December 2017 Legal Update 1

LEGAL UPDATE

It adopted AnnexVI (Regulations forthe Prevention of Air Pollution fromShips) to the International Conventionfor the Prevention of Pollution fromShips (MARPOL Convention) in 1997.Regulation 14 therein covers emissionsof sulphur oxides (SOx) and particulatematter from ships.

The IMO has been setting progressivelystricter limits on the sulphur content offuel oils used by ships. Last year, itadopted a 2008 resolution thatintroduces a reduced global sulphur capon marine fuels.The current global limitof 3.5% mass/mass (m/m) shall decreaseto 0.5% m/m from 1 January 2020.The0.1% m/m limit in Emission ControlAreas (ECAS) such as the Baltic Seaarea, the North Sea area, the NorthAmerican area, introduced on 1 January2015, remains unaffected.

While the new regulation has beenwelcomed by all, there are challenges inensuring its compliance andenforcement.These challenges will bediscussed below.

The challenges

Will there be sufficient affordablelow-sulphur fuel oil (LSFO)?

With 1 January 2020 less than two anda half years away, there is a real concernover whether sufficient LSFO will beavailable to enable compliance.

Improving hydrocracking technology inrefineries is leading to higherproductions of LSFO. Sulphur fromresidual fuels can also be processed awayusing hydroconversion orhydrosulfurization technology, and lowsulphur distillates can be blended withhigh sulphur residuals to create heavyfuel oil with sulphur contents of 0.5%

or less. So, it seems likely that sufficientcompliant fuel will be available.Blended LSFOs will, however, bringchallenges of their own in the form ofcatalytic fines and other impurities.

Increasing demands for 0.5% m/m fuelis anticipated to drive its price up to50% higher than the cost of residualfuel, bringing with it challenges forclosing loopholes for non-compliance.

Scrubbers

One method to meet the legalrequirements of MARPOL without theuse of low sulphur fuel is installingexhaust gas cleaning systems known as“scrubbers”.There are two generaltypes of scrubbers: wet scrubbers anddry scrubbers.Wet scrubbers sprayalkaline water into a vessel’s exhaust toremove sulphur before it is released intothe atmosphere, whereas dry scrubbersexpose dry reagents to the exhauststream to create a chemical reactionthat removes the sulphur from the gas.

The benefit of installing scrubbers isthat ships may continue to use cheaperhigh sulphur fuels. The up-front cost ofthe scrubber (US$1.5m to US$2m),retrofitting costs, potential loss of cargo

space on board, shipyard capacity to meetinstallation demands and training of crewto maintain the scrubbers are, however,challenges for the shipowner.Theestimated payback time for a scrubber is2 to 4 years but this is assuming the fuelprices prognoses are correct.

Only scrubbers fitted with continuousemission monitoring equipment areacceptable. In the United States,scrubbers are permitted but the shipmust at all times still continue tocomply with requirements andprohibitions in regards to waterpollution. Germany and Belgium havealso mandated for closed loop scrubbersin some of their ports and parts of theirterritorial waters. In closed loopscrubbers, the washwater is treated torestore its alkalinity after it leaves thescrubber, and then recirculated in thesystem. Little or no water from thescrubbing process is dischargedoverboard.The German green lobbygroup Nabu has claimed that dischargefrom scrubbers can have a significantimpact on the marine environment.

Accordingly, whilst scrubbers aregenerally effective for removing SOx

from the gas exhaust, there are anumber of considerations shipowners

Sulphur emissions:The outstanding challengesThe International Maritime Organization (IMO) has been working to reduce theharmful impacts of shipping on the environment.

LEGAL UPDATE

need to bear in mind when decidingwhether or not to have scrubbers fitted.

Alternative fuels - LNG andMethanol

LNG,when used as a fuel, significantlyreduces the emission of SOx. It wastraditionally used as a fuel onboardLNG ships only but is now also used inother trades such as short sea shipping.LNG’s use as a fuel has been recognisedby the IMO in the development of theInternational Code for Ships UsingGases and other Low Flashpoint Fuels(the IGF Code), adopted in 2015.Other recent regulations include ISO20519 (2017) which standardises LNGbunkering operations internationally.

Methanol is a clean burning alcohol, andemissions of SOx and particulate matterfrom its combustion are low. Methanol istransported in chemical product tankersat atmospheric temperature and pressure,and stored in tanks similar to those usedfor gasoline. It can be produced from awide range of feedstocks includingnatural gas, coal and renewables.

There are, however, several challengesfacing the success of these fuels as genuinealternatives to high-sulphur content fuel.LNG’s use as a fuel is constrained bythe cost of retrofitting propulsion unitscapable of burning gas and by the lack ofport infrastructure to handle bunkering.An LNG bunker barge costs between 5and 10 times a liquid fuel barge.Thebiggest challenge for using LNG as a fuel,however, is methane slippage due to theincomplete combustion of the methanein the engine.The global warmingpotential of methane is 25 times higherthan CO2; consequently, the release ofeven small volumes of methane caneasily negate the CO2 reductionbenefits of using LNG as a marine fuel.

The energy density of LNG andmethanol is also far lower than forpetroleum,which means highervolumetric quantities are needed topropel a ship a given distance than withtraditional petroleum fuel. Ships willtherefore need to have larger fuel tanks(2.5 times larger in the case of LNG)

which in practice means reducing itscargo carrying capacity.

Commercial disputes andcriminal penalties

Potential disputes under charter partycontracts in regards to compliance withfuel emission regulations are foreseeable.Issues that may arise include whether theship had been “fitted for the service” ifshe is not able to burn compliant lowsulphur fuel, which party is liable to payfor deviations to take on compliant fuel,off-spec bunkers, difficulties in managingand segregating different fuels onboardto avoid contamination, delays, detentionof the ship and even criminal penalties.

Owners and charterers are stronglyadvised to bear in mind the potentialissues above and to pay attention tocosts and risks allocation clauses whennegotiating their charter parties.

Sanctions

Member States to MARPOL (FlagStates and Port States) are to implementthe new regulation through theintroduction of “effective, proportionateand dissuasive”penalties.Most violationsare likely to be met by fines, which inthe absence of any harmonisation ofsanctions framework, can vary in severityfrom jurisdiction to jurisdiction.

Due to the economic benefits of non-compliance, it is likely that fines will be setat up to ten times the economic benefitfor a year’s operation.Therefore, fines inthe region of US$10m to US$50m pership can reasonably be expected.

Penalties in the US are even more severe.In addition to the imposition of fines, theUS Coast Guard (USCG) has the powerto seize ships in breach of sulphurregulations, and the EnvironmentalPollutionAgency (EPA) may impose finesof US$25,000 per day for the duration ofthe violation.The PSC, in contrast,has nopower to detain ships for non-compliance.

Methods of enforcement

The IMO has made efforts to upgrade

December 2017 Legal Update 2

global enforcement of the regulations.In January, the IMO’s sub-committeeon Pollution Prevention and Response(PPR) prepared a list of enforcementconsiderations in order to achieve theenvironmental benefits sought throughRegulation 14. Amongst itsrecommendations, the committeesuggested that the industry considers adraft standard format for reporting fueloil, and develop guidance that mayassist Member States and stakeholdersin assessing the sulphur content of fueloil delivered for use on board ships.

Some countries have developed the useof sniffers as a method for enforcing thesulphur cap. Sniffers are sensory systemsthat detect the levels of sulphur that areemitted from a given ship’s exhaust gas.In Denmark, for example, a sniffer hasbeen installed underneath the GreatBelt Bridge, and sniffers have also beenattached to light aircrafts and drones.

Localised sulphur regimes are also inforce in various jurisdictions includingChina, Hong Kong, Australia,Turkeyand California, and ships trading tothese jurisdictions should be aware ofthe specific rules and regulationsapplicable in these regimes.

Enforcement methods are becomingmore sophisticated but if the ultimategoal is to make ships switch to LSFOcompletely, the question of whether it isthe Flag or Port States that will beresponsible for enforcing the sulphur capin international waters must be settled.

Conclusion

Air pollution from maritime transport is aglobal environmental concern.The needto control the emission of SOx in shippingthrough regulations is acknowledgedbut as highlighted above, challenges forcompliance and enforcement remain. Itis hoped that some of these challengescan be addressed before the new globalcap comes into force in 2020.�

This article previously appeared in the Augustedition of Maritime Risk International.