So the shipping industry’s equivalent of Y2K is now upon us. But rather than wondering whether we’ll be able to switch our computers on, the big question is whether ship owners are now switching to distillates, or turning on their scrubbers, or flicking the switch for LNG conversion to comply with the new Emission Control Area (ECA) regulations that stipulate that vessels can only burn fuel with a maximum sulphur content of 0.1%. Of course the other option is to carry on as usual, and do nothing. It is an important point, because many owners and operators are assessing the risks and rewards of whether it’s worth being compliant.
It should be fairly obvious; fines and shame for those that do not comply, and a clean conscience and untarnished reputation for those that do. It should be relatively straightforward. Unfortunately it is not.
The “0.1% ECA” debate has been one of the shipping industry’s most contentious topics. The arguments ‘for’ were clear; cleaner air quality, reducing shipping’s impact in propagating acid rain and the fine dust that causes cardiovascular and respiratory diseases, and of course improving the sustainability and reputation of the shipping industry. It might be the most efficient form of transporting goods, but it can do more, and by the way, it has had many years to adapt and plan for the change – say the regulators.
Despite this, the lobby “against” was also prolific. Opposers stated the industry could not afford it; distillates carry a significant premium above HFO, and it is only the few that can afford the upfront capital costs required for scrubbers and LNG conversion (an argument countered by the ‘for’ campaign who continue to point to the private equity finance models in the market). However, for ship owners and operators, especially shortsea shipping companies, it is not just going to impact profitability, but in some cases, business continuity. Many also argue that transport will be driven from the sea to the road, which will further clog up already congested land-based transport systems.
Despite firm dividing lines being drawn, 2015 is now upon us and so are the 0.1% sulphur rules. The “against” lobby has fallen short, so what now?
Firstly, faced with the reality that there was not going to be any wriggle room with the ECA regulation, in 2014, some companies began to find money under the mattress to invest in abatement technology, or decided upon a strategy of sucking up the cost of distillates (and ‘streamlining’ their organisations accordingly), or a combination of both. The important point being that they made a decision to comply.
It is at this point that the inevitable has happened. Those that comply want everyone to comply. Why should one company invest in compliance when another company doesn’t? Enter the Trident Alliance, a consortium of leading shipping companies who are lobbying regulators and port state authorities to ensure stringency when it comes to compliance. This is now the new hot topic of debate.
They are concerned that – bar in the US where fines could reach $500,000 for deliberate law breaking - the punishment for non-compliance is not severe enough to ward off those tempted to circumnavigate the regulation. If the penalty does not match the potential savings from non-compliance, temptation may be hard to resist.
Industry analyst SeaIntel recently revealed in a survey: “Our analysis showed that a 4,500 teu vessel sailing at 16 knots from the entrance of the Channel to Hamburg, using 1% sulphur fuel instead of the mandated 0.1%, would save EUR12,000 – six times more than the German fine, and that is just one way.”
So how do you incentivise compliance when the fine is below the potential savings?
A popular view from a recent BLUE/Norton Rose Fulbright industry panel discussion on ECA compliance in November 2014, would be for the authorities to “make an example” of the first shipping company to get caught deliberately violating the regulations. Gibbeting for the 21st century.
Maybe this could be a solution, but then there is the complexity of ensuring widespread policing and who actually does it. Under MARPOL Annex VI, it is a nation’s Port State Control authority. However, while the US Coast Guard is expected to maintain a high level of vigilance, Europe appears beset with fragmented messages and varying ability to manage compliance. While the likes of Sweden and Denmark propagate strict enforcement, other coastal nations are expected to be more lax, or at least sympathetic to the challenges that ship owners face. Can we really expect a vessel to switch to distillates in the whirling, swirling gales and swells at the mouth of the English Channel that welcome many seafarers? Should they choose compliance over health and safety? It is likely that the MCA would prefer the latter; the safety of the crew and vessel should come first.
And then in some cases where there is a willingness to enforce, the question is over the infrastructure to properly police it.
Can Port State Control realistically check every bunker delivery note on every vessel and take samples? The US EPA has talked of doing “flybys” to look at the colour of the plumes of smoke from vessels’ stacks. And in Europe, there’s talk of the development of drone-based monitoring technology.
The reality is that right now, in the initial phases of 2015, there won’t be a level playing field. There will be many that look to "get away with it", and then take the financial “hit” when they are caught. They don’t care about the impact on their reputation. However, for the larger, well-known companies, the impact of non-compliance (particularly if deliberate) on their brands is significant, and probably more damaging that the impact on their pockets.
From a positive perspective, another market is being created by a regulation that is ultimately designed to be progressive. Technology manufacturers and clean fuel propagators get to develop and tout their products; banks, private equity and finance houses see an opportunity to provide the necessary funds for good returns; lawyers get to swoop into action to help navigate the impending legal complexities and fall out; classification societies have an increasing role in overseeing quality and assurance standards in a changing industry; new industry bodies circle their wagons to protect their members; and even PR and communications companies get the opportunity to build, manage and protect the reputations and brands of all those involved.
The consensus is that the winners will be those who incorporate the changes into broader, robust sustainability strategies and reap the commercial rewards and strengthen their overall licence to operate, building brand and enterprise value. In short, adapt now and play the long game, because you cannot stop change, and we know where the industry is heading.
Article contributed by Nick Blythe, executive director at Blue Communications
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