Who pays for an alternative fuel spill?

Renewable and zero-carbon fuels are the end goal for many shipping companies working to reduce their carbon emissions to net zero by 2050, with ships on the water and on order capable of running on a range of alternatives to heavy fuels and distillates.

After long decades of running on liquid fossil fuels, the prospect of changing to new energy sources raises challenges across the industry, including in the conventions that govern how spillages of fuel and oil are cleaned up and compensated. 

Speaking to Seatrade Maritime News, Sachin Shanbhag, Head of P&I Claims - Nordics & Northern Europe at NorthStandard laid out the current state of oil spill conventions and their shortcomings in dealing with spillages of alternative fuels.

When oil is carried as cargo on a tanker, the Civil Liability Convention (CLC) is generally the legislation which governs liability and compensation in the event of an oil spill, said Shanbhag. CLC is an IMO convention which nations must sign up to in order to take advantage of the strict liability that applies to pollution claims and the limited liability for shipowners under the convention.

Strict liability means that irrespective of fault, the ship from which the oil spills must pay the compensation, enabling claimants to seek payment directly without becoming entangled in any disagreements over blame and liability for the incident. Even if a ship at anchor is struck by a vessel underway, the ship at anchor would still be liable to pay compensation for clean up of oil spilled from its tanks. The vessel at anchor may be able to seek compensation in turn from the ship at fault, but strict liability ensures that those impacted by spills have a clear understanding of the party that needs to pay up.

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Claimants also have the right of direction against P&I clubs under CLC, allowing them to claim from the club directly, removing the sometimes difficult task of identifying a ship’s owner in order to get compensated for cleanup work and damages.

“CLC only applies to persistent oils which is a scientific term but essentially means oils which are likely to leave a sheen, those are the oils that require cleanup. For example, a naphtha spill from a tanker might not require cleanup because it will evaporate. Although it is oil, it is not persistent,” said Shanbhag.

Spills from ships other than oil tankers, such as bunkers onboard a bulk carrier or container ship for instance, tend to be governed by the International Convention on Civil Liability for Bunker Oil Pollution Damage, or Bunker Convention, which gives the claimant strict liability against the shipowner and limits shipowner liability.

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The Bunker Convention covers all bunker oil, where CLC is limited to persistent oils.

“What’s happening now, and where there is no legislation in place, is the potential use of alternative fuels on ships as bunkers. Alternative fuels being spoken of such as methanol, ammonia, hydrogen, biofuels - they do not fall under the definition of bunker oils.

 “Potentially, the problem is that when ships start using alternative fuels as bunkers, if they were to have a spill, the CLC and Bunker Convention do not apply. Arguably, there is no international convention in place governing strict liability or claim limitations.

While claims outside of CLC and the Bunker Convention are still insured by P&I Clubs and the level of cover available to the shipowner is the same, the removal of the conventions’ protections does affect the process, said Shanbhag.

“If a ship is a polluter and there is a legal liability in that jurisdiction to pay for a spill of an alternative fuel, we will cover that claim. But that claim may be expensive, because there is no right to limit under CLC or the Bunker Convention. The claimants are probably going to find it difficult to attach liability to a particular person, and there's no right of direct action against clubs,” said Shanbhag.

As IMO regulations, it is for the member states to address any issues emerging with CLC and the Bunker Convention from the introduction of alternative fuels, said Shanbhag, but work is being done to support the development of appropriate solutions. The International Group’s (IG) Alternative Fuels Working Group and IG Pollution Committee are looking to raise awareness of these issues, 

As a member of the IG Pollution Committee representing NorthStandard, Shanbhag said alternative fuels were an important topic for clubs, along with more immediate market challenges like the parallel fleet.

He noted the risks posed by the parallel fleet, ships potentially trading with no cover from IG clubs, no right of direct action, and potentially no insurer involved at all. As the fleet is largely involved in the transport of Russian oil outside of western sanctions regimes, the fleet is predominantly tankers.

Nations signed up to Funds Convention, which is supplementary to CLC, would be able to claim from the International Oil Pollution Compensation Funds (IOPC Funds) for an incident involving a vessel from the parallel fleet, but the IOPC has warned that it may face its own challenges in such a situation; if a shipowner or its insurer fails to establish a limitation fund, the IOPC Funds may have to pay additional compensation, and the body may have difficulties establishing bank accounts to make compensation payments.