As part of a concerted move by the shipping industry community to reduce the environmental impact of shipping, the International Maritime Organization (IMO) has introduced regulations to reduce sulphur oxides emissions. These regulations require ships operating outside designated emission control areas to burn marine fuel with a limit of up to 0.5 per cent sulphur content by January 1, 2020, or install scrubber units into exhaust stacks to continue to burn High Sulphur Fuel Oil (HSFO) bunkers. As a result, the financing of scrubber units alongside other emissions technology is an increasingly important topic and this blog sets out some of the key issues in what remains a relatively novel asset class for financing.
Scrubber units are one of the more prominent emissions technology options that aim to reduce component gases such as nitrogen and sulphur oxide in exhaust emissions from vessels. Marine scrubber units remove sulphur oxides from exhaust emissions in part by mixing these exhaust emissions with a water-based solution. Generally, scrubber units come in one of three forms: open, closed and hybrid. Open systems take on and discharge seawater. Closed systems use a freshwater solution in the ‘scrubbing’ process before discharge into the sea. Hybrid systems have both capabilities. In the process of treating the solution, prior to discharge, sludge is created and this sludge must be retained onboard before disposal onshore.
The cost of fitting scrubber units will vary based on whether they are retrofitted or installed onto newbuilds, but most analysts expect these costs to be recouped within several years of fitting. An important consideration for these assumptions will be the availability of HSFO bunkers and the price spread of high and low sulfate bunkers, which will be a key factor for the expected returns on scrubber units. As scrubber unit technology becomes more cost efficient and improves over time, the installation of scrubber units may become an increasingly attractive option.
Regulation 14 of Annex VI of the MARPOL Convention sets out the lower sulphur oxide emissions requirements that must be met by the beginning of 2020. Scrubber units and ancillary monitoring equipment should be approved by the Flag Administration before installation. Discharged water is to be monitored and recorded, but there are two approaches to performance monitoring:
1. scrubber units undergo an initial test and are certified and are continuously checked to ensure they are within operating parameters, as well as undergoing daily exhaust emission monitoring, or
2. scrubber units undergo continuous exhaust emission monitoring and daily checks to ensure they are within operating parameters.
In practice, the former approach is less intrusive with manufacturers offering the option of undertaking product range approval as certification from that option ensures less intrusion.
There has been an increase in the amount of interest in this area of the market as we near 2020. Banks, too, are increasingly attracted to “green” finance options. As well as traditional lending directly from lender to vessel owner, there has also been some interest in lease financing. For all parties, key issues to consider include:
• Form of security allowed over scrubber units in the relevant jurisdiction
• Requirements for enforcement of security (such as a mortgage) over scrubber units
• Rights of a lender/lessor to arrest a vessel on which a scrubber unit is installed
• Any further rights available to a lender/lessor in the relevant jurisdiction
• Suitability of proposed security and financing documents
• Interaction between separate security/mortgages over scrubber units and vessel
• Ability of lender/lessor to retain title to scrubber units
• Additional actions that could be required to enhance retention of title to scrubber units
• Requirements for any additional notices or consents
• Intention of parties on further action at end of lease/loan period
• Practical considerations, for example, costs of removing scrubber units installed on a vessel
• Legal position of the holder of title to the scrubber units in the event of enforcement action against the vessel owner.
With the IMO 2020 deadline looming, many shipowners are keen to fit their vessels with scrubber units, an attractive option given their relatively low cost compared with the price volatility of bunker fuels. Financiers, too, would be well placed to partner with shipowners and facilitate these installations by having an awareness of the legal and commercial considerations involved with scrubber financing.