THE ASDEM NEWSLETTER - FREIGHT DEFENCE DEMURRAGE
EU ETS - FROM 01 JANUARY 2024 CARBON ENTERS THE FREIGHT AND DEMURRAGE MARKET
ADDITIONAL VOYAGE CHARTER TERMS FOR OPERATIONS AND EMISSIONS ALLOWANCES IN THE EU AREA AND COMPLIANCE WITH THE IMO MEASURES TO REDUCE EMISSIONS FROM SHIPS
The International Maritime Organisation (IMO) is the branch of the universal global body known as the United Nations, that (amongst other things), is concerned with ships and shipping and implementing UN rulings resolutions and protocols on pollution emissions and climate change. The IMO creates mandatory measures that are put into effect at the level of ships trading and operating worldwide through flag and port state controls. There is a broad landscape of provisions that has been steadily introduced from pollution control and compensation, washing of tanks, handling of ballast and slops, fuel composition, data collection, and analysis.
The IMO has been engaged in a global approach to increase the energy efficiency of ships and develop measures to reduce Greenhouse Gas (GHG) emissions from them. Recent changes have seen the introduction of two Energy Indexes. The Energy Efficiency Design Index (EEDI) improves the design efficiency of new ships. The Energy Efficiency Index (EEXI) improves emissions from existing ships by requiring technical measures or improvements to the overall carbon efficiency of the ship's propulsion system.
Changes that will occur in 2024 are the rating of ships according to their emissions and, in the EU, the charging of ships for their emissions. As this system applies only in the EU and to all ships trading in the EU area, it is necessary that charterparties are amended to make provision for this change.
CARBON INTENSITY INDICATOR (CII) AND CII RATING AND IMPACT ON FREIGHT AND DEMURRAGE
CII RATING and FREIGHT AND DEMURRAGE
The measures to reduce GHG emissions from ships introduced in 2023 - 2024 will see ship operating expenses (OPEX) and the cost of each voyage increase due to:
(i) Cost to be invested in the ship to achieve a C emissions rating (or better) and reduce emissions from it; and
(ii) Cost for the actual emissions of ships operating in the EU.
What increases the cost of a voyage or sets operational hard targets on how it is to be performed will influence freight rates. What influences the cost of freight will also influence its counterpart – the 'daily rate of freight' - demurrage. Freight and demurrage provisions will need to be amended to account for the emissions cost of the voyage.
BIMCO EMISSIONS TRADING SCHEME FREIGHT CLAUSES
Ships monitor and record their emissions and can estimate the emissions costs for a voyage. BIMCO has developed and recently released a suite of three clauses to account for them in the freight charge. These clauses are all based on the premise that the voyage charterer will pay the owner for the emission allowances required for the voyage in the freight.
These clauses handle how payment is to be made and offer 3 contractual mechanisms.
All three clauses impact on the working of the contract laytime and demurrage regime and are factors in the freight and demurrage rates that apply and when they apply. This regime will require careful consideration and adjustment if these clauses or ones like them are used.
A review of the voyage charter terms will be required to ensure EU Emissions Allowance costs are correctly documented, calculated, adjusted, and paid. Terms which are concerned with operational control and procedures for operating the vessel under the charter so that it meets its emissions targets and providing for what is to happen when it does not will be needed. Contracts departments, operators, laytime and demurrage analysts and other post fixture professionals will start to see these clauses day to day.
CLAIMING EMISSIONS COSTS AS DAMAGES
The BIMCO clauses do seek to preserve:
'….the Owners' right to recover from the Charterers any costs arising from the surrender of Emission Allowances to the applicable Emission Scheme for the voyage(s) performed under the Charter Party resulting solely from the Charterers' breach of the Charter Party.'
BIMCO explains that this provision:
'….addresses a scenario where the vessel may release more emissions than anticipated due solely to the charterers' breach of the charterparty. For example, the vessel may be detained solely due to the charterers violating the charter party. In this case, this subclause allows the owners to recover any costs arising from the surrender of Emission Allowances for the emissions released during such period of detention.'
Failing to load or discharge within laytime is a breach of charterparty that would increase emissions. If that breach triggers an obligation to pay demurrage, the law treats this rate as being Liquidated Damages, fixing the amount to be paid. The BIMCO clauses make provision for owners' recovery of additional 'costs arising from the surrender of Emission Allowances to the applicable Emission Scheme for the voyage' and targeting additional cost.
If a party wishes to preserve a right to make a claim for the cost of additional emission allowances or make other financial claims regarding the emissions costs of delay whilst a ship is on demurrage, we recommend a statement in the demurrage clausing that this is the parties' intention.
RATES OF DEMURRAGE
Due to the way that emissions are measured under the IMO provisions and their current scope of application we are likely to see clauses emerge similar to those that were used when the Low Sulphur Emissions Areas were first introduced. These clauses permit adjustments to the rate of demurrage.
OPERATING WITHIN THE EMISSIONS LEGISLATION
Existing voyage charter terms must be reviewed and amended as necessary to fit this limitation on operational freedom into the contract, ensuring that the regulations are complied with. The essence of the regulations is that the ship must take steps to comply with the emissions targets but will not be punished for failing to do so if unexpected delays occur.
Failure to take steps to comply could be an actionable breach. A ship that fails to operate within emissions rating requirements could be in breach of local environmental regulations.
BIMCO CII CLAUSE FOR VOYAGE CHARTER PARTIES 2023
It is against this background that BIMCO has created a clause which allows the owner to make changes to the charterers' plan/instructions for the voyage to comply with CII.
Adoption of a clause like the BIMCO clause (like any clause) would require careful consideration of the standard charter forms it is being added to. In the tanker realm, a clause like the BIMCO clause does see, in a sense, a transfer of operational control over the voyage for environmental reasons which override commercial ones. This is the whole point of these regulations.
The true challenge that lies behind the work that owners and charterers must do together is aligning the trade chain, their voyage charters and how the vessel is operated within the emissions legislation. Compliant owners will need to work together with charterers to plan their commercial trade of the ship from an emissions' perspective - distance travelled, fuel consumed, and the length of port stays etc – to meet the target CII rating because this is the reason for these regulations. There is a cost, but this should not be seen as a bad thing to be avoided by an owner or a charterer. It's a negotiation over how emissions operational costs get allocated. The climate is the biggest beneficiary, which is a good thing, and we are seeing the industry embracing the challenge.
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DISCLAIMER
The information contained in this newsletter is provided for informational purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this issue, or any previous issues of the ASDEM newsletter.
UPCOMING CONFERENCES, TRAININGS AND EVENTS
24/25 January 2024 / The Washington Mayfair Hotel, London
Download the brochure and registration form by clicking here.
26 January 2024 / 10:00 to 17:00
The Honourable Artillery Company (HAC), London
Download the brochure and registration form by clicking here.
26 January / 18:30 to 22:30
The Honourable Artillery Company (HAC), London
To register for the party please click here.
To become a sponsor for this event, please click here.
For full information please click here.
13/14 March / 09:00 to 17:30
The Chesterfield Mayfair Hotel, London
Download the brochure and registration form by clicking here.
20/21 March / 09:00 to 17:30
The Chesterfield Mayfair Hotel, London
Download the brochure and registration form by clicking here.
26/27 March / 09:00 to 17:30
The Chesterfield Mayfair Hotel, London
Download the brochure and registration form by clicking here.
ATHENS TANKER CONFERENCE - 16 NOVEMBER 2023
We would like to thank each one of our conference speakers who had made our last Athens Tanker Conference on 16 November such an interesting and lively event. For those interested in getting into contact with one or more of our speakers you may find our speaker lineup and contact details for each below.
Alexander Freeman, Partner, Hill Dickinson International.
+30 210 428 4770 / alexander.freeman@hilldickinson.com
+30 210 429 5120 / ioannis.avgoustis@simsl.com
+30 21 0453 1969 / ian.clarke@westpandi.com
+44 (0)20 3116 3617 / SUnderhill@ReedSmith.com
+30 698 03 10 534 / eleni.antoniadou@gard.no
+44 (0) 203 918-8625 / awilding@asdem.com
IN MEMORIAM - ROGER SEPKES
Founder and Chairperson of Asdem
For those who have not yet heard, we are sad to announce that Roger Sepkes, Founder and Chairperson of Asdem, has passed away.
Roger Sepkes worked in the oil industry for more than 50 years, initially in shipping and refining with Petrofina in London and Brussels.
Roger set up Asdem at the suggestion of several oil trading companies in 1988 and worked tirelessly to develop Asdem into a trusted and valued, independent and impartial consultancy to the oil and gas industry.
Roger stepped down as chairman of Asdem in 2015 but he continued to act as a private consultant for the firm.
Roger will be missed by members of Asdem - both past and present - and will be remembered by the people that knew him as a person who always tried to help, by those he mentored as someone who understood complex problems and could provide clear answers, and to the industry as a whole, as someone who set the standards.
A memorial service will be held at 11.30 am on Friday 12th January 2024 at Bentley Crematorium (Ongar Road, Pilgrims Hatch, Brentwood, Essex CM15 9RZ). Those who would like to make a charitable donation to the Parkinson’s UK foundation in memory of Roger may do so by clicking here.
Asdem has committed to sponsoring a table at LTOPS 2024, and subsequent LTOPS events, in Roger’s honour. We shall be christening this table The LTOPS Laytime and Demurrage Persons Watering Hole. This cozy little area will be where Roger’s friends and colleagues can gather to share stories and memories over a glass of fine wine, a mint julip, a mint tea or just a beer if that’s your fancy.