Outlook 2018: Owners calculate future regulatory costs

Owners are weighing up the financial cost of installing scrubbers. Pictured: Alfa Laval’s new PureSOx scrubber being installed. Credit: Alfa Laval
Owners are weighing up the financial cost of installing scrubbers. Pictured: Alfa Laval’s new PureSOx scrubber being installed. Credit: Alfa Laval

The cost of complying with maritime regulations has never been higher – and the price tag is about to escalate even more. Not surprisingly, regulations have never been of greater concern to shipowners than they are today.

The International Maritime Organization’s (IMO’s) Ballast Water Management Convention shifted into enforcement mode late in 2017, and operators will be focusing on compliance with this mandate, as well as on preparations for the 0.5% global sulphur fuel cap coming into effect in January 2020.

The price tag on fuel-cap compliance will be staggering. For a single container ship, the cost could total USD400 million per year, according to Bryan Wood-Thomas, vice-president of environmental policy at the World Shipping Council. “For larger fleets, the cost for a company can literally be measured in the billions, and across the industry as whole, we’re talking about tens of billions per year in additional operational costs,” he said. “It’s arguably one of the most expensive regulatory requirements we’ve experienced in decades.”

Some operators have spent millions on the installation of scrubbers – equipment placed in smoke stacks to eliminate sulphur from the exhaust generated by high-sulphur fuel – in order to meet an even lower 0.1% sulphur cap in emission control areas in North America and Europe that went into effect in 2015. Others, such as container operator CMA CGM, have announced plans to power newbuildings with liquefied natural gas.

But the vast majority of shipowners are holding off on investments and will instead switch to low-sulphur fuels when the cap comes into effect. The cost of choosing this option will hinge on how much low-sulphur fuel is actually available from refiners.

Deutsche Bank analyst Amit Mehrotra addressed the scrubber issue in a November 2017 research report, highlighting the long-range upside for owners who invest now – before it is too late. He estimated that only about 500 ships worldwide had scrubbers already installed, and most of those were passenger ships. Of the thousands of commercial vessels on the water, he estimated that only about 50 tankers and 35 bulkers already had scrubbers in place.

Mehrotra believes there are about 25 companies worldwide that can produce scrubbers, equating to a total capacity of only 1,200–1,300 units per year. Given this limitation, the fact that installation lead times are “six months currently but likely to extend to well over one year by 2020”, and because of “industry-wide complacency”, he predicted that the “vast majority” of vessels will not have scrubbers installed when the sulphur cap goes into effect.

“We see a significant upside for companies with the capital and foresight to invest early in scrubber technology,” Mehrotra said, adding that owners who “do not invest early are likely to be at a strategic disadvantage”.

Meanwhile, in terms of the ballast-water regulations, the convention officially went into force on 8 September 2017, but extensions for on-the-water vessels (as opposed to newbuildings) were granted. For some vessels, this means the actual installation of ballast-water equipment could be pushed back to 2024.

But now that the US Coast Guard (USCG) has type-approved ballast-water equipment for ships trading in US waters – six manufacturers, with two applications pending final approval as of November 2017 – its vessel inspections are likely to be much stricter about ensuring shipowners either have a valid system on board or can produce documentation verifying the ship’s extended compliance date.

Shipowners also will begin sharing information on ballast-water equipment operations this year with the IMO as part an ‘experience-building’ phase that could be used to justify future amendments to the convention. Anecdotal reports from owners reveal that much of the experience so far has not been positive. There are complaints that some ballast-water treatment system manufacturers have not been providing timely responses and repairs when their equipment malfunctions and that some are not taking responsibility for breakdowns.

Depending on how widespread such complaints become in 2018, regulators in the United States and elsewhere could begin considering requirements geared toward post-installation oversight of ballast-water equipment.

Yet another area of regulatory focus this year involves carbon reductions. Shipowners will begin submitting data on cargo, bunker fuel, and port calls to regulators as part of the European Union’s monitoring, reporting, and verifying (MRV) regulation.

Since the adoption of the European Union’s MRV rules in 2015, vessel operators have been concerned that some of the required information is proprietary and making it public could influence competition. This year, as the required disclosures begin to go public, it should become clearer whether this fear is justified.

Regulators also are focusing greater attention on cyber security in the wake of the major cyber attack on Maersk last year. The US Congress introduced legislation that, if passed, would require the US Department of Homeland Security to establish a model for assessing cyber-security risks in the maritime sector, as well as guidelines for information sharing between ports and the federal government. The legislation would also require the USCG to integrate cyber security into its maritime security assessments.

Although ports and terminals are the initial focus of new guidelines and regulations, the USCG has made it clear that it will be targeting vessels next, likely beginning in 2018.

As a result, shipowners are likely to have to spend more money to make sure their navigation systems are better prepared against cyber attacks and on training to make crew members more ‘cyber aware’.

Biofouling regulations are also in the pipeline. Biofouling, which infects ship hulls and some studies have shown to be a greater source of invasive species than ballast water, is under close scrutiny by the IMO and the US state of California. A regulation requiring vessels arriving at Californian ports to manage ship hull biofouling went into effect in October 2017, and the state’s environmental regulators will be paying closer attention this year to efforts to comply with the requirements. Penalties for non-compliance are USD5,000–USD27,500 per violation, depending on the seriousness of the offence.

Another topic on the regulatory radar is commercial underwater ocean noise. Yet again, California is leading the charge on potential regulations, which are intended to protect the migratory habits of marine animals and would affect how vessels are designed and built.

Other regulations being monitored by shipowner groups this year include those affecting seafarer access to terminals areas, the Vessel Incidental Discharge Act, the Polar Code, and the continued rollout of towing rules under Subchapter M.

The possibility exists that such initiatives could hit roadblocks at the federal level, given US President Donald Trump’s efforts to reduce regulations. After taking office in early 2017, Trump required that for every new regulation enacted by an agency, two existing ones must be sacrificed. This mandate is proving a challenge for US agencies that regulate the maritime sector, such as the USCG, which are overseeing a wider, not narrower, range of responsibilities.

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