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Lighthouse - July, 2017.

New Sulfur Emission Norms A Boon Or Curse?


International Maritime Organization’s ship pollution rules are contained in the “International Convention on the Prevention of Pollution from Ships”, known as MARPOL 73/78. On 27 September 1997, the MARPOL Convention has been amended by the “1997 Protocol” which includes Annex VI titled “Regulations for the Prevention of Air Pollution from Ships”. MARPOL Annex VI sets limits on NOx and SOx emissions from ship exhausts and prohibits deliberate emissions of ozone depleting substances.

IMO has stipulated new cap on the sulfur emission (Sox), which is now reduced to 0.5 % from 3.5%,and which is to be enforced by 2020 by all signatories making respective jurisdiction its responsibly for its compliance. Its Compliance with the provisions of Annex VI is determined by periodic inspections and surveys. Upon passing the surveys, the ship is issued an “International Air Pollution Prevention Certificate”, which is valid for up to 5 years.

It is important to note that under the “NOx Technical Code”, the ship operator (not the engine manufacturer) is responsible for its compliance, While it cannot be denied that this emission cap is essential to reduce the air pollution and for safe and clean environment as envisaged under MARPOL, there are certain repercussions, which cannot be ignored as a result of bringing this regulation.

These standards will be implemented on the world merchant fleet of approx 90,000 ships, which in turn will affect the entities associated with it viz. insurance, classification societies etc. Non-compliance with these regulations may lead to suspension of class, which in turn will affect their Insurance cover. Classification societies or class are non-governmental organizations doing periodical inspections, and have the standards for the construction and operation of ships as per the guidelines provided by IMO. The ships have to be class approved in order to get an insurance cover and therefore the retrofitting and upgrading of engines will be important to meet the specified standards.

For any type of insurance, be it P&I or Hull and Machinery, Ships cannot be in breach of regulations for the insurance cover and moreover companies are going to be reluctant in settling claims for ships which are not even eligible for sailing in the post 2020 emissions regime.

The sulfur emissions do not come under the insurance norms but changes made in engines to reduce the sulfur content can lead to damage to the insured H&M. Although at this stage, it is difficult to quantify the insurance-related impact of the new sulfur emission regulations, but can no doubt be a pinch to the insurers, if the claims are of high value. It is highly likely that the technology for reducing the sulfur content will be costly and older ships would be recycled or scrapped, paving the way for a new fleet making it another factor to be considered.

Keeping the above consequences in mind, the insurance industry is already grappling with lower revenues as the insured value of the ships is going down, in part due to a supply overhang. Also the fact that new clubs/companies are entering the insurance industry is also impacting the margins of some of the existing insurance players.

Also surplus supply of ships has already dragged down freight rates, reducing the ability of ship owners to take insurance covers consequently insurance premiums have declined eroding the earnings of underwriters thus under the circumstances can it be implied that new norms are creating a “perfect storm” like situation, as costs for ship-owner is rising among others expenses and risks, along with expenses associated with training and familiarization of crew for handling cleaner marine fuels? The question remains to be answered.

 


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