Carriage ban on marine fuels with sulphur content above 0.50% formally adopted
International 30.10.2018
On 26 October 2018, during its 73rd session on 22 - 26 October, the Marine Environment Protection Committee ('MEPC73') of the International Maritime Organization (the 'IMO') formally adopted the carriage ban on marine fuels with sulphur content above 0.50%. This was effected through approval of amendments to regulation 14 of Annex VI to the International Convention for the Prevention of Pollution from Ships ('MARPOL Annex VI') as laid down in the IMO document MEPC 73/3. Whilst the 0.50% limit on sulphur in ships' fuel oil will apply from 1 January 2020 as planned, the carriage ban – i.e carriage on board a marine vessel of high sulphur marine fuel oil ('HSFO') with sulphur content above 0.50% will come into force on 1 March 2020, subject to few exceptions. MARPOL Annex VI amendments bring a sea of change not only for ship owners, ship operators and ship managers but also for refiners and bunkering industries. The legal detail and practical ramifications of MARPOL Annex VI, also known as the IMO 2020 rule, are briefly outlined below.
Currently, the maximum sulphur limit in fuel oil is 3.50% globally (and 0.10 % in the four ECAs: the Baltic Sea area; the North Sea area; the North American area (covering designated coastal areas off the United States and Canada); and the United States Caribbean Sea area (around Puerto Rico and the United States Virgin Islands)). The new limit of 0.50% (the 'IMO 2020 compliant marine fuel') will be applicable also globally except for the designated emission control areas (ECAs) where the limit will remain even lower, at 0.10%. This means that when the ban on carriage of HSFO takes effect marine vessel operators will have three options to choose from in order to comply with the IMO 2020 requirement:
To use IMO 2020 compliant marine fuel with a sulphur content of 0.50% or less.
Continue to use HSFO with a maximum sulphur content of 3.5% but only if the vessel is equipped with approved scrubber systems save for when the ship can evidence that it was unable to source an IMO 2020 compliant marine fuel when refuelling (see below).
Use LNG or methanol.
Each of the above options will have its benefits and drawbacks. Each could give rise to risk exposure if not applied properly or due to system shut-down and/or inoperability. Careful planning, consultation and technical assistance of specialists as well as procedural preparation and crew training in the next 15 months will be of tremendous importance.
Meaning of "carriage of fuel oil used on board"
The interpretation of "fuel oil used on board" includes use in main and auxiliary engines and boilers. This means that not only is the delivery for use of any HSFO on board a ship is banned but also its carriage on board a ship. Any HSFO bunkers and tanks remaining on board will have to be removed by 31 December 2019 at the latest. Unless sold to refiners for further blending, the remaining HSFO may have to be disposed of as waste (a) which may not be accepted by all ports; and (b) which will likely cause ship owners and charterers to incur significant disposal costs. Refiners of HSFO are also likely to face difficulties of selling it post 1 January 2020 as demand is likely to plummet. Specialist technical and legal input should be used when formulating an HSFO disposal strategy.
Scrubber systems
One method of meeting the legal requirements of MARPOL Annex VI without the use of low sulphur fuel is to install exhaust gas cleaning systems known as "scrubbers". An installed scrubber system must be approved by the ship's Flag Administration and such approval evidenced in the ship's IAPP Certificate (International Air Pollution Prevention Certificate). Whether to install equivalent arrangements such as 'scrubber systems' or not is a commercial as well as practical decision. Whilst this option is suitable for some ships and operations it is not suitable for all. Ship owners will need to weigh up all the pros and cons before deciding whether to opt for IMO 2020 compliant marine fuel – a long-term solution which, arguably, is more neatly aligned with long-term emission reduction goals for the shipping industry (see below); or whether to opt for scrubber systems – arguably a short-term fix that bears certain environmental and practical risks. Furthermore, opting for scrubber systems requires consideration of factors which go far beyond price and payback period such as considerations as to whether to choose open loop, closed loop or hybrid models; and whether the ship's routes, operations and regular port calls would allow the use of open loop scrubbers given that the latter are banned in certain jurisdictions due to, for example, local laws which go beyond the requirements of the Sulphur Directive 2016/802. Some may consider that scrubber systems do not sit comfortably with IMO's environmental goals nor with those of the Water Framework and Marine Strategy Framework Directives both of which aim to achieve good ecological status in the European marine areas by 2020. The uncertainty and lack of evidence regarding oil mixtures and chemicals contained in open loop scrubbers is the subject of much debate in the industry. Careful due diligence ahead of making this commercial commitment is essential for a resilient solution.
Evidencing non-availability of IMO 2020 compliant marine fuel
In the course of the MEPC73 sessions some member states attempted to defer implementation of the carriage ban on the basis of uncertainty surrounding economic availability and sufficient supply of low sulphur fuel. This attempt was quickly quashed however and MEPC73 proceeded to formally approve the ban. The attempted deferral of the implementation date is not without merit however as opinion in the industry is divided on whether there will be enough of low sulphur marine fuel oil available for all. Ship owners, charterers and operators who opt to use IMO 2020 compliant marine fuel on board their ships risk being unable to source IMO 2020 compliant marine fuel come 1 January 2020. Notwithstanding, Regulation 18 of MARPOL Annex VI which governs fuel oil availability and quality, expressly requires each Party to "take all reasonable steps to promote the availability of fuel oils which comply with this Annex and inform the Organization of the availability of compliant fuel oils in its ports and terminals". Thus ships that are not equipped with scrubbers or other equivalent arrangements will be able to present a Fuel Oil Non-Availability Report – a FONAR - to inspectors in ports who will then corroborate the accuracy of the report and notify the IMO and the EC about fuel oil non-availability. Failure to present such a report and failure to corroborate its authenticity will be an offence and would subject the ship to a more detailed inspection and potential fines and/or prosecution. Further details are awaited on the content of a FONAR and how the accuracy of the FONAR will be verified in practice. There is a risk that the industry may over-rely on the use of FONARs thus creating a regulatory vacuum. IMO is conscious of such risk and working on specific guidelines to avoid any abuse of the FONAR system.
Other means of demonstrating compliance
It will be possible to demonstrate compliance with the IMO Rule 2020 through a number of other means in addition to the ones discussed above. These include the following:
Bunker Delivery Notes (BDNs): ship operators would need to ensure careful record keeping of BDNs which state the sulphur content of the fuel oil carried and supplied and that the same are accurately completed and up to date.
Fuel samples: Samples of fuels may be taken for verification by Port State Control and/or local maritime enforcement bodies in order to verify the sulphur content of the ship's fuel. It is imperative that a sampling point is made available on board a ship and that all tanks are properly cleaned and decontaminated following any fuel changeover and when switching between low and high sulphur fuels. Further guidance is expected in this regard.
IAPP Certificate: The IAPP Certificate, issued by a ship's Flag State, must be carried on board a ship at all times and presented in the course of an inspection to evidence that the ship uses fuel oil with a sulphur content that does not exceed the applicable limit value as documented by BDNs or uses an approved equivalent arrangement such as a scrubber.
Port and coastal States can use Port State Control to verify that the ship is compliant. They could also use surveillance, for example air surveillance to assess smoke plumes, and other techniques to identify potential violations.
Enforcement and sanctions for non-compliance
There is a significant price differential between HSFO and IMO 2020 compliant fuel which could potentially create an incentive not to comply. The IMO does not set fines or sanctions as these are established by individual Parties to MARPOL as Flag and Port States. Sanctions can be in the form of administrative fines or criminal penalties and would include detention, refusal of entry into port; delay; and prosecution and/or fines.
Whilst levels of fines differ between countries if prosecuted in the UK fines would be unlimited. A mandatory order to restore any damage and to remedy the breach (e.g. install an approved scrubber system or decontaminate tanks for the purposes of bringing on board IMO 2020 compliant fuel) could also be made in addition to the fine. The definition of a 'liable person' under UK Merchant Shipping (Prevention of Air Pollution from Ships) Regulations 2008 is wider than that of MARPOL and the EU Sulphur Directive. Whilst the latter instruments penalise the master of a ship and/or the ship owner, the UK regulations are wide enough to place liability on the owner, master of the ship, manager, charterer, harbour authority or terminal operator, fuel oil supplier or fuel oil supplier's representative (e.g. making a false declaration on the BDN) and any person who causes a non-compliance of any of the aforementioned persons through their acts or omissions.
Ship detention, delay or refusal of entry into a port would also carry other legal and practical consequences such as breach of contract and termination of insurance cover.
Implementation and guidance
In light of the risks that new and blended fuels could cause, MEPC73 has endorsed draft guidance which is to be discussed in detail by the IMO in February 2019. The guidance is expected to shed light on risk assessment and mitigation plans addressing the impact of new fuels; fuel oil system modifications and tank cleaning (if needed); fuel oil capacity and segregation capability; procurement of compliant fuel; fuel changeover plan (when switching from 3.5% to 0.50% sulphur content), among other issues. The guidance is part of a larger set of guidelines the IMO is working on ahead of 2020. Meanwhile, organisations, including the International Standardisation Organisation and the International Bunkering Industry Association, are working on a separate guidance geared towards ship operators and fuel suppliers.
The sulphur carriage ban is effectively a supplementary device designed to give teeth to the 0.50% sulphur limit that is to apply from 1 January 2020. It is part of the broader IMO agenda to decarbonise a sector that is currently responsible for 3% of global emissions and which carries over 80% of the world's trade. In April 2018 the IMO made a historic commitment to reduce total annual greenhouse gas emissions by 50% by 2050 compared to levels in 2018. Elimination of HSFO is but one of many measures that the shipping industry will have to navigate in the coming years. Now that the carriage ban has received its official stamp of approval the shipping industry and enforcement bodies can move full steam ahead with preparing for this enormous task.
Paul Sheridan
Partner, London +44 20 7367 2186 paul.sheridan@cms-cmno.com
Olivia Jamison
Partner, London +44 20 7367 2055 olivia.jamison@cms-cmno.com
Valentina Keys
Senior Associate, London +44 20 7367 2173 valentina.keys@cms-cmno.com
Electricity storage licensing – another step closer to regulatory certainty
On 26 June 2019, Ofgem published its statutory consultation notice and covering letter on electricity generation licence changes ("2019 Consultation"), which sets out the regulator's proposed framework for electricity storage regulation. The consultation...
The OGA's role in the energy transition
The UK Government's announcement of binding 'net zero emissions' legislation on 27 June 2019 attracted much media attention. The obvious question that follows is, how is that to be achieved. It is an issue that many businesses, including in the oil &...
Ukraine: Constitutional court rules that status of the Regulator must be changed
On 13 June 2019, the Constitutional Court of Ukraine by its decision (the "Decision") ruled that certain provisions of the Law of Ukraine On National Commission that Performs State Regulation in the Spheres of Energy and Utilities No. 1540-VIII dated...
Smart mobility - Infrastructure for our "Connected Future"
Smart mobility is reshaping the transport sector, shaking up and challenging traditional transportation models. Countries with clear government support and efficient regulatory upgrades are leading the way. The smart city initiative of Dubai is aiming...
Health & Safety Newsletter
CMS is delighted to present its quarterly Health & Safety newsletter, providing information on recent issues relevant to health and safety in the workplace, including a selection of industry news and recent health and safety prosecutions. Our newsletter...
The OGA - one year on: a UK oil and gas industry regulation round-up
On 1 October 2017, the OGA celebrated its first anniversary as an independent regulatory body. A year ago many of the Secretary of State's functions in relation to the oil and gas industry were transferred as most of the relevant sections of the Energy...