After much debate and drama, the chairman of the IMO’s Marine Environment Protection Committee rejected a proposal today to phase in the sulfur regulations through an “experience building phase.” The proposal was vaguely defined in scope and timing and would have created significant uncertainty ahead of the January 2020 start date. Still, ESAI Energy expects the market will phase in the regulations on its own through a combination of waivers and discretionary enforcement, as well as some outright cheating. We expect just under three-quarters of bunker fuel consumed in 2020 to be compliant.
IMO avoids attempt to undermine implementation, but fuel safety still a legitimate and unaddressed concern
The Marine Environment Protection Committee decided not to accept a proposal to phase in IMO sulfur rules in 2020. The rejection of the proposal, which was pushed by the US and backed by many MARPOL-member states outside of Europe, means that IMO implementation of tighter sulfur rules will proceed as expected starting January 1, 2020.
The proposal, originally drawn up by several flag states and shipping associations, asked for a vaguely defined and nontime- bounded “experience building phase” to allow ships to sample compliant fuel and test availability and compatibility. This could have softened the disruption anticipated at the beginning of the year. Despite significant and vocal support from other flag states at the committee meeting, the chairman quashed the proposal, saying it will not proceed to working group.
Shippers have serious and legitimate concerns about the quality, compatibility, and availability of compliant fuel, even if last minute US support was a political play to avoid price spikes in an election year. ESAI Energy expects there to be sufficient compliant fuel components available – mostly in the form of MGO and LSFO – but the compatibility between compliant blends still remains unknown and potentially harmful to engines and filters.
The chairman invited additional proposals for the next meeting of the Marine Environment Protection Committee, in May 2019, that would clarify Regulation 18. This regulation sets out the requirements for supplying bunker fuel. The key point the IMO needs to address is how to identify and regulate which bunker fuel could be potentially harmful for a ship, and what port states are obligated to do. As it stands, the section states that “parties must undertake to ensure that remedial action as
appropriate is taken to bring noncompliant fuel oil discovered into compliance,” but what exactly that action should be remains unclear.
We have long expected the sulfur rules to be implemented more stringently over time, if not through formal codification. We expect there to be a proliferation of fuel non-availability waivers at the outset to ease concerns with fuel compatibility and safety. At the same time, enforcement penalties are discretionary, determined individually by flag and port states, so it is up to them whether they look the other way if a ship has non-compliant fuel or whether they process waiver requests on time.
Our compliance outlook remains unchanged. We expect just under three-quarters of bunker fuel supplied in 2020 to be compliant, including HSFO through scrubbers, LNG, a 0.5 percent sulfur blend, or a 0.1 percent sulfur fuel consumed in the Emission Control Areas. After that, fuel supply and enforcement will improve, causing compliance to rise.
In related news, the carriage ban on high sulfur fuel oil was sent on to working group, withstanding a challenge from several countries, including Saudi Arabia and Russia. The effective implementation of this rule will close a significant loophole in the IMO rules. With the ban in place, ships will not legally be able to carry HSFO in one tank and compliant fuel in another if they don’t have a scrubber, but can still carry HSFO as cargo.