Philip Roche and Utsav Mathur with law firm Norton Rose Fulbright advise ship owners and operators, banks, insurers and energy companies on the legal, commercial and environmental risks of owning, and operating ships, including pollution risks, bunker contamination issues and International Maritime Organization (IMO) 2020 matters. In this Q&A, edited for length and clarity, Roche and Mathur discuss the effects of the IMO 2020 global marine fuel regulation on the shipping market. The two responded jointly to emailed questions.
If a vessel is caught burning high-sulphur marine fuel in international waters in 2020, which international governing body’s responsibility is to penalize the shipowner — IMO? Do you know if there are penalties being discussed?
No, the IMO has no enforcement powers. It will fall to the flag state to prosecute owners (so this is unlikely to happen). However this is only a temporary phase. After March 2020, no one should be carrying HS fuel, so no one should be able to burn it. [The IMO adopted a carriage ban which states that no ships should carry fuel that contains over 0.5pc sulphur in their fuel tanks as of 1 March.] Port state control will be able to prosecute owners for having it onboard in the territorial waters. This is the reason for the carriage ban.
In 2020, if a supplier sells high-sulphur marine fuel (non-compliant fuel) to a shipowner who does not have a scrubber on their vessel, could the supplier be held in contempt of the regulation, in addition to holding the shipowner in contempt? In 2020, should a supplier require paperwork from the vessel to prove that there is a scrubber on board the vessel if the owner claims that there is one on aboard and is looking to purchase high-sulphur bunkers?
I am not as aware of any legislation that prevents this — the sanction is against vessels using (and after March 2020 carrying) the fuel. If a bunker supplier fraudulently stated the bunkers were compliant when they were not, then the bunker supplier would be liable for that fraud.
It is not for bunker suppliers to police this regulation but they do have certain obligations. According to the IMO:
“The bunker delivery note shall include a declaration signed and certified by the fuel oil supplier’s representative that the fuel oil supplied is in conformity with regulation 18.3 of MARPOL Annex VI and that the sulphur content of the fuel oil supplied does not exceed:
· the limit outside ECAS (currently 3.50pc, falling to 0.50pc from 1 January 2020) under regulation 14.1;
· the limit in emission control areas (0.10pc m/m) under regulation 14.4; or
· the purchaser’s specified limit value, on the basis of the purchaser’s notification that the fuel oil is intended to be used:
1. in combination with an equivalent means of compliance; or
2. is subject to a relevant exemption for a ship to conduct trials for sulphur oxides emission reduction and control technology research.”
So a purchaser has to notify the supplier that it has an exhaust gas cleaning system (EGCS). The supplier does not need to check this, he can take the notification at face value.
Could a shipowner submit a fuel oil non-availability report (FONAR) and still get fined for non-compliance in 2020? Under what circumstances? Have you encountered cases like this?
FONAR is a new development for the 2020 0.5pc fuel regulation but I understand it has already been used for Emission Control Areas 0.1pc non-availability. The FONAR must reflect and document a genuine attempt to acquire compliant bunkers and demonstrate why such could not be obtained at the port of departure.
The vessel is not required to deviate its route to get compliant bunkers so may proceed with non-compliant bunkers. But there will need for good evidence that bunkers were not available and such a report has to be filed as soon as possible after the vessel sails. This may be difficult for the vessel owner if he is waiting for the vessel charterer to give them the information on availability.
The vessel owner is required to populate the FONAR. If it is found that compliant fuel was available, or there was excessive delay in reporting, or the owner/charterer made no real effort to obtain compliant fuel, the owner may be prosecuted and fined.
Shipowners are concerned that the 0.5pc sulphur fuels that the different suppliers are offering will not be compatible with each other. Mixing different specification fuels from different suppliers could cause vessel engine problems. Could a shipowner use FONAR, even if 0.5pc sulphur fuel is available for purchase, but the shipowner does not want to buy it because they are worried that the new fuel and the fuel that is already in their tank might not be compatible?
The answer is not entirely clear. If the compliant fuel available is truly not able to be mixed with other compliant fuel onboard, then a FONAR should be sent demonstrating why this is the case. But it is not known if the port’s inspection agencies, also known as Port State Control (PSC) will accept this defense if compliant fuel was available at the port of departure. The owner will need to demonstrate why they could not arrange bunkering so compliant fuel could be taken onboard. Indeed paragraph 7 from IMO’s guidance on ship implementation plan for 2020 compliance suggests that such measures will need to be taken in the management of bunkers to avoid such situations.
“The ship implementation plan could be used as the appropriate tool to identify any specific safety risks related to sulphur compliant fuel oil, as may be relevant to the ship, and to develop an appropriate action plan for the Company to address and mitigate the concerns identified. Examples should include:
1. Procedures to segregate different types of fuel and fuels from different sources;
2. Detailed procedures for compatibility testing and segregating fuels from different sources until compatibility can be confirmed;
3. Procedures to changeover from one type of fuel to another or a fuel oil that is known to be incompatible with another fuel oil;
4. Plans to address any mechanical constraints with respect to handling specific fuels, including ensuring that minimum/maximum characteristics of fuel oil as identified in ISO 8217 can be safely handled on board the ship; and
5. Procedures to verify machinery performance on fuel oil with characteristics with which the ship does not have prior experience.”
PSC will look at the individual ship implementation plan (SIP) and the circumstances to determine whether the vessel has made sufficient efforts to deal with this set of circumstances.
In the spring and summer of 2018, the shipping industry was plagued by slew of contaminated marine fuel cases which originated in the US Gulf. The contaminated fuel caused a number of vessels to stall without engine power. The contaminated fuel was also exported and spread to Panama and Singapore. Because the contaminated fuel is mixed with other fuel in the vessel tank, it is very hard to prove how the specification problems originated. Shipowners have about 15 days to present a marine fuel contamination claim against the fuel supplier. Do you have advice for these shipowners?
It is correct that bunker suppliers have very short limitation periods. Owners should ensure that fuel is tested immediately if they have any suspicions about the provenance of the bunkers supplied.
That said, the increase in quality of the bunkers that are supplied to vessels (i.e. no longer residual fuel oil) may make it more difficult for bunker suppliers to adulterate fuel with non-permitted substances without it being obvious quite quickly. Nevertheless, owners have to take samples and get them tested if in doubt and not wait until they use the bunkers.
Singapore and other places are making efforts to close down rogue bunker suppliers. A class action will be tricky for evidential reasons and the likely target of such action (the rogue suppliers) are unlikely to have any assets to satisfy the judgement/award — so it may be a pyrrhic victory.
A scrubber breaks down and the vessel does not have 0.5pc sulphur fuel onboard. Will the shipowner be subject to fines or arrest if they call the next port burning high-sulphur fuel?
No, but the PSC officers will require good evidence that the scrubber is properly maintained and the breakdown was a true fortuity, rather than due to a lack of maintenance, trained personnel, lack of parts etc. If a vessel has a “breakdown” frequently then this may cause PSC officers to become suspicious and less inclined to believe it was unavoidable. That said, EGCS are hard to run and we will probably see a lot of breakdowns.
What are the claims you expect to see from shipowners with regards to IMO 2020?
1) Supply of non-compliant bunkers;
2) Supply of off-spec bunkers leading to engine damage;
3) Claims arising from damage to machinery by bunkers that are on specification.
This will depend on the agreement that the shipowner and the charterer have reached in the time charter party agreement. Ship operators need to specify much more carefully what fuels will be compatible with machinery and what will not. This is part of the considerations that must be included in the Ship Implementation Plan. But with new types of fuel coming on to the market, it is not certain whether an apparently compatible fuel will damage ship’s machinery or whether this potential problem will be evident in advance.
4) Claims for non-availability of installed scrubbers – from charterers to owners and from owners to suppliers.
It is becoming apparent that exhaust gas scrubbers can be quite challenging to operate. In the initial introduction of a lot of these units may suffer from unreliability due to unfamiliarity and other issues.
Do you think that the US will ban the use of open loop scrubbers in its territorial waters?
Possibly. A number of ports in Europe and the Far East are banning the use inside port limits already.
What are the most common marine fuel record keeping violations you have seen shipowners commit?
Falsifying oil record books is always a favorite.
Do you know of cases where the US Coast Guard or the EPA has fined shipowners for not burning compliant 0.1pc sulphur marine fuel in the US Emission Control Area (ECA), since the ECA sulphur limit was established at 0.1pc maximum in January 2015? How are the non-compliant vessels typically caught?
Yes. Typically US Coast Guard only detains vessels for ECA violations, but, recently the US Department of Justice (DOJ) prosecuted a MARPOL case arising from an ECA violation. The case arose from a July 2018 Coast Guard examination on board a tanker. US Coast Guard observed discrepancies in the vessel’s bunker delivery notes. A more detailed investigation revealed false entries in the vessel’s oil record book and that some of the bunker delivery notes had been falsified. The investigation also found that an officer of the vessel had directed crew members to lie to the Coast Guard. The US government brought charges against the operator, owner, commercial manager, master, and chief engineer. This appears to be the first MARPOL enforcement case in which prosecutors have gone after a vessel’s commercial manager for directing a vessel to use non-compliant fuel. All defendants pled guilty.
In the matter identified above, the vessel’s owner and its operator were sentenced, under a plea agreement, to fines of $1.50mn, four-year term of probation, and implementation of an environmental compliance plan. The master and chief engineer were sentenced to three years of probation, during which time they cannot enter the US on any vessel. The officer who allegedly directed the crew to lie also received a three-year probation and an additional $3,000 fine. The vessel’s manager entered a plea agreement for a $500,000 fine.
Non-compliant vessels are identified through discrepancies in bunker delivery notes or the oil record book. Discrepancies are discovered during crew interviews. Whistleblower crew members can all trigger more detailed inspections or investigations. A more detailed inspection can include sampling of a vessel’s fuel.