Industry Insight: ECA Regulations - How to Comply and Remain Competitive

by Alok Sharma, Senior Vice President, Inatech
Wednesday November 26, 2014

The shipping industry is increasingly subject to environmental legislation designed to reduce air and marine pollution. In January 2015, new regulations concerning sulphur emissions will come into force that seek to limit the amount of sulphur emitted by ships. All vessels within specified Emission Control Areas that include the North Sea, the Baltic Sea, and North American waters will be prevented from burning fuel above 0.1% sulphur content.

The regulations will introduce further uncertainty into a market that is suffering from overcapacity and depressed demand as a result of market conditions and low consumer confidence. Low-sulphur fuel is estimated to be around 40% more expensive than ordinary bunker fuel and therefore the regulations are also further driving up costs.

What's more, the International Maritime Organisation (IMO) has not yet made it clear how and when shipping companies will be expected to prove they are complying. This is causing further uncertainty in the market.

As a result, most shipping companies are unsure about how to prove they are complying, while others are considering whether complying with the regulations is worth the cost. However, this is a risky approach for the following reasons:

  • Enforcement by national and international authorities - The US Coastguard has so far been aggressive in enforcing previous regulation on sulphur limits and there's no reason to think this won't be the case with the incoming regulation. While the fines handed down in the US have been comparatively small compared to the cost of compliance, the enforcement process can be extremely disruptive for shipping companies. What's more, the fines could be far larger in future. The regulations will be enforced across all the ECAs, with the European Union expected to enforce the regulations particularly strongly. 
  • Finance - Shipping companies rely on banks for credit to operate and large loans are often secured against ships. Therefore, a non-compliant vessel represents a risk to creditors. It may ultimately be seized by the coastguards or port authorities enforcing the regulation, which will put a valuable asset - and the bank's loan - at risk. Companies with a reputation for non-compliance may also find it hard to find credit in the first place, putting the whole operation in danger.
  • Operations - The seizure of vessels by authorities for non-compliance could prove fatal for a shipping operator. If the ship is not at sea, it is not earning. It also means a customer's shipment will be delayed. As a result, the shipping company may have to compensate the customer, who will also be less inclined to use the company for its shipping needs in future.
  • Global sulphur limits - With global sulphur limits expected to come into force either by 2020 or 2025 any attempt to avoid compliance is simply delaying the inevitable - the companies that adapt now will have the best chance of surviving in the long term.

There are also ways for shipping companies to mitigate the implied costs of complying with the ECA regulations, allowing them to remain competitive.

When it comes to proving compliance and thereby avoiding the costly implications of prosecution under the new regulations, the only option is to continuously track various metrics such as quality of the fuel being burned, sulphur content of the fuel, switch-over times and fuel quantity, and store that information securely. This way shipping companies are completely covered and protected from the threat of punitive measures.

It's also critical to properly manage a ship's inventory in line with the actual zones themselves - burning low-sulphur fuel outside of the Emission Control Areas represents a waste of potentially thousands of dollars. However, it can take anything up to  24 hours for ships to switch between different types of fuel, so operators need to plan routes carefully.

Shipping companies also need to ensure they are getting full value for money when they buy bunker fuel. Problems with fuel quality and quantity in the bunker industry are not new. However, whenever new regulations are passed, the problem becomes particularly acute and the quality of bunker fuel becomes more dubious. Therefore, buyers need to make sure they are adequately controlling, and checking and rechecking the quality of fuel. If the average company spends approximately $8 million on fuel per year, a variance in the stated fuel quantity of 2% represents a loss of $120,000. In light of new ECA regulations, shipping companies need to be more vigilant than ever about fuel quality.

Shipping companies can also mitigate the effect of the ECAs by optimizing their bunker-buying strategy. Armed with the right information, they can buy the right fuel at the right time and potentially saving hundreds of thousands of dollars on their fuel costs. Having a bunker plan means ships can bunker where the cost is lowest and the quality is highest - filling up as and when leaves ship captains vulnerable to expensive, low-quality fuel. Having up to date information on the bunkering market means buyers can negotiate with traders and secure a much better deal. Full and timely information is the key to optimising a bunker strategy.

To many shipping companies, the new ECA regulations coming into force in January 2015 seem onerous and costly. What's more, the regulatory body that introduced the regulation, the International Marine Organisation still has not specified how companies should comply. All of this means that some in the industry remains unsure about whether or not to comply. However, the cost of not complying is too great and smarter, more informed bunker buying and fuel usage can mitigate the cost of compliance and ensure shipping companies remain competitive in a tough marketplace.