The number of reported total shipping losses of vessels over 100 gross tons (GT) declined in 2019 to 41 – the lowest total this century and a nearly 70% decline over 10 years. Improved ship design and technology, stepped-up regulation and risk management advances are some of the factors behind the long-term improvement in losses, but a number of new risks are emerging, including a number of environmental challenges.
From January 1, 2020, allowable sulphur levels in marine fuel oil were slashed under the International Convention for the Prevention of Pollution from Ships (MARPOL) Annex VI, more widely-known as IMO 2020, as the shipping industry plays its part in achieving a more sustainable environment. However, compliance with the new sulphur cap is far from straightforward, with a range of options available – each with its own cost implications, compliance challenges and risks.
One of the most straightforward options to comply with IMO 2020 – which cuts sulphur levels to 0.50% m/m from 3.50% m/m – is to use a fuel that is naturally low in sulphur, such as liquefied natural gas (LNG), biofuel or marine distillate. An increasing number of new vessels are opting for such fuels, although most existing ships are expected to use “blended” low sulphur fuel, where a refinery combines non-compliant fuel oil with low-sulphur oil to achieve a compliant fuel oil.
Ship owners will need to balance the pros and cons of each fuel type. Distillate fuels, for example, are a lower risk option – they do not produce cat fines that can block filters and damage engines – but they are more expensive. Bio-fuels have a lower flash point than heavy fuel oil while low-sulphur fuels could affect the performance of machinery because sulphur acts as a lubricant.
Low sulphur fuels present an added regulatory risk for ship owners. The carriage of non-compliant fuel oil was banned from March 1, 2020, except for vessels with exhaust gas cleaning systems. Though compliant, blended low sulphur fuels may not be compatible and typically carry an increased risk of cat fines which can damage engines. Fuels from different ports and refineries currently have varying properties, which could result in damage to engines and essential equipment. Bunker quality disputes have already arisen from the use of incorrect fuel mixes.
The main alternative to using compliant fuel is to fit exhaust gas cleaning systems, also known as scrubbers, which remove sulphur oxides from the ship’s engine and boiler exhaust gases. There are two types of scrubber, open-loop and closed-loop. Open-loop scrubbers return washwater to the sea while residues in washwater from closed-loop scrubbers must be discharged onshore. Discharge from open-loop scrubbers, however, must meet strict criteria and a growing number of ports and countries restrict or prohibit the discharge of washwater from open-loop scrubbers within their waters.
With the rush to fit exhaust systems ahead of the IMO 2020 deadline, there have also been incidents resulting from design flaws and quality of workmanship, including issues with manufacture, testing and installation of scrubbers. The quality of scrubbers also varies between manufacturers and yards, while there is no data on the performance of scrubbers over their life cycle.
IMO De-Carbonization Targets
In the coming decades the shipping industry will need to undergo a radical transformation if it is to meet challenging targets to cut greenhouse gas emissions. Investments in green technology will need to begin immediately, with due consideration for the risk and safety implications.
The global shipping fleet is estimated to account for 2.2% of global CO2 emissions and without action, emissions from international shipping could grow between 50% and 250% by 2050, mainly due to the growth of the world maritime trade, according to the International Maritime Organization (IMO).
In April 2018, the IMO adopted Resolution MEPC.304(72), its initial strategy to reduce global shipping industry greenhouse gas emissions by at least 50% (from 2008 levels) by 2050. Meeting the target could require $1trn to $1.4trn of investment in cleaner fuels and technology between 2030 and 2050, or an annual average investment of $40bn to $60bn over the next 20 years, according to a study. If the shipping industry was to fully decarbonize, it would require a further $400bn investment, or a total of $1.4trn to $1.9trn, by 2050.
De-carbonization is, however, very different from reducing sulphur emissions, which can be achieved through relatively simple measures, such as changing fuel or technical solutions.
Each form of energy and propulsion has a different carbon footprint over its life-cycle. For example, vessels could reduce their emissions by switching to electric power, but batteries are carbon-intensive to produce, and the electric power will need to come from renewable sources. A growing number of vessels are powered by LNG, but this too has a carbon footprint and would not be enough on its own to achieve a 50% cut in emissions.
In addition to the technical challenge, de-carbonization will have regulatory, operational and reputational (corporate social responsibility) implications for shipping companies. Investors are increasingly shunning carbon-intensive industries, while regulators and investors are insisting on more transparent reporting of climate change risks and exposures.
Climate Change Manifests in Marine Claims
Record water levels on the Mississippi river in 2019 resulted in damage to vessels and shore side infrastructure, as well as causing major disruption for supply chains. As weather becomes more unpredictable with climate change, such events are likely to have a greater impact on trade and marine insurance claims. The Mississippi River and its tributaries form one of the most important commercial waterways in North America, and a river system that is critical to the transport of agricultural and manufactured goods across the country. However, 2019 saw year-long disruption on the Mississippi River from high water levels, floods, fog and ice jams.
The high water levels and flooding closed locks and made large parts of the river unnavigable, forcing many shippers to move grain to ports by rail or by truck or accept lower prices in the domestic market, missing export opportunities. This disruption is just the latest example of how the influence of climate change can now be seen in marine claims. The 2019 floods caused at least $6.2bn in damage, according to the National Oceanic and Atmospheric Administration (NOAA). It was one of 14 separate billion dollar weather and climate disaster events to hit the US in 2019.
Additional insights into Allianz’s 2020 Safety & Shipping Report.
Captain Andrew Kinsey,
Senior Marine Risk Consultant at Allianz Risk Consulting