As of 1 January 2020, the cap of the sulphur limit in marine fuel has decreased from 3.5% to 0.5% in accordance with Annex VI of the International Convention for the Prevention of Pollution from Ships (known as MARPOL Convention), Regulation 14 which aims to reduce sulphur oxides (SO x) emissions from ships.

Shipping companies are required to use low sulphur fuel such as marine gas oil (“MGO”), marine diesel oil (“MDO”) or other compliant blends unless fitted with “an approved equivalent method of compliance” (using the words of the 2019 Guidelines for Consistent Implementation of the 0.5% Sulphur Limit under Annex VI of the MARPOL Convention).

In accordance with Annex VI of the MARPOL Convention, Regulation 4, an “approved equivalent” includes any “fitting, material, appliance or apparatus, such as SO x scrubbers, to be fitted in a ship …”. There is certainly debate as to whether SO x scrubbers are green technology but, in so far as financing is concerned, scrubber fitting would typically qualify as green investment.

In the first months of 2020, ships fitted with scrubbers appear to be benefitting. This is the case for larger vessels, in particular. According to a reputable shipbroking firm, an ‘eco-type’ VLCC with a scrubber was earning nearly $78,000 daily in mid-January compared with $56,000 daily for a ‘non-eco’ VLCC with no scrubber fitted. The difference in smaller ships like MRs is less substantial but still apparent.

Payback on investment

The payback on investment has been quicker than predicted due to fuel price differentials and a trend of falling High Sulphur Fuel Oil (“HSFO”) prices. Difficulty in sourcing Low Sulphur Fuel Oil (“LSFO”) and bunkering vessels at different terminals last month meant that smaller owners with no direct contracts with LSFO suppliers had to pay a premium.

It is early to say where the fuel price is going to settle as it is unpredictable and fluctuates based on events outside the shipowner’s control but, if this trend continues, we might see the value of ships fitted with scrubbers increase, which would in turn decrease the loan-to-value ratio on the shipowner’s financing.

What should you consider?

Ships that are not fitted with scrubbers will need to comply with the prohibition on carriage of non-compliant fuel oil (for combustion purposes for propulsion or operation) on board a ship coming into force on 1 March 2020. Keystone Law’s Anastasia Papadopoulou recently worked on a sale and purchase transaction in which the buyers refused to pay for any non-compliant fuel on board due to this rule. In cases where non-compliant fuel quantities are substantial, the loss for a seller that has to de-bunker can be substantial.

On take-over, there is also the risk that there is still residue of non-compliant fuel in the bunker tanks. The cleaning of the bunker tanks is an expensive task, taking the ship off-hire for a couple of weeks and the shipowner runs the risk of fines if the port authorities inspect and verify non-compliance post-acquisition. Although the IMO has not set specific sanctions and fines for not complying with the new regulations as these are determined by the individual states, if non-compliance is established, the port state may prevent the ship from sailing until the ship takes suitable measures to achieve compliance.

Anastasia Papadopoulou has been considering wording in sale and purchase contracts to address the risk of handover of non-compliant bunkers and luboils, as well as the responsibility relating to cleaning the bunker tanks of non-compliant fuels.

We have also been involved in advising on matters relating to technologies that contribute to greener shipping and we are best placed to advise shipping companies on environmental compliance issues in the context of ship sale and purchase and bareboat charterparties and on environmental covenants in shipping loans.

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.