. Furthermore, if clear grounds to conduct a more detailed inspection exist, Port State Control will be permitted to conduct sample analysis and other detailed inspections to verify compliance to the regulation, as appropriate. Flag State administrations will also need to ensure that adequate fines and sanctions will be introduced in order to serve as a real detriment against violations or breaches.

Earlier this year, the IMO MEPC issued its Guidelines for Consistent implementation of the 0.5 per cent Sulphur Limit under MARPOL Annex VI as well as its Guidelines for port State control under MARPOL Annex VI in order to offer some assistance in relation to the implementation and enforcement of the new sulphur cap.

Nonetheless, a plethora of questions are still being put forward. For instance, will flag States with limited resources – including human resources – be in a position to effectively ensure compliance when their ships are navigating on the high seas? The International Bunker Industry Association has also raised concerns of the possibility of a compliance breach as a result of sulphur still being present in the tanks before switching. Are all ships expected to have cleaned their fuel tanks just prior to January 1, 2020?

Moreover, the effectiveness of IMO 2020 as a global threshold will only be possible if the same enforcement levels are applied across the board. Uniformity could help avoid market distortions. Due to public outcry, Indonesia had to recently backtrack on its original plans for a partial implementation of the new limit (by not applying it to cabotage vessels).

That said, there are still a number of countries, such as Egypt or Argentina, which have not yet even ratified Annex VI of MARPOL 73/78 and therefore ships in those jurisdictions may face no enforcement checks. Apart from external enforcers, ship owners may have contractual reasons to wish to comply. If a ship has an incident and it transpires that the bunker fuel are off-spec, P&I Clubs may consider the ship ‘unseaworthy’ or in breach of applicable laws, and thus could decide to invalidate that owner’s policy.

With just three months to go before the January 2020 deadline sets in, there still remain a number of variables at play and several lingering questions remain unanswered. It appears that only time will tell as to whether or not the shipping industry and the fuel supply chain in general are adequately prepared for this imminent momentous change.

by Adrian Attard, Fenech & Fenech Advocates

Source: Times of Malta