Topics in this section: Shipping emissions rules likely set despite pending proposal Enforcement responsibility is geographical Limits on low-sulfur fuel availability may lead to exceptions Sanctions may risk more than money
This article is by contributing analysts Brandon Barnes, Salih Yilmaz and Talon Custer from Bloomberg Intelligence. It was first published on the Bloomberg Terminal.
Shipping emissions rules likely set despite pending proposal
Owners of ships required to adhere to stricter sulfur emissions limits by the International Marine Organization (IMO) will most likely be required to carry compliant fuel despite a last-ditch proposal to limit a noncompliant fuel ban. We expect the IMO will reject proposals in May.
Sulfur-emissions enforcement responsibility shifts depending where the ship is at a given time. If the ship is 200 miles from land, then enforcement is on the flag country's shoulders. While 96% of the fleet is flagged under countries that have signed onto this emissions limit, 63 of the 153 countries with coastline aren't. Once the ship is within 200 miles of land, responsibility is jointly shared by the flag country and port/coastal country, though it effectively falls on the port country.
Many of the coastal countries that haven't signed on or ones that have but don't have resources for enforcement aren't likely to enforce the new sulfur emissions limitations on a regular basis, at least in the near term. In the Baltic Sea SECA in 2015, e.g., violations were only sanctioned an estimated 30% of the time.
Ports lacking compliant fuel availability in 2020 may create short-term exemptions for ships that allows higher-sulfur fuel use without compliance consequences. Ships that can't obtain compliant fuel in the U.S. because it's not available can submit fuel oil non-availability reports (FONARs) without fear of reprisal. Because the search for compliant fuel can't require a ship to deviate from its voyage or be unduly delayed, the FONAR option in the U.S. could provide some short-term relief. Other countries might adopt this as a short-term solution.
Containerliners with major fuel requirements include COSCO, NYK, K-Line, Mitsui and Evergreen. Shippers committed to the compliant fuel option include Maersk, Hapag-Lloyd and Euronav. Other shippers likely impacted by the changes are Frontline, Teekay and OOIL.
Vessels are at risk of criminal and administrative penalties if they are non-compliant within a country's territorial seas (the 200-mile boundary), in addition to potentially hefty financial penalties. Sweden, for example, punishes willful violators with up to two years in prison. These types of sanctions are very hard to levy given the proof required, so financial penalties are far more likely. In nonterritorial waters, sanctions are limited to monetary fines.
Refiners that could be impacted by changing oil spreads include Phillips 66, BP, Repsol and Valero. Those that could benefit most in the EU given middle distillate output include Hellenic Petroleum, Motor Oil Hellas, Saras and Oil Refineries Ltd. Exxon spent $1 billion in the Netherlands on upgrades to process low-value fuel oil.
"...I can repeat that here that we are not [ph] billing (3:05) for scrubbers and which means that our solution would be related to fuel. And then, apart from how we're going to comply of course...we are quite active on the enforcement side, in dialog with authorities and other stakeholders trying to find good solutions to ensure a strong enforcement regime, which we think is essential of course to create a level-playing field and make sure that yes, business is not distorted..."
AP Moller - Maersk A/S Business Update Call, Dec. 19, 2017
