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Shipping is a crucial component of trade finance and anything
that impacts the regulatory or financial standing of a vessel, a
vessels ownership structure or how a vessel operates requires
attention and assessment by trade operators at banks and other
financial institutions.
One such impact is the IMO2020 regulation due to take
effect from January 1st 2020. The International Maritime
Organisation has initiated the IMO2020 policy to deal with the
environmental impact of shipping, specifically the fuel oil used to
power a vessel. Fuel oil used by vessels today mainly takes the
form of HSFO (High Sulphur Fuel Oil) containing a sulphur content
of 3.50%. The IMO2020 initiative sets a regulatory, upper limit on
the sulphur content of fuel oil to be used by ships at 0.5%.
The aim of the new policy is to decrease the amount of emissions
global shipping produces and it will affect around 60,000 ships
currently in operation.
Vessels, therefore, need to comply with the IMO2020 regulation
and there are a number of solutions available to them:
Run entirely on LSFO (Low Sulphur Fuel Oils)
Use an alternative energy supply such as LNG (Liquified Natural
Gas)
Install a 'scrubber' that acts as a gas cleaning system to
reduce the sulphur content from HSFOs
Switching directly from HSFO to LSFO is the most straight
forward option. Fuels such as Marine Gas Oil (MGO) have a low
sulphuric content but are much more expensive compared to HSFOs.
Even so, most vessels operating in north west Europe and North
America are already using MGO due to emission control areas
managing the environmental impact of fuel oils.
But the other two options; installing a scrubber and utilising
LNG are more complex and costly. Scrubbers need to be retroactively
fitted to the vessel and currently only 2% of the global shipping
fleet has implemented one. LNG also poses problems due to vessel
technicalities and it is unlikely in this regard that LNG will take
off as the bunkering fuel of choice.
Therefore, whatever route ship owners and operators decide to
adopt, there are implications of doing nothing or not being
business-ready by January 2020. By no means are all vessels fully
compliant with the new regulation.
Enforcement of the IMO2020 regulations will not fall to the IMO.
Instead they will be managed by the port state control and the flag
registries. These authorities will use bunker delivery notes,
vessel documentation and bunker samples to indicate where
infractions of the regulation occur.
Failure of a vessel to comply with IMO2020 can lead to a high
fine, impounding of the vessel and even imprisonment of the ship's
captain.
A case in point was enforced by the US Department of Justice in
August 2019 when a tanker owner and operator were fined $3 million
for failing to comply with fuel pollution regulations. The fuel
used on the M/T Ocean Princess (IMO:9268291) exceeded the 0.1
sulphur content as specified by the US Caribbean Emission Control
Area. The Ocean Princess remained at port for a lengthy period of
time whilst checks were conducted on the fuel and the ship's crew
were interviewed. This action led to lengthy delays in the vessels
scheduled operations; it entered port in late-July and did not
leave until mid-September.
Obviously, there are risks and costs for ship owners and
charterers but what are the impacts for banks and financial
institutions who finance the shipment of cargoes moving from
location to location?
Recently, the IMO released a set of guidelines for the 'Consistent Implementation of the
0.5% Sulphur Limit'. These guidelines indicate how a vessel
should and can be inspected but also notes that all efforts must be
made to prevent a delay or detainment of a vessel due to the
enforcement of IMO2020. Whilst this might be the intention, delays
will be inevitable. The time taken to test and inspect fuel oil
will have an impact on the time a vessel remains at berth, this
will have a knock-on effect of increasing wait-times for a vessel
seeking to enter a port.
Furthermore, non-compliance can result in the vessel being
prevented from sailing until it has de-bunkered its non-compliant
fuel oil. This is a costly and timely action as a ship pumps fuel
oil 'in' rather than 'out'.
Therefore, the cost of non-compliance is high for all parties
involved in the shipping of cargoes. For banks, financing the
shipment of goods on a vessel that does not comply with IMO2020
regulations could mean a delay to delivery, a possible delay in the
release of payment and in the worst case example of the M/T Ocean
Princess, an impounded vessel and cargo with its crew detained by
the port authorities.
In this context, it is vital that bank trade finance teams are
not only aware of IMO2020 but also actively understand its
implications to their business. Ship finance departments at banks
such as DNB, Citibank and Société Generale have signed up to the Poseidon Principles, a set of advisories that
tie banks and their shipping operations into environmental
initiatives designed to reduce the emission levels found within
global shipping. An extension of these principles to the goods and
commodities carried by vessels financed by trade finance banks
would also be a welcome initiative.
Posted 03 December 2019 by Byron McKinney, Product Management Director, Maritime, Trade & Supply Chain, S&P Global Market Intelligence
