Summary: IMO Annex VI SOx cap for emissions from ships will come into force 1 January 2020. What are the options for compliance by shipowners?

Those of you who are not readers of the dedicated shipping press may have missed the current spike in discussions and announcements around compliance with the MARPOL Annex VI – the International Convention for the Prevention of Pollution from Ships (MARPOL Convention) adopted by the IMO in 1997. Annex VI specifically addresses air pollution from shipping and imposes targeted reductions in the sulphur oxides (SOx), nitrogen oxides (NOx) and other harmful particle matter emitted by ships. The targeted reductions agreed in Annex VI (which, in a revised and strengthened form, finally came into force in July 2010) represents the most significant response from the commercial shipping sector to global action to address air quality and wider environmental issues. The current focus is all around how shipowners will meet the SOx emissions regulations which are set to take effect as of 1 January 2020. The current global limit for sulphur content of fuel oil for ships is 3.50% m/m and this will reduce to 0.50% m/m on 1 January 2020. Ships are operating with fuels which show a much lower average SOx content than the current upper limit but there is a real concern as to how they will meet the challenging target set for 2020.

Shipowners can, in principle, comply with the new regulations in a number of ways. They can buy compliant low-sulphur fuel, they can fit or retro-fit equipment which provides an “approved equivalent arrangement” or they can transition into using alternative compliant fuels or power sources. Each of the options has its challenges. There is a lot of comment about the lack of refining capacity to produce sufficient low-sulphur fuels. Certainly it seems that there is not, and will not be, sufficient capacity to meet the demand if even a significant minority of the world fleet switches to low sulphur fuel.

This relative scarcity is reflected in the price differential between high and low sulphur fuels – a difference of around $300 per tonne. It is unlikely that this significant differential will disappear by 2020 but over time it might be reasonable to believe that refineries will respond to demand by producing more compliant fuel and that the differential will reduce. But this is also somewhat dependent on how many ships elect to fit technological solutions which allow them to continue to use current heavy fuels and scrub exhaust gas emissions so that they comply with the regulations.

The development of these technology solutions has been much discussed and while there remain sceptics and doubters as to whether current “scrubber” solutions will be reliable and are a solution for the remaining life of the ships on which they are installed there is no doubt that many shipowners will elect (or have elected) to go this route. Safe Bulkers, Star Bulk, Eagle Bulk and other major owners are reported to have placed their faith and money in this solution – at least for a significant part of their fleets.  There may be no one best solution for all ships and shipowners will weigh up the relative advantages of finding the down-time and capital to fit scrubbers against the disadvantages of paying the premium attached to low-sulphur compliant fuel.

The third solution, moving to an alternative fuel, is the more radical and visionary approach. The problem here is to know which fuel or which power source to invest in – methanol, hydrogen, LNG, LPG, batteries, solid fuels or sails – or hybrid combinations? There is plenty of choice and again some power sources will suit some ships and operational conditions better than others. Superficially it makes sense to use LNG as a fuel on an LNG carrier and LPG on an LPG carrier. It’s unlikely that rotor sails will ever be the sole power solution for a commercial ship but combined with other fuel options can, even with current technology, provide significant overall fuel savings for certain ship types operating in certain geographies. The recently delivered “Victoria of Wight” (operated by Wightlink) combines battery power with conventional fuel to reduce overall emissions. A solution which for the time being is probably confined to vessels operating in relatively calm conditions over short distances. Many see LNG as the fuel of the future and owner/operators of mega container ships, cruise ships, LNG carriers and some bulk carriers have already put their money behind that conviction. Switching to alternative fuels/power sources – even if those alternatives have been in development for some time – involves assuming risks on the technological solution itself, the equipment that delivers that solution and on the development of infrastructure to support it. Hardware, software and Apps – there are endless examples of winners and losers in all investments in technological innovation.

If it seems that ship owners are responding at the last moment to a piece of regulation which has been on the cards for some time then that is a misreading of the situation. That the move to lower emission standards is being imposed by international regulation (and not entirely voluntary actions) is not surprising given the need for a global set of rules to ensure a level playing field. That ship owners have waited until now to go pat on their preferred solution is mainly down to concerns about the performance and reliability of the competing scrubber equipment and processes, the costs of retro-fitting it and the certification of its status as an approved “equivalent arrangement”. Commercial shipping operates under fierce cost pressures and many sectors are only still emerging from seven or more lean years with no certainty that the structural causes of those lean years have been fixed.

Although it is the IMO that has brought the new rules into existence it will be the flag state with which a ship is registered and the port/coastal states which will have responsibility for implementation. It is they who set the sanctions for non-compliance. There is no reason to think that they will be lax in their policing and implementation and it will in practice be down to port state control mechanisms (which have been operating effectively for many years) to check the paperwork (e.g. a ship’s IAPP certificate, bunker delivery notes and documents concerning any “approved equivalent arrangement”) and sniff out violations (but linking a violation to a particular ship may not be so straightforward in many cases – just as it hasn’t been so easy to do with liquid emissions by ships). The huge benefit of the adoption of these regulations by a world body such as the IMO is of course that its sets a cap for everyone wherever they are and avoids the difficulties that arise where there are multiple regional schemes. But in the end the effectiveness of the regulation will be down to the practices of individual shipowners and the implementing authorities. These authorities do have incentives to be seen to be on board with the programme (not least because they voted for it) but there is a risk that there will be inconsistent implementation/sanction. How will shipowners comply with the regulations and what are the incentives to do so?

Finally on a more legal note, ship owners and charterers will need to focus hard on the contractual responsibilities and liabilities they will be exposed to in relation to compliance with the 2020 SOx limits. Who is to carry the risk and cost of adopting an equivalent arrangement (scrubber) solution to compliance? What happens if it proves to be ineffective or unreliable?