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Getting The Deal Through

Global overview

Kevin Cooper, Freddie Courtney and Kirsten Jackson

MFB Solicitors

Thursday 01 August 2019


Environmental measures

One of the biggest challenges facing the shipping industry is the impact of the global cap on sulphur emissions imposed by the IMO, which will enter into force on 1 January 2020.

The driving factor behind the global cap is to improve vessels’ environmental footprint. Currently, vessels are responsible for 2.5 per cent of global greenhouse gas emissions, although it should be noted that over 90 per cent of global trade is by sea. One of the most harmful pollutants that vessels emit is sulphur dioxide (SO2), produced from the combustion of fuels containing sulphur. SO2 is considered to have significant adverse effects on both the environment and human health.

Under the global cap, the IMO has set strict limitations on vessels to use fuels with a sulphur content of no more than 0.5 per cent, rather than the current limit of 3.5 per cent. However, the global cap has generated discussion on the potential implications for shipping, namely the availability of compliant low-sulphur fuels and the likely high cost of such fuels.

The options for compliance include the following:

  • using very-low-sulphur fuel oil or compliant fuel blends (0.5 per cent sulphur);
  • retrofitting vessels to use alternative fuels, such as LNG or other sulphur-free fuels;
  • installing exhaust gas cleaning systems (scrubbers), which allow operation using non-compliant fuels; or
  • switching from high-sulphur fuel oil (HSFO) to marine gas oil (MGO) or distillates, which have a lower (and compliant) sulphur content.

As to the first option, there is concern that there will not be sufficient availability of low sulphur fuel by 2020, as it requires significant investment to upgrade or modify refineries to produce such fuels. Even if there is sufficient availability, such fuels are likely to be very expensive owing to a sudden increased demand, which could also result in unfair competition and market distortion.

While LNG has virtually no sulphur content, this is likely to be used by a small percentage of the global fleet, as very few vessels are currently designed to run on it. Ship operators may instal scrubbers, which remove the SO2 in the exhaust pipes before they are emitted to the air. Scrubbers can, however, be costly to instal. Also, many port authorities have banned or restricted the use of open-loop scrubbers owing to concerns that, while they remove the air pollution problem, they create a new one by discharging pollutive wastewater into the sea. Unlike closed-loop scrubbers, where the exhaust gases are washed and the harmful substances are collected in a tank that is emptied in port for appropriate further treatment, open-loop scrubbers involve washing the exhaust gases and the washing water, together with the harmful substances that it contains, is discharged into the sea. However, the Clean Shipping Alliance 2020 (CSA 2020) reports that it has recently received written confirmations from port authorities that their earlier decisions to ban or restrict open-loop scrubbers will be revoked in light of scientific evidence that apparently shows that the wastewater generated by the open-loop scrubbers is environmentally acceptable and within regulatory limits.

It is widely expected that, at least for the immediate future, fuel oil will be the mainstay. Therefore, MGO or other distillates could represent the easiest (and likely least expensive) means of compliance, mainly because they are already used in main engines that normally run on heavy fuel. Yet availability and compatibility issues are likely to present difficulties for wider use. Although distillate fuels are used in the marine sector, the non-marine sector relies on this fuel far more heavily, which could lead to tension between the two sectors in respect of supply and cost. Also, as such fuels may differ in their composition from supplier to supplier, it could potentially lead to compatibility issues and mechanical problems.

Marine insurance may also be affected, with insurers concerned about the potential for engine damage, loss of propulsion and other problems that could be caused by the introduction of new fuel products that are still not fully understood. As a result, such uncertainties may lead insurers to increase their premiums.

Charter party clauses relating to bunkers will also need to be reviewed to avoid disputes, especially in relation to differing prices and performances of fuels. BIMCO has recently published two new clauses to address the issues that the global cap presents.

In May 2019, the IMO’s Marine Environment Protection Committee (MEPC) held its 74th session in London. As it was the last MEPC meeting before the global cap takes effect, the emphasis was on the implementation of the sulphur 2020 limit. The MEPC approved and adopted a comprehensive set of guidance and guidelines to assist with consistent implementation. The MEPC also addressed other key environmental topics, including the reduction of greenhouse gas emissions from ships and the reduction of marine plastic litter. Among other matters, it also approved amendments to the International Convention for the Control and Management of Ships’ Ballast Water and Sediments 2004 concerning the commissioning and testing of ballast water management systems and the form of the International Ballast Water Management Certificate.

Ship recycling

Ship recycling is on the rise, partly owing to overcapacity in the market, but also due to regulatory pressures. However, ship recycling raises environmental concerns. According to the European Maritime Safety Agency, most ship recycling takes place in South Asia, often on tidal beaches and in dangerous conditions that lead to health risks and extensive pollution of coastal areas. Furthermore, old ships contain many hazardous materials, including asbestos, polychlorinated biphenyl and large quantities of oil and oil sludge. As a result, there have been a number of international regulatory initiatives designed to ensure that ship recycling is performed in an environmentally sound manner.

The Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal (the Basel Convention) is an international treaty that came into force in 1992. As of October 2018, 186 states and the European Union (EU) are parties to it. Haiti and the United States have signed but not ratified it. The Basel Convention aims to reduce hazardous waste generation and promote environmentally sound management of hazardous wastes, wherever the place of disposal. It also aims to restrict the transboundary movement of hazardous wastes, except where this is perceived to be in accordance with the principles of environmentally sound management. The exact regulatory requirements are, however, dependent on the national law of each contracting state party. The Basel Convention also permits party states to impose additional requirements to those laid down by the Convention, to better protect human health and the environment.

In addition, the IMO’s Hong Kong Convention for the Safe and Environmentally Sound Recycling of Ships (the Hong Kong Convention), was adopted on 15 May 2009 but is not yet in force. To date, the Hong Kong Convention has been ratified or acceded by 11 states: Belgium, Republic of the Congo, Denmark, Estonia, France, Japan, the Netherlands, Norway, Panama, Serbia and Turkey. The combined merchant fleets of these 11 states constitute 23 per cent of the gross tonnage of the world’s merchant fleet and their combined ship recycling volume is about 1.6 million gross tonnes. The Hong Kong Convention will not be in force, however, until 24 months after ratification by 15 states representing 40 per cent of the world’s merchant shipping by gross tonnage, provided that those states’ combined maximum annual ship recycling volume is not less than 3 per cent of their combined tonnage. Nonetheless, the IMO has issued several guidelines to assist member states with the early implementation of the Convention. The Hong Kong Convention focuses on environmentally sound recycling. Among the main requirements are:

  • the performance of an initial survey to verify and produce an inventory of hazardous materials onboard vessels;
  • a ship-specific recycling plan; and
  • that the recycling must take place at an authorised ship recycling facility.

In the EU, on 30 December 2013, the Ship Recycling Regulation (EU) No. 1257/2013 Regulation entered into force, with the aim of reducing the negative impact linked to the recycling of EU-flagged ships. The Regulation was based on the Hong Kong Convention and was designed to implement the principles of the Convention quickly, without waiting for its ratification and entry into force. In addition, on 19 December 2016, the European Commission issued Decision (EU) No. 2016/2323 establishing the European list of ship-recycling facilities pursuant to the Regulation. The Regulation provides, among other things, that ships flying the flag of an EU member state can only be recycled at one of the facilities included in the list. For a facility to be approved and included in the list, it must comply with the requirements set out in the Regulation. The first edition of the list, published in December 2016, included 18 European recycling yards considered to be safe for workers and environmentally sound in accordance with the Regulation’s requirements. However, the European Community Shipowners’ Association argued for ship recycling facilities in non-EU countries to receive EU recognition, to raise standards worldwide. The European Commission published the latest list in December 2018, adding six new yards, taking the total up to 26 facilities. It includes 23 facilities located in the EU and, for the first time, three located in non-EU member states, with two being in Turkey and one in the United States.

Global sanctions

The impact of international sanctions on the global maritime industry remains a hot topic, particularly following the agreement to lift certain sanctions against Iran in January 2016 and the US Trump administration’s recent decision to withdraw from that agreement. Although international sanctions are designed to aid international law and foreign policy objectives in matters such as terrorism and human rights abuses, it is clear they are becoming increasingly politicised and unpredictable. Shipping businesses and insurers subsequently face tougher challenges to manage their exposures to risks in markets affected by sanctions.

Iran

On 16 January 2016, the E3/EU+3 powers (France, Germany, UK, China, Russia and the United States) and Iran reached a diplomatic agreement under the Joint Comprehensive Plan of Action (JCPOA) to lift a number of sanctions against Iran, following Iran’s commitment to wind down its nuclear weapons programme. The EU adopted several legal actions to implement the JCPOA and lifted restrictions against Iran in the following sectors:

  • financial, banking and insurance;
  • oil, gas and petrochemicals;
  • shipping, shipbuilding and transport; and
  • precious metals and currency.

Once the restrictions had been lifted (bar a few exceptions), EU entities were able to begin trading to Iran legally, including with Iranian entities. That said, some restrictive EU measures remain in place (but these relate largely to military goods: weapons and items that might be used for internal repression) and some entities and individuals remain listed. This has meant a need for all trades related to Iran to be checked to ensure that they comply with the remaining sanctions.

Unlike the EU, however, the United States only lifted extraterritorial, or ‘secondary sanctions’, being those that target non-US persons and companies, even where there is no US nexus. On 8 May 2018, the Trump administration announced the United States’ withdrawal from the JCPOA with effect from 27 June 2018, re-imposing the previously lifted sanctions, subject to a wind-down period that permitted otherwise prohibited transactions to occur until 4 November 2018. These sanctions affect not only Iranian oil exports, a key source of Iran’s economy, but also international shipping companies, banks, insurers and port operators doing business with Iran. It should be noted that eight countries (China, Greece, India, Italy, Japan, South Korea, Taiwan and Turkey) were granted waivers to permit the import of limited amounts of Iranian crude oil until 2 May 2019. The United States’ recent confirmation that it will not extend the waivers has accelerated tension and uncertainty in an already stressed oil market that is dealing with lower global supply due to agreed production cuts by OPEC. Consequently, international trading relations are becoming increasingly strained, particularly between the United States and China, with the latter being the largest consumer of Iranian oil.

Other countries

The United States has also imposed sanctions on Venezuela. In particular, it has targeted any vessels deemed to be involved in the petroleum trades between Venezuela and Cuba, having recently added to its ‘Specially Designated Nationals and Blocked Persons’ (SDN) list four ship-owning companies and nine vessels for involvement in the carriage of petroleum cargoes from Venezuela and Cuba. Becoming a SDN has grave implications for the trading and insurance cover of any designated vessel. Additionally, the United States also deems any vessel undertaking activity involving PDVSA, a Venezuelan state-owned oil and natural gas company, as being engaged in the Venezuelan oil sector, and thus at risk of being added to the SDN list.

Syria also faces comprehensive sanctions by the United States, United Nations (UN) and the EU in response to the Syrian government’s support of international terrorism and human rights violations in the country. Since first being implemented, the sanctions have been strengthened several times owing to escalating violence in the region. Current imposed sanctions include trade restrictions on the import, purchase and transport of crude oil and petroleum products from Syria. Other restrictions include travel bans and asset freezes on certain Syrian officials, as well as a ban on Syrian investment by US persons.

Russia is also subject to economic sanctions by the EU and United States, following Russia’s failure to comply with demands regarding the annexation of Crimea and Sevastopol. The sanctions were initially in the form of asset freezing and restrictions on travel. In July 2014, they were extended to prohibiting:

  • the import into the EU of goods from Crimea or Sevastopol; and
  • the provision directly or indirectly, of financing or financial assistance as well as insurance and reinsurance related to such imports.

In August that year, the supply of dual-use goods to Russian persons or for use in Russia if they are intended for military use, as well as the supply without prior EU authorisation of goods related to oil exploration and production activities in Russia, were also prohibited. Russia has issued its own embargo on the importation into the Russian Federation of goods from the United States, EU, Canada, Australia and Norway.

The EU, UN and United States have all imposed sanctions against North Korea. The EU restrictions are wide-ranging and include, among others:

  • requirements for cargo inspections on all cargo going to or from North Korea by sea or air, or which has been brokered or facilitated by North Korea or its nationals, or which is being transported on North Korean flagged aircraft or maritime vessels;
  • a prohibition on North Korea and its nationals from chartering aircraft or maritime vessels, and a prohibition on member states or their nationals from providing crew services to North Korea;
  • a restriction on providing helicopters and vessels to North Korea;
  • a prohibition on the import of petroleum products from North Korea;
  • prohibitions on the transfer of funds to and from North Korea unless the funds are for a specific purpose (listed in the relevant regulation);
  • a prohibition on the transfer of funds to or from North Korea unless they fall within a specific exception;
  • a prohibition on investment in certain commercial activities and financing and financial assistance for trade with North Korea; and
  • a prohibition on services incidental to mining or manufacturing in the chemical, mining and refining industry.

Piracy

Maritime piracy, which has posed a significant threat to the shipping market for many years, including taking a significant financial toll, is generally in decline. The number of piracy incidents is at its lowest level since the late 1990s, according to the IMO. Modern maritime piracy reached its peak around 2011, with over 700 hostages held in 32 ships by Somali pirates off the coast of Africa. Since then, counter-piracy operations, including military intervention, have successfully suppressed these incidents. According to Oceans Beyond Piracy, the total economic cost of Somali piracy in 2017 was US$1.4billion, compared to US$7billion in 2010.

Nonetheless, a spike in piracy events in the Horn of Africa in the spring of 2017, including the hijacking of the Aris-13, indicates that Somali criminal networks are still capable of sophisticated attacks. Also, 2018 has seen an increase of piracy-related incidents in the Gulf of Guinea, with numbers rising from 16 in 2017 to 46 in 2018 according to the International Maritime Bureau (IMB). It appears the approach of pirates there has changed from theft of cargoes to the Somali kidnapping model. However, the IMB did report that due to improved efforts by the Nigerian Navy to actively respond to reported incidents, the numbers dropped in the first quarter of 2019 from 66 to 38 year-on-year. Nevertheless, the IMB also noted that these first quarter statistics should not be a basis to anticipate trends for the rest of the year, as it is too short a sample period and there may be an under-reporting of incidents. Caution should therefore be exercised as the Gulf of Guinea remains risky for vessels.

Anti-corruption measures

Following global support expressed by countries and international organisations, the IMO’s Facilitation Committee has recently agreed to include marine corruption in its work programme. In 2018, the Maritime Anti-Corruption Network (MACN), together with leading maritime associations, engaged the IMO on the consequences and risks facing the maritime industry regarding maritime corruption. According to MACN’s anonymous reporting system, up to 28,000 incidents of maritime corruption incidents have been logged to date.

During the 43rd meeting of IMO’s Facilitation Committee in April 2019, a paper on this topic was presented by the Marshall Islands with numerous countries and international organisations expressing their endorsement of a proposal to develop guidelines to assist all shipping stakeholders in embracing and implementing anti-corruption practices and procedures. As a result, the IMO has agreed to start work on an official guidance document that addresses maritime corruption; the document is expected to be completed by 2021.

Autonomous vessels

Interest in autonomous and remotely-controlled ships is fast gathering pace, with the first commercial projects already under way. The first fully electric and autonomous containership is currently under construction in Norway. From completely unmanned vessels, to vessels remote-controlled from land, to vessels with automated processes and decision support systems, the field is a wide one. According to Rolls-Royce Marine, by 2030 autonomous ships will be a common sight on the oceans.

The potential benefits of autonomous vessels are attractive to the marine industry. Crewless vessels not only reduce crew wages and expenses but can also eliminate systems once needed to make the vessel liveable for the crew, simplifying vessel design and creating more space for cargo. Autonomy can also offer the potential for reducing human error, which is currently estimated to account for 75 per cent to 96 per cent of shipping-related incidents. This has the obvious appeal of reducing costs related to accidents and insurance. Also, by enabling operations that do not put human lives at risk, the number of human tragedies would decrease. Without crews to hold hostage, the issue of piracy may also be reduced.

Nonetheless, although this has obvious appeal, there are many challenges that will need to be addressed before this technology can be put fully into operation. For example, although risk of human error is reduced, new risk factors will emerge, such as possible technological failures and inadequacies. Cyber threats could also present new forms of piracy. While the changing risk picture affect existing market players such as shipowners, charterers, banks, insurers, new parties will enter the picture, including suppliers of autonomous systems and onshore operators controlling or supervising vessels.

Insurers face the difficult challenge of understanding and pricing the risk correctly, as autonomous vessels will present new, as well as existing, risks. They will also need to consider how the current legal framework will fit with the new technology, not only with respect to technical requirements but also as to liability. For example, if an autonomous vessel is involved in an accident and causes damage to a third party, the question of who is liable arises.

The IMO has confirmed that it will review regulations pertaining to Maritime Autonomous Surface Ships (MASS) in 2019. In December 2018, the IMO’s Maritime Safety Committee, at its 100th session, completed an initial regulatory scoping exercise on unmanned ships, including preliminary definitions of MASS and degrees of autonomy. During 2019, IMO will analyse the most appropriate way in which regulations can address the development of MASS, accounting for technology, human elements and operational factors.

Cybersecurity measures

The extensive ransomware attack that hit almost 100 countries in May 2017 is only one of many incidents that have highlighted the increased global cyber threat in recent years. Indeed, that attack was soon followed by the Petya cyber-attack in June 2017 that affected a number of large companies around the world, including the Danish transport and logistics group AP Moller-Maersk. The cyber-attack was reported to have resulted in the shutdown of the group’s IT systems in multiple offices around the world.

There is increasing concern that as the maritime industry becomes more reliant on technology, the exposure to cyber-attacks will increase. In recent years, the industry has taken measures to tackle the cyber threats and adopt the appropriate crisis management tools. In 2017, the IMO Maritime Safety Committee approved various measures intended to enhance maritime security, including adopting a resolution that requires shipowners and operators to incorporate cyber risk management into in their ships’ safety management systems by January 2021. This was followed by the third edition of BIMCO Guidelines on Cyber Security onboard Ships in 2018, which provides additional guidance for shipping companies in carrying out appropriate risk assessments and include measures in their safety management systems to protect ships from cyber-incidents.

Blockchain

Blockchain technology has been touted as a possible solution against cyber-attacks by providing secure transactions. Blockchain systems are based on open-source, decentralised, peer-to-peer topology, supposedly making it inherently impossible for any one entity to gain control of the systems. Such systems can only be updated based on the consent of each participant in the system and, when new data is entered, it can never be erased. Blockchain offers a secure, efficient, transparent and decentralised platform open to anyone with access to it. In any shipping transaction, all manual and paper-based operations (certificates issuance or validation, bills of lading, cross border payments, etc) could be digitised onto the platform and all related parties (eg, cargo sellers or buyers, shipowners, charterers, banks, agents, customs and port authorities) would be able access the platform securely and easily.

Although the technology is still at an embryonic stage in the maritime industry, big shipping players have been looking to invest and adopt it in recent years. AP Moller-Maersk joined forces with IBM and launched TradeLens in January 2018 to apply blockchain to the global supply chain. The TradeLens system currently includes more than 40 port and terminal operators globally. In November 2018, five shipping lines and four terminal operators formed a consortium called Global Shipping Business Network to develop a blockchain platform to digitise the industry and transform documentation flows.

It will be very interesting to see how this new technology affects the industry over the coming years.


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