At MEPC 80 in July 2023, the IMO agreed its revised Greenhouse Gas (GHG) Strategy to reach net-zero GHG emissions by or around 2050, taking into account different national circumstances.
2023 saw the coming into effect of amendments to MARPOL Annex VI which provide for the Energy Efficiency (Existing Ships) Index (EEXI) Regulations and the Carbon Intensity Indicator (CII) Regulations.
2024 has seen the maritime sector being brought into the existing European Union Emission Trading System (EU ETS) as part of the EU’s Fit for 55 package, to align it with the target of a 55% reduction of EU net greenhouse gas (GHG) emissions by 2030, compared to 1990 levels.
In order to achieve the IMO’s indicative checkpoint targets of a reduction of GHG emissions from international shipping of 20% (striving for 30%) by 2030 and at least 70% (striving for 80%) by 2040, new market-based measures will be introduced by the IMO, with the expected implementation of such measures being in 2027.
The existing and expected regulatory measures mean that parties need to review how the costs and risks of compliance will be allocated in forthcoming contracts and charter parties. This briefing is an introduction to some of the key issues for parties to consider, including:
IMO CO2 / GHG reduction measures (including EEXI and CII regulations)
European Legislation
CO2 data collection clauses
Alternative fuels
Want to know more?
Contact your usual FD&D contact, or emailIMO CO2 / GHG reduction measures (including EEXI and CII regulations)
The IMO at MEPC 76 in June 2021 adopted amendments to MARPOL Annex VI in respect of the EEXI and CII regulations. These amendments entered into force on 1 November 2022, with the requirements for EEXI and CII certification coming into effect from 1 January 2023.
Our article “IMO Takes First Steps to Decarbonise Shipping” summarises the EEXI and CII Regulations and can be read here.
Energy Efficiency Existing Ships Index - EEXI
This is the IMO’s “technical” regulation, aimed at vessel design or technical modification to a vessel. As was expected, most shipowners have sought to meet the EEXI requirements by limiting engine power (“EPL”) or shaft power (“SHaPoLi”); by installing energy saving devices; or by making bow or propeller improvements.
Where the engine or shaft power has been limited, owners should have agreed with charterers to amend the vessel description accordingly, as well as any other charter party terms that are affected, such as speed and consumption warranties. A failure to do so may lead to Owners being in breach of their speed warranties for example, despite having no option to increase the vessel’s speed.
In 2021 BIMCO published the EEXI Transition Clause for Time Charter Parties. The Clause addresses the relationship between shipowners and charterers in the context of compliance with the regulation. Furthermore, where EPL or SHaPoLi modifications are the chosen method of compliance the clause also provides for amendment to the vessel’s warranted maximum speed and consumption (where relevant) following the modification, as well as consequential amendments to the vessel’s description.
Carbon Intensity Indicator - CII
The CII Regulations are now in force and have been introduced by the IMO into the MARPOL legislation to reduce the operational carbon emissions of ships. From 1 January 2023 it is mandatory for ships of 5000 gt and above to initiate the collection of data for the reporting of their annual operational carbon intensity indicator, i.e. CII Rating. The Required annual operational CII is the target value and is equivalent to a mid-point of a “C” Rating. The data will be collected each year, starting 2023 and then submitted and a rating given the following calendar year. So in 2024 when a ship is “C” rated this is based on the data submitted for 2023 and is not reflective of how the vessel is trading in 2024.
Ships will be rated either A, B, C, D, or E, with A being the best and E being the worst. The vessels’ enhanced Ship Energy Efficiency Management Plan (SEEMP) sets out the implementation plan, stating how a vessel will achieve the required annual operational CII and owners have to follow this. However, where there is a failure to comply with the regulations and, for example, a ship is rated D for 3 consecutive years or E for one year, a corrective action plan must be submitted, which will form part of the enhanced SEEMP and which must be verified to show how the required index of C or above will be achieved. The corrective action plan should consist of an analysis of why the required annual operational CII was not achieved.
At present, apart from having to produce a corrective action plan, the sanctions for breaching the CII Regulations are not clear. Therefore, at present and perhaps in the ongoing short term, the main concern for shipowners when it comes to non-compliance is commercial losses. For example, we understand certain charterers will wish to charter ships with a CII Rating of C or better for their own sustainability objectives. It is also understood that a ship’s asset value may decrease if it has a lower CII Rating. Therefore, it is not unreasonable to expect that a two-tier market may appear for better rated ships and poorer rated ships, such that owners may not be able to obtain the better market rate for the ship if the CII Rating drops.
In the charter party context, as these are the “operational” regulations, to bring or keep a vessel in compliance will cut across the charterers’ traditional rights under a time charterparty. Charterers are used to having flexibility when it comes to giving orders to the Master. New regulatory requirements require something of a shift in mindset since older (unamended) time charterparties are simply not geared up to deal with the CII regime.
That is not to say there is no operational control in the owners’ hands. For example, owners have control of some of the ship’s operational efficiency in terms of the vessel’s maintenance. However, while the primary obligation for compliance under the regulations is on the owners, given that it is the charterers who have control over the vessel’s employment, it seems clear that charterers’ cooperation will be required if the owners are to comply with the CII Regulations. Put simply, compliance with the CII regulations means that it cannot be business as usual.
As regards charterparty provisions to enable shipowners to comply with the CII regulations, there is no straightforward answer given the tension between compliance and cutting across charterers’ traditional rights under a time charter.
In 2022 BIMCO published the CII Operations Clause for Time Charter Parties. The clause and the explanatory notes can be found on the BIMCO website here .
In 2023 BIMCO published the CII Clause for Voyage Charter Parties. The clause and the explanatory notes can be found on the BIMCO website here: CII Clause for Voyage Charter Parties 2023 (bimco.org). In addition, our Industry News piece on this clause can be found here: The BIMCO CII Clause for Voyage Charter Parties 2023 (north-standard.com)
In terms of the CII generally and any clause that owners and charterers do agree to, it remains clear that data is incredibly important and that both charterers and owners should be taking an interest in the vessel’s data from a CII perspective. We expect that many disputes that arise in a CII context will come down to the data, which will be complex. Furthermore, it is expected that performance claims may also tie in with CII disputes, which will add another layer of complexity.
Operational Efficiencies – voyage optimisation
Slow steaming
We understand that many owners envisage that slow steaming will be a key tool for achieving compliance with the CII Regulations, at least in the early years.
A time charter party usually contains a right for the charterer to slow steam the vessel. Otherwise the ship should proceed as per the charterparty description for speed and consumption as ordered by the charterers. It is also not unusual for the slow steaming/eco speed and consumption warranty to be given “without guarantee”, whereas the general speed and consumption will usually be given on an “about” basis.
If owners require the option to slow steam the vessel in order to meet reductions in CO2/GHG emissions, then it would be necessary to include the right to do so in the charterparty. In this regard, where slow steaming is in the owners’ interests, the charterers may press for the usual “without guarantee” wording to be removed from the eco speed and consumption warranty.
There is a risk that by slow steaming this could be considered a deviation under the bills of lading. Therefore, relevant protective provisions should be included in the charter party and an appropriate liberties clause included in the bills of lading. Members should always consult with their usual P&I contact if they have any concern that slow steaming could be a deviation under the bills of lading.
Weather routing
Under the charterparty terms it is likely that the vessel will need to proceed using, for example, “utmost despatch”. There are also likely to be obligations under the bills of lading not to deviate. There may be a failure to prosecute the voyage with utmost despatch where, without good reason, the master sails at reduced speed, or takes a route other than the shortest and the quickest. However, in some cases it may be that the shortest route between two points will not be the most fuel efficient because of currents, wave heights or winds. As such, Owners may wish to have the right to proceed by the most fuel-efficient route. If this is the case, an express right for Owners to do so should be included in the charterparty, which makes clear that proceeding on that basis is not a breach of Charterers’ orders and does not put Owners in breach of any utmost despatch (or similar) obligation.
Members should always consult with their usual P&I contact if they have any concern that proceeding by a particular route could be a deviation under the bills of lading.
Charterer and schedule port rotation/optimisation
If ship down-time can be reduced and connectivity between ports optimised then bunker consumption (and therefore GHG emissions) may be reduced.
The IMO developed the Just In Time (JIT) arrival guide and to encourage wider adoption of the JIT arrival principles BIMCO has now developed a clause for voyage charter parties. The clause creates a contractual framework to overcome the primary obstacle to JIT arrivals, which is the obligation on shipowners to proceed with due or utmost despatch and without deviation. This is a critical aspect of making JIT arrivals work. Without removing this obstacle, ships are unable to adjust their speed to arrive at a port at an optimal time to avoid delays without breaching their usual voyage charter obligations. A copy of the clause is on the BIMCO website : Just in Time Arrival Clause for Voyage Charter Parties 2021 (bimco.org)
The above clause may also be used together with the BIMCO Port Call Data Exchange Clause 2021. This latter clause has been designed to encourage wider application and use of the IMO data model framework for the harmonised exchange of ship/port information.
From a time charterer’s perspective, as well as including the Port Call Data Exchange Clause, it may be wise to ensure there is a right to slow steam for Charterers in the charterparty.
Reduction of cargo intake
We have seen suggestions that one option for owners to meet the IMO’s CII regulations could be to reduce the cargo intake in order that the vessel is lighter and, therefore, consumes less fuel. This is because the operational attained CII equation does not factor in the mass of cargo carried and so the CII rating will not be positively affected by a fully loaded vessel.
However, the shutting out of cargo not only makes a ship less attractive to charterers, but also, arguably, does not work from an economies of scale perspective, i.e. more ships will be needed to move the same amount of cargo and so more fuel will still be used overall, which seems to defeat the purpose of the proposed MARPOL measures.
The review of the CII Regulations is due by the start of 2026 and will include a review of the metric as well as the correction factors, including for short voyages and port waiting time.
Also to note, at MEPC 80 (July 2023) there was approval given to Guidelines for the Reduction of Underwater Radiated Noise from Shipping to Address Adverse Impacts on Marine Life. The guidelines, which took effect on 1 August 2023, include a dedicated section about the relationship between measures like the CII and the reduction in underwater radiated noise, because steps like optimizing voyage planning, reducing ship speed, hull maintenance, etc, should help to keep the noise levels low, as well as reducing emissions.
European legislation
European Union Emission Trading System (EU ETS)
The EU ETS includes shipping from 1 January 2024.
The new amendments have now been published on the EU Official Journal and entered into force on 5 June 2023.
Read our article on the EU ETS here.
BIMCO has published the Emission Trading Scheme Allowances Clause for Time Charter Parties 2022. This clause can be found on the BIMCO website here together with the explanatory notes.
The purpose of the clause is to allocate costs and responsibilities for obtaining, transferring, and surrendering greenhouse gas emissions allowances for ships operating under an emissions scheme, such as the EU Emissions Trading System (ETS). The clause has been drafted to capture, not just the EU ETS, but also any similar schemes that may be introduced in future.
We now know, for example, that domestic shipping is to be included in the UK ETS from 2026, albeit the detail is not yet known, but it may be that this clause will assist there too. Also, because there are countries with higher ambition than the strategy that was achieved at MEPC 80, it may be that other countries try to fill the gap between a 1.5 degree aligned target and the IMO’s new GHG strategy and introduce emission trading systems themselves.
Under the BIMCO clause, the responsibility for the cost and provision of the allowances passes to the charterers. There is a mechanism in the clause whereby owners calculate and request the number of allowances required and charterers are to provide them within the given time frame.
There is an adjustment made at the end of the voyage for any over or under provision of allowances as the case may be.
Finally, there is a right for owners to suspend performance where charterers do not provide the allowances in the given timeframe and after notification of this failure by owners. The reason this final provision has been included is because, if charterers do not provide and pay for the allowances, the amount outstanding to owners could be more than hire given the significant cost of allowances, so it is a substantial credit risk.
BIMCO has also introduced three different clauses to deal with emission trading schemes in a voyage charter party context, and a clause for the SHIPMAN contract. Read our article on these clauses here.
Fuel EU Maritime
The FuelEU Maritime Regulation of 13 September 2023 can be accessed here.
The Regulation has been implemented with a view to establishing increasing levels of demand for renewable and low-carbon maritime fuels. In particular, the Regulation seeks to encourage use of renewable fuels of non-biological origin (RFNBO).
It shall apply from 1 January 2025, with the exception of Articles 8 and 9 which shall apply from 31 August 2024.
Article 8 of the Regulation states that by 31 August 2024, companies shall submit to the verifiers a monitoring plan for each of their ships, or for ships falling under the scope of this Regulation for the first time after 31 August 2024, companies shall submit a monitoring plan to the verifier without undue delay and no later than two months after each ship’s first call at a port under the jurisdiction of a Member State. Article 8 sets out the requirements of the monitoring plan and associated documentation. Article 8 also notes that monitoring plans should be standardised and based on templates that will be determined through the Commissions adoption of implementing acts.
Article 2. 1 states that the Regulation applies to all ships of above 5 000 gross tonnage that serve the purpose of transporting passengers or cargo for commercial purposes, in respect of:
(a) the energy used during their stay within a port of call under the jurisdiction of a Member State; (b) the entirety of the energy used on voyages from a port of call under the jurisdiction of a Member State to a port of call under the jurisdiction of a Member State;
(c) notwithstanding point (b), one half of the energy used on voyages arriving at or departing from a port of call located in an outermost region under the jurisdiction of a Member State; and
(d) one half of the energy used on voyages arriving at or departing from a port of call under the jurisdiction of a Member State, where the previous or the next port of call is under the jurisdiction of a third country.
A voyage is any movement of a ship that originates from or terminates in a port of call and that serves the purpose of transporting passengers or cargo for commercial purposes. A ‘port of call’ is defined as meaning “a port where ships stop to load or unload cargo or to embark or disembark passengers with the exclusion of stops for the sole purposes of refuelling, obtaining supplies, relieving the crew, going into dry-dock or making repairs to the ship, its equipment or both; stops in port because the ship is in need of assistance or in distress; ship-to-ship transfers carried out outside ports; stops for the sole purpose of taking shelter from adverse weather or rendered necessary by search and rescue activities; and stops of containerships in a neighbouring container transhipment port listed in the implementing act adopted pursuant to Article 2(2)”.
The entity responsible for ensuring compliance with this Regulation is the company, defined at Article 3(13) as “the shipowner or any other organisation or person such as the manager or the bareboat charterer, which has assumed the responsibility for the operation of the ship from the shipowner and has agreed to take over all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention”.
For those who know the wording of the EU ETS legislation these definitions will look familiar.
The crux of the Regulation is set out in Article 4 and provides that the yearly average GHG intensity of the energy used on board by a ship during a reporting period shall not exceed a particular limit. This limit is to be calculated by reducing the reference value of 91,16 grams of CO2 equivalent per MJ by the following percentage: — 2 % from 1 January 2025; — 6 % from 1 January 2030; — 14,5 % from 1 January 2035; — 31 % from 1 January 2040; — 62 % from 1 January 2045; — 80 % from 1 January 2050.
Furthermore, and applicable to passenger ships and containerships, there are provisions requiring from 1 January 2030 that these ships connect to an onshore power supply (OPS) and use it for all its electrical power demand at berth. This requirement is extended beyond just passenger and containerships from 1 January 2035 in circumstances where the quay is equipped with available OPS.
Article 20 of the Regulation allows for banking and borrowing of compliance surplus on a ship’s GHG intensity, or if applicable on its RFNBO subtarget, between reporting periods. A ship may, therefore, bank it to the same ship’s compliance balance for the following reporting period. On the other hand, where the ship has, for the reporting period, a compliance deficit, the company may borrow an advance compliance surplus of the corresponding amount from the following reporting period. The advance compliance surplus may not be borrowed for an amount exceeding a stipulated % or for two consecutive reporting periods.
Article 21 addresses the issue of pooling of compliance. The compliance balances for GHG intensity and, if applicable, the RFNBO subtarget of two or more ships may be pooled for the purposes of complying with the requirements of the GHG intensity limits. A ship’s compliance balance may not be included in more than one pool in the same reporting period. Pools can be controlled by two or more companies. A pool is valid only if the total pooled compliance is positive.
The “reporting period” under the Regulation is from 1 January to 31 December. The companies must monitor and record the information stipulated in Article 15 of the Regulation and by 31 January of the verification period (i.e. in the year following the reporting period), companies are to provide to the verifier the ‘FuelEU report’ containing the required information.
By 31 March of the verification period, the verifier shall record in the FuelEU database the FuelEU report that complies with the Regulation.
By 30 April of the verification period, the company shall record the advance compliance surplus, following approval by its verifier, in the FuelEU database.
By 30 April of the verification period, the selected verifier shall record in the FuelEU database the definitive composition of the pool and allocation of the total pool compliance balance to each individual ship.
Any FuelEU Penalty due shall be calculated before 1 May of the verification period and such FuelEU Penalty paid by the company by the 30 June of the verification period. The idea is that the FuelEU Penalty should be based on the amount and cost of renewable and low-carbon fuels that the ships should have used to meet the requirements of the Regulation.
By 30 June of the verification period, the verifier shall issue a FuelEU document of compliance for the ship concerned and Article 24 states that by that date ships calling at a port under the jurisdiction of a Member State, arriving at, staying within or departing from a port under the jurisdiction of a Member State, or which have carried out voyages during the corresponding reporting period, shall hold a valid FuelEU document of compliance.
Where a ship fails to comply with the obligation set out in Article 24 for two or more consecutive reporting periods, and where other enforcement measures have failed to ensure compliance with the Regulation, the competent authority of the Member State of the port of call may, in respect of a ship not flying the flag of that Member State and after giving the opportunity to the company concerned to submit its observations, issue an expulsion order. Every Member State, with the exception of the Member State whose flag the ship is flying, shall refuse entry of the ship which is subject to the expulsion order into any of its ports until the company fulfils its obligations. Where a ship fails to comply with the obligation set out in Article 24 for two or more consecutive reporting periods and enters into a port of the Member State whose flag it flies, the Member State concerned shall, while that ship is in one of its ports, after giving the opportunity to the company concerned to submit its observations, order a flag detention until the company fulfils its obligations. This enforcement process is set out in Article 25 of the Regulation.
From reading the above paragraphs about the FuelEU Regulation, it will be well understood that it will impact commercial cost and risk and should be properly addressed in the charter party context, as well as possibly in a fuel supply contract and a ship sale and purchase agreement.
The Regulation does refer to the ‘polluter pays’ principle and at Article 23 states that, while the company shall remain responsible for the payment of the FuelEU penalties, this does not in any way stop the company from concluding contractual agreements with the commercial operators of the ship to be reimbursed for FuelEU penalties, when the responsibility for the purchase of the fuel or the operation of the ship is assumed by the commercial operator. The Regulation stipulates that operation of the ship means determining the cargo carried, the route and the speed of the ship. This Article also anticipates that companies may wish to include contractual clauses in fuel supply contracts to deal with payment of FuelEU penalties where this has been caused by the fuel supplier.
In a time charterparty context an owner is likely going to want to consider the following aspects to include in a FuelEU clause:
The ability to obtain any required information and data from the charterers in a timely manner and for such information and data to be accurate and compliant with the Regulation. This will assist the owners to ensure that the monitoring plan is accurate, or where it needs to be modified that they have the requisite data and information to do this. There are also certain requirements in relation to what information should be included in a bunker delivery note.
Responsibility for ensuring the fuel supplied to the ship will not lead to the ship exceeding its GHG intensity limit.
How off-hire periods should be dealt with.
Particularly for passenger ships and containerships consideration of OPS and the ships readiness in this regard.
Liability for FuelEU Penalties should these be issued, as well as liability in the event of expulsion/detention orders.
Whether there will be any pooling of the compliance and how this interplays with a charterers’ obligation, e.g. to stem a fuel to meet a particular GHG intensity.
Banking and borrowing of compliance and how this interplays with a charterers’ obligation, e.g. to stem fuel to meet a particular GHG intensity.
As noted above, in a fuel/bunker supply contract, it may be wise to stipulate the information required to be set out in the bunker delivery note. In addition, if the fuel quality is a problem, or if the certification of a fuel ultimately does not meet requirements and causes the company to become liable for a FuelEU penalty, owners (or time charterers) may wish to ensure there is an express right to recover such a liability from the supplier.
In the event of the sale of a ship from one company to another the seller will need to notify to the verifier of the required data and information for the time up to the sale/purchase. As close as practical to the day of completion of the transfer and no later than one month thereafter this information has to be verified and recorded in the FuelEU database. It will then be the purchasing company that has responsibility for the operation of the ship on 31 December of the reporting period that shall be responsible for the compliance of the ship with the requirements for the entire reporting period during which the transfer or multiple transfers took place. As such, purchasers of ships will need to ensure this factors into their due diligence and that any liabilities arising under the Regulation because of the ship’s operation prior to the sale/purchase are addressed.
The EU Commission has published the FAQs on the FuelEU Maritime Regulations, which can be found here.
CO2 Data Collection Clauses
The Sea Cargo Charter (SCC), provides a framework that enables shipowners, charterers and cargo owners to align their activities and promote shipping’s green transition.
Where Charterers have signed up to the SCC, a suitable clause will be required in the charterparty to ensure that Owners/Operators are compelled to provide the requested data and information.
On 2 April 2024 the SCC was expanded to fully include shipowners, recognising the need to enhance further transparency and collaboration.
The SCC has a bespoke clause, which they say is designed to be generic and broad in nature so it can be used with any charterparty form. The SCC also say it is non-prescriptive to resist the urge for parties to make amendments. The SCC clause can be found at the following link.
As you will see, the clause requires Owners/disponent Owners to submit a completed emissions form, in the format required by the Clause, within 7 days of the completed voyage. Owners/disponent Owners may want to assist with shipping’s decarbonisation goals and so it is expected that the clause may be included unamended. However, should Members have any questions around the clause, or have concerns about any responsibility or liability for errors or omissions in the information provided under the Clause then please do get in touch with your usual Club contact, or one of our Navigating Decarbonisation experts.
Outside of the Sea Cargo Charter, there are Charterers taking the initiative themselves to collect GHG emissions data. Therefore, we have had questions come in from Members regarding bespoke CO2 data collection clauses that have been presented to them by Charterers for inclusion in their charterparties. It is expected that we will see more and more of such clauses as time passes towards the decarbonisation goals.
There is no obligation on the Owners to agree to such clauses in their charterparties and so it is a commercial decision. However, as with the Sea Cargo Charter, it is expected that Owners may want to assist with the decarbonisation goals and so will agree to such clauses, so long as it does not impose any onerous obligations or liabilities on them.
Of course, it will be important for Owners to review the wording of the requested clause and the following points are worth bearing in mind:
Are Owners being asked to provide information which could be an onerous task, as opposed to information that is readily available?
Is there wording in the clause that could allow the Charterers to request changes to the information provided/format the information is provided in?
Is the time frame within which Owners are being asked to provide the requested information reasonable/achievable?
Is it clear within the clause who Owners are to send the information to?
Are Owners being asked to make a monetary contribution towards Charterers’ CO2 data collection program? If so, is this acceptable to Owners or not?
Have Charterers provided details about who will use the information provided and where it will end up?
Are any modifications required to the vessel to obtain the requested data, e.g. installation of sensors?
Alternative fuels
Many of the alternative fuels being talked about as the fuels of the future are very much in their infancy. However, there are some alternative fuels available, which should reduce GHG emissions. At this point, it is also worth bearing in mind the difference between a reduction in emissions well to wake (whole process) and a reduction in emissions tank to wake (from when the fuel hits the tank to when propulsion produces a wake). On a tank to wake basis, biofuels compare to fossil fuels, however, if you look at the well to wake emissions, biofuels may be a better, more sustainable option, although given longer term land use concerns biofuel availability will be a concern.
Biofuels
Biofuels can be blended with traditional crude-derived marine fuel oils or used as a “drop-in” fuel, where they act as a direct substitute. There are numerous biofuels, all derived from various feedstocks through different processes.
Whether Owners and Charterers are considering a trial of biofuels, or whether biofuels are to be used as the vessel’s fuel, the following points are important to consider from a charterparty perspective.
Will the trial/use of biofuels start under an existing long-term time charter, or will there be a new charterparty put in place before the trial/use of biofuel takes place?
All clauses relating to bunkers will need to be considered, such as bunker quality/specification clauses, as well as bunker price and BOD/BOR clauses.
What specification applies to the biofuels? There is no standard specification for biofuels. ISO 8217 is a fossil fuel standard and whilst it could be used for guidelines there are missing parameters relevant to biofuels and others which are no longer relevant. From a charterparty perspective, if biofuels are to be used then wording could be included, for example, that Charterers are to provide biofuels of a quality and specification which are approved by the engine manufacturer. A requirement in the charterparty for Charterers to provide the certificate of quality could also be included. Some engine makers have already carried out testing of certain biofuels to check the compatibility with their engines. In terms of the quality of the biofuel the biggest concern given that there is no standard specification is that some suppliers may provide poor quality biofuel.
Consideration should be given to the performance warranty. Biofuels use a bit more fuel than fossil fuels for the same propulsion.
Potential inclusion of a tank cleaning clause and consideration of the maintenance clauses and dry dock clause. Cleaning of tanks from previous fuels may be prudent to prevent compatibility problems and if there are any quality concerns it’s easier to prove when a clean tank has been used at the outset. Dry docking should not be necessary prior to any trial/use of biofuels as they can often be used with no or minimal modification to the vessel. However, it may be prudent in any event for an Owners to have the right to dry dock other than just in the case of an emergency or for the scheduled dry dock.
What will happen in the event of time loss/costs being incurred as a result of a biofuel trial?
Consideration of whether alternative fuels need to be provided in the event of non-availability of the agreed biofuel.
LNG
While there is much debate on whether LNG is a greener fuel choice or not, LNG has been chosen by some shipowners as their transition fuel of choice. From a charterparty perspective the following points will need to be considered.
Will LNG bunkering operations interfere with cargo operations? If so, at whose cost?
Consideration of the fact that bunkering infrastructure for LNG is more limited than fuel oil/diesel oil for example.
All clauses relating to fuel will need to be carefully considered in view of the special characteristics of LNG and the lack of standard specifications. There is currently no standard specification for LNG bunkers. The quality requirements for LNG bunkers will be given by the engine manufacturer (e.g. minimum methane no., lower heating value, maximum amount of hydrocarbons other than methane and limits on trace components). However, these parameters cannot be too narrow as LNG composition varies quite significantly around the world.
It will also be necessary to consider different sampling methods. LNG samples have to be taken through a dedicated sampling unit and are usually taken from the supply manifold, not the vessel manifold, whereas standard bunker clauses usually provide for samples to be taken from the vessel’s manifold. Clauses will therefore need to be tailored to deal with this.
Will the use of LNG affect the speed and consumption warranties? Owners need to be mindful of the equivalent calorific benefits of fuel oils versus LNG, as well as the different calorific value between different LNGs. For example, LNG with a high methane content might have a lower calorific value than LNG with a lower methane content. This means more fuel is consumed to achieve comparable power output. The potential for variations in performance must be taken into account when agreeing any vessel performance warranties.
Will an indemnity from the Charterers be required to cover onerous Conditions of Use terms for LNG bunkering operations? If Members are concerned by any onerous terms in the LNG bunker delivery contracts, they should consult with the Club in case they may impact P&I cover.
Are there any standard LNG bunker clauses? Yes, Intertanko published the LNG Bunkering Clause for Time Charterparties in January 2021. The commentary on this clause can be found here: Model Clauses Library - INTERTANKO.
Methanol
As the shipping industry continues to address emissions compliance, orders for alternative and dual fuel vessels have risen, including those to be capable of running on methanol. However, integrating methanol use into established time charter terms and other legal frameworks raises some concerns from the FD&D perspective.
Compared to traditional fossil-fuel bunkers, methanol has little sulphur content and burns cleaner, emitting significantly less harmful pollutants such as sulphur dioxide and nitrogen oxide. Particulate matter and soot emissions are also lower. It has potential for renewable production including from sources such as green hydrogen and using carbon capture, which adds further environmental allure.
Methanol has several other characteristics that make it suitable for a marine fuel. It is a liquid at ambient temperatures and pressure. It can be stored in fuel tanks (with modifications) on existing vessels. Methanol is lighter than water, but also highly soluble, so the fuel will rapidly dissolve in seawater in the event of a spill. It is a very widely manufactured and transported chemical.
Its main disadvantages are toxicity of vapours, lower energy density – compared to gasoil, and a low flashpoint which increases risk of fire and explosion. Infrastructure for bunkering and onboard storage also lags behind traditional bunkers, with logistical and costs implications. Charting a course towards methanol use will require proactive collaboration across the maritime industry, including consideration of how existing charter forms and standard terms need to be adapted and added to.
Charter and contractual concerns
Established charter forms and terms are unlikely to be fully equipped to deal with the use of methanol, or dual fuels. With methanol, ambiguity around fuel procurement and bunkering costs, product quality, and onboard handling creates potentially fertile ground for contractual disputes. Robust contractual provisions would need to be tailored to methanol's peculiarities to navigate these uncertainties and allocate risks and costs clearly and comprehensively.
Consider these scenarios and issues:
Bunkering Delays: Limited methanol bunkering stations, and supply mainly being available by small ship could lead to extended waiting times. Who bears the delay time? Specific provisions for methanol bunkering defining acceptable waiting times, cost-sharing mechanisms for delays, and procedures for sourcing alternative fuels in case of unavailability would need to be considered.
Methanol Quality Issues: Contaminated methanol could damage engines, necessitating repairs, and causing delays to charter service. When does off-hire commence during repairs or when seeking alternative fuels? Would time charterers be willing to warrant the quality of supplying an unfamiliar fuel and accept the risks of any fitness and off-specification issues? Clear quality and sampling/testing protocols and pre-bunkering inspections would need to be agreed and consequences for contaminated fuel, including off-hire periods and responsibility for repair costs would need to be allocated.
Engine Switching Malfunctions: Dual-fuel engines might face issues switching between methanol and traditional fuels. Outlining off-hire events, repair procedures, and cost allocation during downtime if such malfunctions disrupt operations would need to be addressed.
Performance: Speed and consumption disputes may arise if the vessel's performance deviates significantly from the agreed warranties in the charter. Having an initial trial period for methanol and dual-fuel use, and for switching between fuel types on a “without guarantee” basis may need to be considered before performance metrics are clear and binding figures can be agreed. Tolerances for “about” would need to be carefully defined.
Off-hire and Safety Concerns: Off-hire and other disputes might arise if the vessel cannot operate safely with methanol as a dual fuel or if environmental regulations are breached. “Breakdowns” would usually be included as off-hire, but specific outlining of other methanol-related off-hire events may need to be considered.
Incidents and accidents: Provision will need to be made allocating liabilities and responsibilities in the event of incidents or accidents related to methanol use including pollution risks, damage to third parties, and other liabilities arising from the adoption of methanol as a marine fuel.
Crew Competency and Training: Specific provisions may need to be included in charters that require adequate training for crew members for methanol handling to enhance crew safety and wellbeing and to minimise legal risks associated with human error.
Dispute Resolution Mechanisms: Given the propensity for disputes arising from the use of methanol as a relatively new alternative fuel, alternative dispute resolution agreements for claims related to methanol usage, technical issues, or performance may assist the parties to reach early settlement and avoid uncertain and drawn-out litigation which is likely to be dependent on technical and expert evidence.
Ammonia
What is Ammonia?
Ammonia (NH3) is produced by combining hydrogen with nitrogen at high pressures and elevated temperatures (the Haber-Bosch process, chemical formula: N2 + 3H2 = 2NH3). Ammonia is an industrial chemical, with about 80% of the current ammonia production being for the fertiliser industry.
Types of Ammonia
There is different colour labelling for the type of ammonia. The type of feedstock used for providing hydrogen and nitrogen is what defines the labelling colour. These include the following:
Brown Ammonia – from fossil sources (natural gas or coal).
Green Ammonia – produced by electrolysis powered by renewables or nuclear.
Blue Ammonia – from fossil sources with close to complete carbon capture and permanent storage (CCS).
Most global ammonia production is currently brown ammonia. Green and blue ammonia are often known as ‘clean ammonia’.
Ammonia as a fuel
Ammonia is seen as an attractive source of zero-emission fuel for shipping. It is anticipated that the demand for green and blue ammonia as a maritime fuel will increase rapidly in the coming years (from around 2.3 MTPA in 2030 to 62 MTPA in 2040 and 245 MTPA in 2050)[1].
Practical Considerations
(1) Availability and cost
More than half of ammonia currently available is produced in four countries (China, the US, India and Russia). For the maritime industry, there is a need for an increased production of green and blue ammonia and a sufficient supply at key trading ports.
The green and blue ammonia production industry has announced over 150 clean ammonia projects which are distributed globally (a large number of the green ammonia projects are in Australia, and the majority of blue ammonia projects are in the USA). Many of these projects are in the early stages of development. Factors which will determine the production of green and blue ammonia in a country will include: access to resources (for example, natural has and renewable electricity); the local market for consumption of ammonia; and production costs.
(2) Volume
Liquified ammonia has a low volumetric energy density (around half of LNG and a third of conventional fuels). This means that a larger amount of ammonia is required in order to get the same energy as from LNG or conventional fuel oil. To sail over long distances either a substantial amount of ammonia fuel would be required onboard or, alternatively, more frequent bunkering stops would be needed. The more efficiently the vessel can be operated, the better.
(3) Vessel readiness
Leading engine makers have been developing dual-fuel two-stroke ammonia engines or an ammonia-fuelled four-stroke engine. To create the requisite combustion in the engine, a pilot fuel will always be required to be mixed with ammonia. Where the pilot fuel is an ordinary diesel or fuel oil then this would have a negative impact on the emissions factor for the vessel. Accordingly, ultimately to achieve net-zero emissions, in the future the pilot fuel would also need to be carbon neutral or suitable emission capture and storage technology utilised.
Ammonia storage and supply systems on board a vessel will generally include the following:
Ammonia bunkering station
Fuel storage tanks
Fuel valve unit
Ammonia piping system
Venting system
Ventilation system
System for nitrogen supply
Ammonia release mitigation system
On board arrangements get designed on a risk-based approach. Several suppliers are currently developing ammonia fuel supply systems.
Ammonia can be stored in IMO Type A, B and C tanks and these will be independent of the ship’s structure. Membrane-type tanks which have been adapted to ammonia can also be used. Ammonia tanks will be able to store liquid ammonia at a temperature of -33 degrees Celsius. Accordingly, fuel tanks which are to store ammonia are required to have material properties which are not susceptible to stress corrosion cracking (SCC).
(4) Safety and toxicity considerations
A key challenge with using ammonia as a fuel is its toxicity. Exposure to ammonia above a certain threshold can be lethal. Whilst ammonia has been transported as a cargo for some time, in order for vessels to use ammonia as a fuel, specific crew safety training would be necessary. Recommendations for design and operation of ammonia-fuelled vessels include, for example, lowering storage temperature; dividing the fuel preparation room into two or more separate spaces; minimising, monitoring and controlling access to (and time spent) in spaces containing ammonia equipment; ventilation outlets; and sensors to detect ammonia leaks.
Separate guidelines are being drafted by the IMO in respect of vessel’s using ammonia cargo as a fuel and vessel’s bunkering ammonia as a fuel.
Contractual considerations
For ammonia vessels it will be important that the relevant charter parties include specific provisions in respect of, inter alia, the following:
(1) Delivery and Redelivery
Delivery and redelivery clauses should specify how much ammonia (and pilot fuel) is to be on board the vessel at delivery and redelivery (and any option to stem an alternative fuel if ammonia is not available).
(2) Ammonia bunkering
This may include a warranty by the owners that the vessel is capable of receiving, storing, maintaining and using ammonia as a fuel and that the vessel complies with all international ammonia standards and meets all applicable requirements of bunkering procedures. Such a clause may also specify that charterers are to provide details of their intended ammonia bunker supplier(s). Further, the charter party should include provisions relating to safety during bunkering operations and segregation into different tanks.
(3) Grade of Fuel
The charter party should specify the grade of fuel which is to be supplied to the vessel during the term of the charter party. For dual fuel vessel’s this will be for ammonia and fuel oil. The parties may wish to include requirements for certification of the fuel and / or specific information which is to be included in the bunker delivery note (BDN).
(4) Cool Down
Ammonia fuel must be cooled down after bunkering for safe storage and use. The charter party should specify for who’s account the costs and time for the cooling down process will be for, and whether or not the vessel will remain on hire during this time.
(5) Ammonia System Operation
We would recommend that the charter party should specify what should happen if the ammonia system is out of service. For example, if the vessel is unable to proceed in gas mode but can operate at full capacity using alternative bunkers, then the vessel will remain on hire (with provision made for who’s account the additional costs and liabilities related to the burning of fossil fuel - rather than ammonia - should be for). Emissions after combustion will also need to be considered, notably NOx emissions. Unburned ammonia can be left in the exhaust (ammonia slip), together with particles and NOx and N2O, if there is poor combustion of ammonia.
(6) Drydocking
If the vessel is to be gas-free then a clause in the charter party should be included to specify for who’s account (usually the owners) the gas-freeing costs will be.
(7) Safety
Due to the toxicity of ammonia, specific provisions as to safety on board should be included within the charter party in respect of bunkering, storing, maintaining and using ammonia as a fuel. This should include compliance with all international ammonia standards and all appliable requirements of bunkering procedures.
[1] DNV Availability of Green and Blue Ammonia in 2030 to 2050 (page 35)