Draft amendments to the International Maritime Organization’s mandatory rules on reducing carbon in existing ships by 2023 are likely to result in new clauses in charter party agreements that could make hiring ships challenging.
The move is expected to give a strong push to the scrapping of old tonnage and expand the duration of the period chartering for ships that meet the standards.
The rules, which are due to be formally adopted later in 2021 and slated for implementation at the end of 2022, mean that charterers looking to hire ships for upwards of two years will now increasingly prefer those that already meet the amended standards.
The IMO already has in place several energy efficiency measures, but the upcoming amendments will introduce a new Energy Efficiency Existing Ship Index, or EEXI, and a Carbon Intensity Indicator, or CII. Carbon credits, long identified with onshore industries, forestry, palm oil and fuel trading, could also make major inroads into the maritime sector, where renewable fuels that were once almost non-existent could become the new norm.
According to the IMO, the new rules aim to address both the technical aspects of how a ship is retrofitted and equipped as well as the way it operates. Different values will be set for ship types and categories, and each ship will have to achieve energy efficiency compared to a baseline.
The proposed EEXI regulations mean that a VLCC in operation today would have to meet a 15% reduction factor relative to the reference line, said Catrine Vestereng, Business Director, Tankers at DNV GL-Maritime.
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“This can be quite a task for existing vessels, especially the largest ones,” Vestereng said. Engine power limitation or shaft power limitation are the most likely first steps, she suggested, as well as the installation of energy-saving devices.
Almost all commercial ships currently being used in global trade are expected to come under the purview of the rules, as they apply to all ships of 5,000 gross tonnage and above.
The maritime transport sector already collects data on fuel oil consumption. Now they will have to calculate their annual CII, which determines the carbon reduction needed for continuous improvement year on year. Actual CII will be compared with required CII and ratings given to each ship. Ships with better ratings could command a commercial freight premium.
“There will be a lot of changes, with rewards for charterers who take these ships, such as carbon credits for lesser emissions,” a senior executive with a clean tanker owner said.
“More eco-ships will be used, there will be advantages as older tonnage will be scrapped. Ships with scrubbers or lower emissions will be preferred,” the executive said. Eco ships have engines that are more energy efficient and consume less fuel.
Slow sailing to meet EEXI norms
One way to meet the EEXI norms is to reduce a ship’s sailing speed, a source at a ship classification society in China said. However, other market participants said this was not always commercially viable when a ship had back-to-back voyages lined up in a tight itinerary.
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Initially, it can increase the expenses of owners to make their tonnage more fuel efficient, but larger companies can spread this over their entire fleet. Large owners must calculate the commercial impact of EEXI on their whole fleet rather than a single vessel, the classification source said.
Owners have already begun due diligence to get the energy performance of their ships assessed, but guidelines will be clearer by the second half of the year, the source said.
Calculating carbon intensity and measuring its reduction in a ship’s voyage can be extremely complicated. “Considerable further work on the implementation of the measures is still ahead of us,” IMO Secretary General Kitack Lim said in a statement late last year. Technical guidelines, carbon intensity codes and the impact assessment of measures on developing countries are some of the areas in which the shipping industry is awaiting more information.
Charterers will get picky
Charterers will get picky
“It’s not just regulations that are sharpening the industry’s focus on efficiency,” said Vestereng. Charterers are increasingly looking to impose their own emissions requirements and this trend will only ramp up the pressure on older vessels, she said. They recently launched the Sea Cargo Charter, which includes Total, Shell, Equinor and Cargill, or the Poseidon Principles.
Another tanker company executive said the onus for compliance will be on the owners and all the initiatives will entail a cost. “The whole business model has to be changed. Owners are carrying carbon to end-users and it also depends on how the end-users use [crude] in an effective way.” he said.
“Owners will have to report emissions daily, just as they do temperature,” a shipbroker said.
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While installing scrubbers or using of lower-carbon bunkers such as methanol and LNG may gradually become the norm, in the near term, the scrapping of ships will likely gather pace.
Currently there are more than 150 VLCCs, or just under 20% of the total global fleet, that is over 15 years old and if the current trend of negative earnings continue, around 100 may be scrapped this year alone, a VLCC broker said.
While this is bound to be a business decision, it will, by default, help weed out ships that are unable to meet the proposed new norms.
Source: Hellenic Shipping News
