Member Article

The Framework

In its essence, the Fuel EU Maritime Regulation sets requirements for the well-to-wake greenhouse gas emission of the energy used on board vessels trading in the EU. The intention is to provide a step-based incentive to reduce GHG intensity from a baseline of 91.16 g CO2 equivalent per MJ. Lack of compliance with the applicable limit will lead to penalties, while a positive compliance balance may be used to offset another vessel’s deficit.

Information on Prior Performance

Subclause a) requires the Owners to inform the Charterers of the vessel’s compliance balance for the previous two reporting periods, as well as the aggregated balance for the current reporting period up to the date of delivery. Such information is necessary for the Charterers to evaluate their exposure to Fuel EU-penalties during the charter period.

It is important to note that the regulation imposes a multiplier on the penalty to be paid if the vessel operates at a deficit for consecutive reporting periods. Once we have one full reporting period in the books it will thus be important for the Charterers to have this information in mind already when negotiating terms, and not just on delivery of the vessel, as the clause provides for.

Monitoring Plan

Subclause b) is rather uncontroversial and provides that the Owners are responsible for ensuring that the vessel has a monitoring plan recorded in the Fuel EU database. This responsibility may be delegated to a third-party ship manager, but in relation to the Charterers, the Owners should always be responsible, as the clause provides for.

Provision of Alternative Fuel

Subclause c) allows the Charterers to achieve compliance by supplying fuel and energy, provided that such fuel complies with the agreed specification under the charter party and that it is accompanied by BDNs with the information required by the regulation. Depending on the vessel and the contemplated fuels, the parties may also need to consider the charter party provisions on fuel specification and any implications alternative fuels may have on speed warranties, requirements for tank cleaning and other operational requirements.

Reporting and Payment of Surcharge

Subclause d) includes two alternative intervals for reporting, whereby the Owners shall provide Charterers with the vessels’ aggregate compliance balance either on a per journey or monthly basis. The charter party period and the vessel’s intended trading area will likely determine what is most practical. The clause envisages Charterers paying a surcharge equivalent to the Owners’ exposure to the Fuel EU penalty, based on the reported compliance deficit, calculated as described in subclause e), and in accordance with the payment provisions agreed in subclause f). If the aggregated compliance balance is improved compared to the previous settlement period, the Charterers are entitled to a reimbursement in accordance with subclause g). If payments are not made as agreed, subclause h) stipulates that the Owners may suspend performance after providing five days’ notice.

The parties may agree that payment shall be made on a per voyage/monthly basis or upon redelivery or by 7 June each year, whichever is the earlier. The appropriate payment terms will in our view largely depend on the vessel’s expected overall compliance balance for each reporting period. For vessels that is expected to incur deficits during the reporting period, settling the score at regular intervals make sense to ensure the Owners are not left with a large unsecured liability at the end of the period. Conversely, any single month deficit on a greener vessel may not necessarily represent the same latent liability on the Owners, in which case end of period settlement may be more acceptable.

It is also worth noting that the Charterers may have the right to achieve compliance by pooling the vessel or borrowing a compliance surplus from a different reporting period. In such cases, no penalty would be imposed and any surcharges paid to the Owners shall be reimbursed in accordance with subclause k). To the extent such arrangements are anticipated at the start of the charter period, it may impact what is deemed to be fair payment terms.

Regardless of the terms agreed under these subclauses, it will be quite important for Charterers to have back-to-back provisions in any sub-charters. In particular, it may be reasonable to agree that the calculations provided by the Owners under the head charter shall be final and binding also for the purposes of the sub-charter.

Banking and Pooling

The regulation anticipates that a vessel may have a positive compliance balance by the end of a reporting period and such “excess compliance” may be utilized in several ways. It can be banked to be used against a future deficit, or the vessel can be pooled with other vessels carrying a deficit. As the Charterers are responsible for any penalties incurred, it is also reasonable that they reap the benefit of a positive compliance balance. Subclause i) sets out the conditions and requirements for these mechanisms.

It is important to note that the clause unamended only allows for banking and pooling if the charter period covers a full reporting period, i.e. a calendar year. This is because it would be difficult to apportion such rights between multiple charterers and indeed because the vessel can only participate in one pool for a given reporting period. That said, there is nothing preventing the parties to shorter charter parties from making such arrangements, but these clauses need to be carefully tailored to fit each purpose.

If the Charterers are not to have the right to bank or pool positive compliance balances, it is reasonable that they receive compensation from the Owners for the benefit of its compliant operation. Subclause m) addresses this situation by prompting the parties to agree on a fixed rate for positive compliance. This is a reasonable attempt to tackle an issue that is likely to see several bespoke solutions, but it comes with some noteworthy challenges.

It remains to be seen how effective the market for pooling of compliant vessels will be, but presently it is not obvious how to one would arrive at a price for compliance. The corresponding penalty may be a reasonable starting point, but the multiplier for consecutive non-compliance and indeed the supply/demand of compliant vessels will also be relevant factors. Furthermore, the Owners may be hesitant to front the cost of a not yet unrealizable compliance balance and correspondingly, the Charterers may not be content with extending the same credit to the Owners.

Borrowing

As we have already touched upon, a vessel may achieve compliance by borrowing an anticipated surplus from a future reporting period. Under subclause i), the Charterers may only borrow if the following reporting period falls entirely within the charter period. One could technically envision variations to this principle in the same manner as for pooling, but there will be less incentive to do so as one would merely defer liabilities for which a price and settlement mechanisms are then required.

Liquidated Damages

Subclause i) only applies if filled in and is proposed as a solution to the fact that the payment of penalties does not offer full compensation for the adverse effect of several consecutive periods of non-compliance. Since future penalties will be subject to an ever-increasing multiplier for each year of non-compliance, the Owners or new Charterers will to some extent bear the burden of previous years of non-compliance. Calculating this effect will however be quite challenging as the multiplier is an interest element on a future penalty that is not yet known.

Onshore Power

The final subclause is only relevant to container and passenger vessels, which from 2030 will be subject to the requirement that they are fitted to utilize onshore power.

Concluding Remarks

The BIMCO clause is a well drafted starting point for dealing with the issues arising from the Fuel EU Maritime Regulation. There are nevertheless several areas where different solutions can be envisioned and, in particular for shorter charter periods and greener vessels, the parties still need to give careful consideration to how a compliance surplus shall be dealt with.

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