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New shipping rules are on the horizon. Is your supply chain ready?

The negative consequences could be both financial and reputational, and should be of particular concern to the traditional fossil-fuels energy supply chain.

On Jan. 1, the new International Maritime Organization regulation for reducing the sulfur content of marine fuels from 3.5 percent to 0.5 percent will take effect. With the change comes the need for inspections and enforcement to give the new rule "teeth" and force compliance.

IMO 2020 stipulates that oceangoing vessels must use either cleaner bunker fuel, install on-board gas stack scrubbers to clean the higher sulfur fuel or switch to an alternative marine fuel such as liquefied petroleum gas, liquid natural gas or methanol.

In early 2018 when it embraced this approach, the IMO clearly was thinking of noncompliance and offered additional mechanisms to tighten enforcement and force compliance. Two of those mechanisms included providing Port States, which handle inspections, with additional authority to enforce IMO 2020 rule compliance and a potential loss of insurance for those shippers/owners not in compliance with the lower sulfur fuel or on-board scrubbers.

Looming consequences of IMO 2020 noncompliance

Even with additional administrative "teeth," actions speak louder than words. Two recent examples speak to the seriousness of enforcement and penalties for noncompliance that shippers/owners can expect.

In April, Singapore issued a statement to discourage noncompliance with the low-sulfur ban. The Maritime and Port Authority of Singapore stated that "captains and owners of vessels that burn overly sulfurous fuel could face as long as two years in prison from the start of 2020." Penalties would be maximized if the shipowners and crew were found to falsify documents or obstruct routine investigations.

A detained ship means product either was not delivered or picked up according to schedule. That imposes other delays downstream in the process.
Separately, in August, the owners and operators of the tanker Ocean Princess were convicted and fined $3 million for pollution violations for the use of fuel that exceeded allowable sulfur concentrations and for attempting to deceive the U.S. Coast Guard.

Three ship officers each were convicted and banned from the Caribbean for three years, and each were required to pay an additional fine. The Master officer (an 80-year-old veteran seafarer with 45 years as a Master) stated he was just following the practice aboard the vessel. He failed to stop a practice he knew was wrong, thereby ending his career with a criminal conviction.

Potential impacts within the energy supply chain

Oceangoing vessels are integral to many industries, including the traditional energy supply chain. Refiners, shippers, suppliers, owners and vessel operators cannot afford the penalties of noncompliance. A vessel provides economies of scale to transport feedstock (crude or other feedstocks) or refined products to market. Each party is incented to avoid delays in the supply chain and avoid unnecessary delays, penalties or fines. 

Those supply chain efficiencies would be compromised if a shipper is caught for noncompliance. The first cost could be financial, as was the case in the Caribbean example referenced above. That $3 million fine was meant as a signal to other potential offenders. Some owners and operators may be able to cover the $3 million without issues. Most cannot and will suffer financially. 

The second cost of noncompliance is to reputation. The energy supply chain is based on relationships and working with reputable parties to provide for feedstocks or deliver finished products. More and more, energy companies are getting savvy in only dealing with players that have a good reputation. Still recent in the minds of refiners are enforcement actions and negative publicity associated with fraudulently issued Renewable Identification Numbers (RINs) under the Renewable Fuels Standard program. The U.S. Department of Justice brought numerous cases of fraud for those that tried to deceive the program. These individuals and companies were placed on "blacklists" circulated amongst reputable companies.

The third cost of noncompliance is time. The Ocean Princess was anchored at the port in the U.S. Virgin Islands and detained along with the crew while the investigation was underway. That represented a huge cost to the supply chain, where each party tries to run lean, just-in-time inventory. A detained ship means that product either was not delivered or picked up according to schedule. That imposes other delays downstream in the process, affecting overall inventory and increasing costs unnecessarily.

Preparing for a new world

With the new regulation soon to go into effect, companies that rely heavily on shipping must ask themselves what is to be done. 

Companies must plan and think about managing their oceangoing supply chain effectively. It’s paramount that shippers, refiners, marketers and traders prepare now so fines don’t mount and trade flows aren’t disrupted. Refiners must focus on relationships with suppliers and other logistics companies now to negotiate term deals for fuel.

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