There have been a dramatic expansion of regulations in key sectors of the global economy over the past decade, driving most of the improvement in conditions we have seen up to date — curtailing pollution, preventing abuses in the finance system, ensuring food safety, and protecting public health et cetera.
The financial system for instance have seen a great change since the Great Recession, as a result of regulations meant to safeguard the system and the tax-payers who had to bail it out, from another crisis. In the health sector, regulations have become an increasingly essential part of the political tool-box in the healthcare system, protecting the public from a number of health risk and providing numerous programs for public health and welfare at every level.
The natural resource extracting industries (i.e., fossil fuel, timber, and mining) which have been known for causing immense pollution and wiping out entire ecosystems, have also received a fair share of regulatory changes, with the application of special regulatory attention to drilling, pipelines, and other risky ventures where the consequence of an accident (natural or man-made) produces very damaging health or environmental impacts.
The shipping sector which plays a vital role in global trade, have equally undergone various regulatory changes over the period, with merchant shipping beings one of the most heavily regulated sectors, and amongst the first to adopt widely implemented international safety standards. The regulations in the sector have covered matters ranging from construction standards, to navigational rules and standards of crew competence; all in a bid to ensure safety of life at sea and the protection of the marine environment.
Since 1948 when the International Maritime Organization (IMO) as a specialized agency for the United Nations (UN) responsible for regulating oceangoing transport was formed, it has grown to re-inforce its objective of “creating a regulatory framework for the shipping industry that is fair and effective, universally adopted and universally implemented.”
Beginning 1st January 2020, the IMO will restrict the level of Sulphur in fuel oil (bunker fuel) used by shipping vessels operating outside designated emission control areas to 0.50 percent m/m (mass by mass), from 3.50 percent m/m
Sulphur dioxide can pose a threat to human health, animal health, and plant life. When inhaled, Sulphur may cause chest pains, heart and lung disease, asthma attacks, and respiratory problems in susceptible population groups. According to the world health organization (WHO), air pollution causes million annual premature death, and that is now the single biggest environmental and health risk. A study cited by the Union of Concerned Scientists (UCS), says Sulphur dioxide can react in the atmosphere to form fine particles, and poses the largest health risk to young children and asthmatics.
It is estimated by the IMO that this new regulation will reduce the shipping industry’s emission of Sulphur dioxide by 85 percent, thus reducing an annual amount of premature death by 200,000.
The new Sulphur regulation to be implemented next year is an enhancement of previous ones adopted since 1997, and implemented to gradually reduce the Sulphur content of marine fuels. The quest for reduction was given a boost in 2006 when the US Environmental Protection Agency (EPA) announced phasing-in more stringent regulations to lower the amount of Sulphur content to 0.001 percent.
The IMO had mandated in May 2005 that marine fuels contain no more than 4.5 percent Sulphur. In May 2006, the organization ordered that the Sulphur content of fuels used in the Baltic Sea Environmental Control Area (ECA) be capped at 1.5 percent, with this restriction extending to the English Channel in November 2007 and to waters off North American coasts in 2012. The Sulphur content limit in ECAs was subsequently reduced to one percent in 2010 and to 0.1 percent in 2015, whilst the limit for non-ECA areas was reduced to 3.5 percent, January 2012.
In 2016, delegates to the MARPOOL meeting agreed that the global Sulphur cap of 3.50 weight percent outside of ECA boundaries be decreased to 0.50 weight percent, with effect from January 2020.
Methods of Compliance
The IMO designed the 2020 Sulphur regulation as an open policy without designating one compliance method but instead allowing market participants decide for themselves how best to comply. It does however provide three realistic methods for ship operators who are now faced with some stark choices, if they are to remain compliant:
- using low Sulphur Fuel Oil (LSFO), created by an extended refining process, during which a greater percentage of the Sulphur content is removed.
- using approved equivalent methods, such as exhaust gas cleaning systems or “scrubbers”, which “clean” the emissions from heavy Sulphur Fuel Oil (HSFO) before they are released into the atmosphere.
- using liquefied natural gas (LNG), methanol or hydrogen as a fuel; considerably “greener” alternatives to oil, which has the potential to reduce SOx emissions by 90 to 95 percent.
Each of the solutions proffered offer advantages and disadvantages, with the cost implications, however remaining high. For instance, the longer and more involved refining process in making LSFO, the more expensive would the LSFO be, compared to traditional HSFO; notwithstanding the delay in supplying the required amount of the new fuel as refineries work to switch production to this relatively new (and more involved) refining process.
Also the installation of new, adequate scrubbing equipment can be very costly, with Mike Wackett of “The Loadstar” claiming that it may cost up to US$10 million to install such equipment per vessel. This is aside the fact that ship operators may be exposed to huge operational headaches should scrubbing equipment ever break down while the vessel is at sea.
And beside few ports having the storage or refueling capability to support the large-scale adoption of LNG fuel, re-engineering vessels to run on LNG would prove to be costly, since an existing conventional marine diesel engine cannot be switched to run on LNG.
Degree of Compliance
Compliance with the Emission Control Area (ECA) 0.10 percent Sulphur limit appears to be good in the European Union (EU). But Unni Einemo, IMO Representative and Communications Manager for the International Bunker Industry Association (IBIA), claim there is no guarantee this will translate to high levels of compliance with the global cap. He suggest though that the EU has put in place minimum requirements for documentation checks and fuel testing on ships calling at its ports so operators know there is a real risk of being caught if they are not complying. However, such level of checks comes with a significant manpower and fuel testing resources available, resources that some MARPOL signatories may not be able to afford or prioritize.
The U.S. Energy Information Administration (EIA) suggest in its Annual Energy Outlook (AEO2019) and the Short-term Energy Outlook (STEO) that the implied rate of compliance to the new IMO Sulphur limits for the United States is 100 percent. The statistical and analytical agency within the US Department of Energy, however concedes that the level of compliance with the new IMO Sulphur limits may vary globally.
The cost, supply, availability, space, and breakdown implications et cetera from the available compliance options, have generated considerable debate on the extent to which the new regulation would be comply with in its immediate years, especially the first or two. More importantly, the openness, the complexities of implementation, and the number of participants limits the first-mover advantage toward compliance.
In response to this dispute in mind, the IMO has promised to declare ships that violate the rule as uncompliant, and possibly unseaworthy, which could nullify their insurance. That if a vessel disappoints in complying with the requirements of the MARPOL Convention, then it would practically be in breach of the flag state national law, and the vessel’s MARPOL certificate may be withdrawn, or at least suspended, by the flag state. This clear message from the IMO was arrived at during the annual meeting of the European Refining Technology Conference (ERTC) in Athens in mid-November 2017.
It thus suggest that the risk for ship owners is quite significant, which may assure compliance. There are also previous litigation records that goes to prove that the careless disregard of IMO regulations can saddle shipping firms with full liability for their hulls and cargos. In fact, the extent of ratification and enforcement of IMO Conventions is generally very high, compared to international rules endorsed for shore based industries.
For certain, the national governments which makes up the membership of IMO, implement and enforces these international rules, are expected to ensure that vessels which are registered under their national flags comply. And given the enormous support from member states of the IMO and signatories to the MARPOL Convention, including Ghana, Nigeria and many others, to strictly enforce compliance with the new regulation; one can only be convinced that the compliance level by shippers on the global scale is likely to be almost 100 percent, should the regulation come into force in January 2020.
Written by Paa Kwasi Anamua Sakyi, Institute for Energy Security (IES) ©2019
The writer has over 22 years of experience in the technical and management areas of Oil and Gas Management, Banking and Finance, and Mechanical Engineering; working in both the Gold Mining and Oil sector. He is currently working as an Oil Trader, Consultant, and Policy Analyst in the global energy sector. He serves as a resource to many global energy research firms, including Argus Media.