Transport CommitteeWritten evidence from Prof Michael Bloor, Prof Susan Baker and Prof Helen Sampson (SES 02)

1. This submission is based on current research funded by the UK’s Economic & Social Research Council (grant reference: RES-062-23-2644), “Effectiveness of international regulation of pollution controls: the case of the governance of ship emissions”. The project began 1/9/2010 and finishes 31/12/2012. The submission is therefore in the nature of an interim, rather than a final, report.

2. The project draws on observations of ship inspections in selected UK and Swedish ports, and interviews with inspectors, regulators and shipping industry stakeholders, with the objects of both assessing the effectiveness of current enforcement of controls on ships’ SOx emissions in the North Sea and Baltic Emission Control Areas (ECAs), and of offering suggestions to regulators on the enforcement of possible future regulations on carbon emissions.

3. Hard evidence of non-compliance. The best evidence of non-compliance with the SOx regulations should, in principle, come from analyses of fuel samples taken by inspectors and other enforcement officers. Hence the alarm registered in the shipping press earlier this year when Meindert Vink of the Netherlands Shipping Inspectorate presented findings from 135 fuel samples taken in the port of Rotterdam in 2010.1 These showed that in the first six months of 2010 (when an ECA sulphur limit of 1.5% was in force), the non-compliance level was 7% (from 72 samples), whereas in the second six months of 2010 (when an ECA sulphur limit of 1.0% was in force) the non-compliance level had risen to 46% (from 63 samples). However, alarm may well have been misplaced. It should be borne in mind that these 135 samples (drawn from around 12,000 ship visits per annum to the port of Rotterdam) are not a random sample, but rather are intelligence-led, frequently arising out of complaints from the harbour authorities and others—thus, better intelligence alone may be sufficient to account for the seeming increase in non-compliance. The Swedish Maritime Administration has kindly made available the results of the tests they conducted on samples taken from 149 vessels in 2010 (the same year as the Rotterdam tests) and, allowing for a margin of error in sulphur content of +/- 0.05%, only six vessels (ie 4%) were found to have non-compliant heavy fuel oil.2 The Swedish sampling was also intelligence-led. The only other test evidence we have found within the public domain comes from the Danish Maritime Administration in 2008, where three samples out of 54 were found to be of non-compliant fuel.3 It may also be relevant to report that the cost of analysis of each of the Danish samples was 150 euros.

4. Other evidence. Maritime administrations also sometimes receive intelligence on analyses of samples taken for commercial purposes and we understand that these data also show no evidence of widespread non-compliance. Bunkering operations at Falmouth, which lies just at the western boundary of the ECA, has experienced a major boom from shipping seeking to bunker with compliant fuel before entering the ECA. One of the two bunkering operations in Falmouth kindly made available some of their activity data: 369 vessels bunkered there in 2006; this rose to 1304 vessels in 2008.4 It has been suggested that a laser technology, LIDAR, can be used to analyse the sulphur content in a ship’s exhaust plume and the Swedish Maritime Administration has experimented with mounting LIDAR equipment on a spotter plane, but this experiment was discontinued because of technical difficulties and concerns about aircrew safety. We understand that LIDAR would only have been used as a screening device: identifying potentially non-compliant vessels which would, on berthing, have been boarded for inspectors to take fuel samples for analysis. However, LIDAR equipment was mounted at the entry to the port of Gothenburg to analyse the exhaust plumes of more than 2,000 vessels and found 5% of these to be seemingly non-compliant.5

5. Likely Baltic Compliance Patterns. It is probable that compliance levels in the Baltic ECA are higher than in the North Sea ECA, not least because Sweden has been charging differential “fairway dues” (charges on berthing ships to pay for ice-breaking services and coastal and navigation lights, first introduced in 1998) to those vessels which operate continuously on low-sulphur fuel and which incentivised operators to switch to low sulphur fuel prior to the establishment of the ECA. Major Swedish ports also operate differentiated port dues for vessels using continuous low sulphur fuel, but the scale of these charges is such that their influence is thought to be marginal, relative to the fairway dues. A vessel of 20,000 gross tonnage, using fuel with a sulphur content greater than 0.5% (ie half that permitted under the ECA regulations), making 24 port calls p.a., would pay $146,880 p.a. in fairway dues.6 In addition, some Scandinavian ship operators (such as the ferry companies) and charterers (such as IKEA) value being able to demonstrate a “green profile”. Nevertheless, port-state control enforcement only operates on berthing ships, so vessels merely transiting through Swedish and Danish waters to and from East European ports such St Petersburg (where port-state control has in the past been demonstrated to be less effective)7 are thought to have lower levels of compliance.

6. Likely North Sea/English Channel Compliance Patterns. Vessels operating continuously in the ECA are highly compliant, indeed such ships would have difficulty sourcing non-compliant high-sulphur fuel. This applies to certain industry sectors such as the North Sea and Channel ferries, and the rig supply boats and other vessels servicing the North Sea Oil industry out of Aberdeen. Ships merely transiting UK waters to and from other European ports are likely to show different compliance patterns depending on the inspection regime of their destination port (Rotterdam-bound, more compliant; St Petersburg-bound, less compliant). Ships entering the ECA bound for UK ports are thought, by industry stakeholders and regulators alike, to be largely compliant and there is some indirect evidence (see (4) above) in support of this. However, such majority compliance appears to be largely due to a culture of compliance that has grown up in recent years among ship operators trading in UK/European waters. Evidence of this “culture of compliance” can be found in the very large fall in ship detentions (for serious regulatory deficiencies) in UK/European ports between 2001 and 2010: detentions fell from 1,699 vessels in 2001 (comprising 9% of all ship inspections) to 790 in 2010 (comprising 3% of all ship inspections).8 Yet this new culture of compliance appears to be threatened, in respect of the SOx regulations, firstly by the escalating price differential between compliant low-sulphur fuel and non-compliant high-sulphur fuel (with the consequent economic incentives to non-compliance), and secondly by particular problems in respect of the effective enforcement of the sulphur regulations.

7. Fuel price differentials. In 2005 Wallenius Wilhelmsen, a major global operator particularly strong in the car carrier sector, was the first such major operator to commit itself publically to continuous low-sulphur operations. In 2009, the estimated annual cost to the company of this policy was an additional $2.7 million dollars.9 In early 2010 the existing low-sulphur/high-sulphur price differential suddenly increased greatly with disruption to supplies of Libyan oil (which has a naturally low sulphur content): the price differential increased from around $10 per tonne to around $80 per tonne. The imminent arrival of the North American ECA (coming into force on 1/8/2012) will further stimulate demand for low-sulphur fuel and we are advised by industry specialists that, short of a world slump, there is no prospect of a fall in that price differential in the medium term. Many ship operators are now paying out more in fuel costs than they are in crewing costs, at time when maritime freight rates remain depressed. There is therefore a strong economic incentive to operators to break with the culture of compliance, particularly if they believe competitors to be successfully evading detection.

8. Problems in effective enforcement in UK waters:

(a)Although the Maritime & Coastguard Agency can charge operators for follow-up visits to detained ships, port-state control is not a revenue-generating activity and the MCA’s port-state inspection operations naturally face budgetary constraints. The MCA has not equipped its surveyors with the sampling kits used by Swedish inspectorate or with the sampling-and-testing kits used by the Dutch. Nor does the MCA have the technical capacity to detect non-compliant ships transiting UK waters but not destined for UK ports.

(b)The MCA relies for detection of non-compliance on document checks, rather than on fuel sampling. Surveyors may ask to see the Bunker Fuel Delivery Note (BFDN) provided by the bunker supplier, which specifies the sulphur content of the fuel. And surveyors may ask to see the Oil Record Book which records the point at which the vessel both began and later completed its changeover from high-sulphur to low-sulphur fuel. Neither of these documents are particularly robust. The BFDN is frequently supplied by a sub-contractor, rather than a registered bunkerer and the Registration Number of the bunkerer does not appear on the delivery note. The BFDN is also frequently hand-written, as are the entries in the Oil Record Book. Both documents are thus open to potential fraud/forgery. Hard evidence of fraud is naturally hard to come by. However, fuel samples taken by other maritime administrations have sometimes shown considerable discrepancies between the sulphur level recorded in the BFDN and that found on analysis. For example, the Grande Mediterraneo (IMO no. 9138393) inspected in Wallhavm, Sweden, on 10/11/2010 was found to have Heavy Fuel Oil in the service tank that was 1.68% sulphur, while the BFDN recorded 0.98% sulphur.10

(c)Although Masters are required to notify maritime administrations of their estimated times of arrival, this duty is normally delegated to the port authorities. However, some ports (particularly smaller ports) are not notifying the MCA of arrivals and so inspections are not scheduled.

(d)At the time of writing this evidence, MCA surveyors have not reached an agreement with the agency about being on call at weekends. Consequently, ships making berthing Friday afternoon to Sunday evening are not currently subject to inspection. However, we understand that such an agreement is now in the offing.

(e)Specifically in respect of the EU requirement to burn fuel with a maximum of 0.1% sulphur in port, because this is an EU (rather than an IMO) requirement, non-compliant vessels do not have this deficiency recorded in the Paris MoU database (Thetis) and or in industry databases like EQUASIS. Consequently, non-compliance with the EU regulations has no adverse commercial impact on the vessel’s freight rates, because “naming-and-shaming” has not occurred.

(f)Port-State inspections follow a discretionary methodology, allowing surveyors some latitude in the foci of the inspections and in the penalties for non-compliance. This discretionary element is welcomed by many operators, but it also leads to uncertainty about penalties which may serve to weaken compliance. While one surveyor might typically record non-compliant fuel as a “15” deficiency (“to be rectified by the next port”) his colleague in the same office might typically record it as a “99” (“an observation to the Master”). Parenthetically, it should be noted that uncertainty about penalties is not confined to the UK: the Swedish Maritime Administration’s programme of sampling and testing programme has not yet led to a single prosecution by the State Prosecutor’s Office;11 and Denmark’s testing programme detected 10 violations of the sulphur regulations in 2006 and 2007, but these resulted in only one successful prosecution.12

(g)Vessels with a single service tank (that is, the day tank that serves the main engine, as opposed to storage tanks) are particularly disadvantaged by the technical difficulties entailed in compliance. Such a vessel may take as much as a four-day changeover period to flush low-sulphur fuel through its service tank before sufficient high-sulphur fuel has been expelled to make the vessel compliant. Many of these vessels have insufficient space in the engine compartment to retro-fit an additional service tank.

9. Conclusion. Past OECD Reports13 have referred to the significant percentage of total vessel operating costs that could be saved by regulatory avoidance. The sums quoted there (eg a saving of $37,000 pa by undermanning a bulk carrier by two crew) are dwarfed by the potential savings currently to be made by operating with cheap non-compliant fuel. The shipping industry is both highly competitive and is presently suffering a downturn in profits in most sectors. There is therefore a danger that the present “culture of compliance” that characterises the bulk of the industry will be undermined by a minority of “free riders” who, under the current inspection regime, are relatively unlikely to be detected in violation of the sulphur regulations and, if detected, are relatively unlikely to suffer commercial loss.

References

1. M Vink (2011). “The Sulphur Issue”, unpublished conference presentation 7/4/2011.

2. Personal communication.

3. Minutes of the 8th meeting of the Maritime Group of the Helsinki Commission, Lubeck, 24/11/2009, p.6.

4. Personal communication.

5. Personal communication.

6. Ljungstrom, T (2010). “The environmentally differentiated fairway dues system”. www.sjofartsverket.se/pages/1024/fairway/%20dues.pdf

7. Bloor M, Pentsov D, Levi M, Horlick-Jones T (2004). “Problems of global governance of seafarers health & safety”. www.sirc.cf.ac.uk.

8. Paris Memorandum of Understanding on Port State Control (2010) Annual Report. www.parismou.org.

9. www.wilhelmsen.com/about/CorpSocResp/Environment/enviroinitiatives/Pages/emissions.

10. Personal communication.

11. Personal communication.

12. Minutes of the 8th meeting of the Maritime Group of the Helsinki Commission, Lubeck, 24/11/2009, p.8.

13. Organisation of Economic Cooperation and Development (1996) “Competitive advantages obtained by some shipowners as a result of non-observance of applicable international regulations”, Paris: OECD. Organisation of Economic Cooperation and Development (2001) “Short sea shipping”, Paris: OECD.

October 2011

Prepared 8th March 2012