Environmental and Regulatory issues in Bunkers/Fuel Oil markets

Platts Conference

New Orleans

22 June 2004

I would like to thank the organizers of this conference for the invitation to be with you today. In my opinion, the shipping industry is confronted with a big challenge in the next period on how to reduce its air emissions and there is no question that the quality and the type of fuels used by ships will be a central part of the debate and developments. It is therefore a privilege for me to address this conference on an issue of such importance.

For those less familiar with the Association on behalf of which I speak today, let me very briefly introduce the International Association of Independent Tanker Owners (INTERTANKO). We are a trade Association representing some 230 owners and operators of oil and chemical tankers from about 45 countries. They operate some 2,200 tankers with an aggregate tonnage of some 165 mill. dwt. This represents around two-thirds of the total tanker tonnage. Our members transport some 60% of the oil and oil products imported by USA every year. No doubt that our members are an important group of marine fuel buyers.

There is no doubt, that New Orleans and all other important ports up the river are continuously visited by our members’ tankers. No doubt that they are the customers of many of you in the audience. It is therefore a great opportunity for me to share with you some of the INTERTANKO views and policy decisions with regard to bunkers, bunker quality, air emissions and not least about the urgent need for the protection of bunker tanks.

Let me go straight into the areas I wish to address today and give you an outline of my presentation. The content displayed on the screen seems quite extensive but all issues addressing air emission are cohesively linked to each other and thus, I should be able to finish my presentation before the moderator would call me to order. I will probably save a few view points for the Q&A part of our session.

Air Emission from ships

Genuine concern – There is no question that air emissions from ships need to be curbed down. Most sectors of the international maritime industry have been positively engaged on this issue for many years. There is little dispute within the industry that vessel-source air pollution is a global problem that merits the attention of national governments and international organizations. This has been an issue in which the regulated industry has had to drag the national governments behind it, but there are clear signs that the inertia of the last seven years is over and that we will soon have in force an effective international framework for attacking air emissions from vessels.

Defining the challenges – We have seen an increased number of studies with all kinds of statistics on how much ships contribute to the overall emissions of sulfur oxides, nitrogen oxides, bi- and mono- carbon oxides, particulate matters and some other elements. There seems sometimes to be a race in demonstrating the obvious, namely that the results of the combustion of ship’s engine produce and emit all these elements into the atmosphere. We all know this and we all know there is a need to reduce the volume of these emissions.

We need to reduce the SOx emissions. There is one simple cure for this: use of fuels with lower sulfur content. This is an element that unfortunately the ship operators alone cannot deal with. One needs to find sufficient and adequate low sulfur fuel and one needs to adjust the engine to operate safely with that type of fuel. This would simply work only if there is a consistent international regime with similar requirements no matter the country. This also requires a more direct involvement in regulating and monitoring the supply. So far, there is no such system, except lately in Singapore. Globally, the sulfur content of the bunkers delivered to ships has dropped from some 3% in the late 1990s to 2.6% in the last couple of years. Critics say this level is still too high and needs to be reduced. I would not disagree with them but I still do not hear any practical solution that would apply in a manner which is safe and feasible for ships engaged into international voyages

Reducing the NOx emissions is a much more complex technical challenge. This can be efficiently achieved by a continuous development of modern and less pollutant engines None of the Studies I have seen assessing the NOx emissions from ships has taken into account that all engines installed onboard ships delivered on and after January 2000 have a NOx emission level reduced by 25% to 30% as compared with the engines of an earlier generation. I know that engine manufacturers work very hard to build newer generation of engines with lesser NOx emission levels.

Typical for tankers but little known to the public at large, is that there is a significant potential of Volatile Organic Compounds emissions from cargo tanks during loading and during the transportation at sea. These amounts, if not contained are significant and the elements released could be harmful. I am glad to state that the tanker industry itself has come with its own assessments of the level of emissions and has developed alternative operational and technological measures to reduce and contain VOC emission during transportation. At the moment, these technologies can reduce the VOC during transportation between 70% and 90%. Much less progress has been achieved in reducing VOC emissions during loading. Annex VI requires that tankers are equipped with vapor return lines to be able to transfer the VOC emission during loading back to the shore facility. I would believe that if not all, more than 90% of tankers have installed vapor return lines. However, according to a survey among our members, these vapor return lines are seldom used (in less than 10% of the calls at loading terminals). However, shipowners again have developed new technology that could contain this aspect too. I speak about the VOC emissions containment because, compared with emissions from engine combustion, tanker operators can deal with these on own initiatives than they can do with issues related to emissions from ships’ engines.

So, through a simple iteration of these issues, it is clear that one needs to direct resources to constructive discussions in search for efficient and feasible solutions without using energy to demonstrate the need for action. I guess the difficult question to answer is the right pace for developments and the right sector of the industry that could contribute best to a significant improvement.

Regulatory developments

International context of reducing air emissions from ships – Since the mid-1990s the marine industry has, despite reservations and concerns, supported the development of a targeted regulatory regime under the aegis of the International Maritime Organization. In September 1997, with strong participation from the United States, IMO members were able to adopt Annex VI to the International Convention on the Prevention of Pollution from Ships (“MARPOL”). The Annex establishes NOx standards for new engines, fuel quality standards and mechanisms for special SOx control areas to limit sulphur emissions, and addresses ozone depleting gases and volatile organic compounds. The mechanisms of the Annex create a system of certifications and inspections that are structurally compatible with existing flag and port state regimes used to monitor vessel safety.

As is often the case with international agreements, the provisions of Annex VI did not please everyone. Agreement on fuel sulphur content limits rested on a number that is almost universally regarded as being very high (4.5% or 45,000 ppm). There is near consensus across many affected sectors that new NOx standards will evolve within the structure of a ratified Annex VI, given advances in engine technology in the past seven years. But, whatever its limitations, the offsetting advantage of Annex VI is that it provides a framework for international cooperation in addressing what clearly is a problem that affects the entire world.

However promising was international agreement on the text of Annex VI, the international maritime industry has been dismayed at the glacial pace of national approvals. A major disappointment came from the nation which represents the world’s largest maritime trading destination, a country that had a great deal to gain from international agreement on air emission standards - the United States of America. The United States had been an active leader in the negotiation of Annex VI. Its lack of leadership in acting to ratify, had a negative ripple effect in convincing other maritime nations that there was no urgency to acting on Annex VI.

Anyway Annex VI has been ratified by 15 countries which have an aggregate tonnage of 54.57% of the world commercial fleet and it will enter into force on May 19, 2005. Please have a look at the list of ratifying countries and draw the conclusion yourselves when comparing it with the great expectations on lower emission from ships, particularly from the EU and UnitesStates.

Regional developments and their drawbacks – Instead of adopting the international agreements and establish a good platform for discussions for further improvements, there are regional attempts to develop own regulations for reduction of air emission from ships. In each case, the proposed regulations have, for different reasons, encountered serious practical obstacles.

The famous EU Sulfur Directive, as enforced in June 2000 is at least bizarre. It requires that IF ships use marine gas oil or marine diesel oil, then these should have a sulfur content of maximum 0.2%. There was no provision to require that Governments ensure such a supply. There is no cap on the sulfur content on the IFO and HFO fuels. The EU Directive is bizarre because it was obviously developed by people knowing very little about shipping. What they did was to force many ship operators that were using a MDO with 1.5% sulfur content to use IFO and HFO with double sulfur content. The result of this ingenuous ruling was an increase in the SOx emissions. Furthermore, the EU countries are directly responsible for the late enforcement of Annex VI. That has kept the SOx emissions at a higher level than it would have been with Annex VI enforced in due time. We made an analysis of the excess of SOx emissions from ships transiting the British Channel. When Annex VI is enforced, the British Channel would have become a Sulfur Emission Controlled Area (SECA) where ships cannot use fuel with sulfur content more than 1.5%. Unfortunately, Governments themselves, like France, UK, the Netherlands, Belgium, and Germany seem to be little interested into these aspects and, as a result, ships transiting the British channel have emitted for quite a few years an excess of SOx of 40% to 45% as if SECA restrictions would have applied.

On the other hand, the Dutch River Police stops ships coming out of Antwerp and controls whether these use gas oil or diesel oil as fuel and, if the sulfur content is higher than 0.2% they fine the ship. It is a continuous struggle to explain and show documents to the Dutch River Police that the fuel suppliers in Antwerp in Belgium did not have such a low sulfur fuel available. There is no interest to understand that the ship is a consumer and unless it can get a proper supply it has no chances to comply with the Directive and thus the only chance is to pay the fine and go ahead. Is this a money-making exercise? Maybe not, but it is definitely not an efficient and fair Governmental pursue of legislation to reduce emission from ships. Strange enough, no other EU country applies such an original monitoring of such a bizarre regulation.

Let me be very clear again: INTERTANKO members and I guess all ship operators would have no problem in taking necessary measures to reduce air emission from ships. With the initiatives I presented before, there is enough evidence that the industry is ahead of legislators on these matters. But it has to be clearly understood that ships have a limited role in fulfilling the expectations. Lower air emissions from engines require newer generations of engines. Cleaner air emission means cleaner fuels. These are not produced or controlled by ships, these are offered to ships for purchase. Governments would need to fix these priorities in order to have a system that would indeed achieve its aim.

I would conclude on this issue that the best alternative is that all countries ally themselves to the internationally agreed standards and that all make an effort to improve them when it is feasible and possible without any negative aspects in ship’s safety. Ships are not cars, they are not trucks, they are not airplanes, they are not locomotives. Just because someone has a bright idea about regulating these and other modalities does not mean that the same solution will work well in a maritime context. These engines weigh many hundreds of tons, cost millions of dollars, the ships are built around them, and both ship and engine are expected to last for decades.

Bunker quality and control

Bunkering is a crucial operation for ships. The quality of the fuel received is vital for the safety of the ship at sea and for environmental protection. Until now, the supply of bunkers has been purely a commercial matter between the bunker trader or seller (bunker deliverer) and the customer (the ship and ship operator). However, with MARPOL Annex VI entering into force on May 19, 2005, the quality of fuel delivered to ships needs to be in full compliance with these new regulations. It is therefore extremely important to have proper procedures for adequate monitoring of the transfer of bunkers to ships. MARPOL Annex VI lays down certain quality standards for delivered bunkers and makes reference to IMO Guidelines for the required bunker sampling procedure. These could however fall short if not properly endorsed and monitored by the authorities in the jurisdiction where the fuel is bunkered to ships. So far, only the Singapore Port Maritime Authority has developed clear guidelines and procedures for bunker transfers in the Port of Singapore to comply with the requirements of MARPOL Annex VI. Its procedure, CP 60, should be a model adopted urgently by other Ports or relevant local Authorities.

Since it is expected that Governments will be slow in developing an Unified Procedure in all ports of the world, INTERTANKO issued Guidelines to assist ship operators by taking preventative action and avoiding liability should the bunkers delivered to ship be outside the specification and cause damage or place the ship in a dangerous position in restricted navigable waters. These Guidelines are based on the IMO Guidelines as contained in Resolution MEPC. 96(47) but also referenced, as an example, the CP 60 standard of Singapore.

From a bunker supplier point of view, particular attention has to be paid to Regulation 18 of MARPOL Annex VI which sets the quality standards for the fuel delivered to ships. It also sets a system for monitoring the deliverers within each port authority jurisdiction as follows:

  • Port States retain a register of authorised bunker suppliers
  • Suppliers must provide a BDN and a sample that certify that the fuel meets the requirements for the required quality and for the sulphur content. The BDN must be retained onboard for a period of 3 years and must be accompanied by a representative sample of the fuel delivered.
  • In the event of a breach of the requirements, the Port State Administration should take appropriate action against the fuel supplier.
  • PortState Administrations are to inform the Flag Administration of any ship receiving fuel that is not in compliance with both the Sulphur Regulation (14) and the Fuel Quality Regulation (18).
  • PortState Administrations are to inform the IMO of all cases where fuel suppliers have failed to meet the requirements so that such information is relayed to all Flag States that are signatories to these Regulations.
  • PortState Administrations have to advise the relevant Port State Administration where non-compliant fuel oil was bunkered and supply all relevant information relating to the issue.

This complex procedural monitoring system would need a harmonized international approach. It would be impossible for both deliverers and ships to comply with different sets of procedures enacted through different regional national legislation.

Governments have been fairly timid about tackling the hard decisions that will be necessary to ensure uniform, low-sulfur fuel quality. There are huge variations from place to place around the world in the quality of marine bunker fuel. If governments are serious about tackling sulfur issues, they must be serious about the public investment necessary to ensure that fuel quality is consistent from port to port and that there are facilities for ensuring that fuel quality standards are monitored and maintained.