FuelEU Maritime represents a strategic headache for shipping companies on the same level as its technical complexity. Senior management must evaluate the variables of different compliance options amid fluid economic parameters to make business-critical decisions – so an effective commercial strategy is vital to mitigate risk and manage outcomes, according to OceanScore.
“The fundamental novelty of FuelEU Maritime is not just its technical complexity, but the need for shipowners and managers to make multiple decisions, often based on unknown or changing parameters, and that these decisions can have significantly differing financial outcomes,” says OceanScore’s Managing Director Albrecht Grell.
This requires a proactive approach guided by a clear and well-informed strategy as decisions made today can have profound financial and operational consequences tomorrow.
According to the maritime data and technology firm, determining such a strategy depends on two intertwined considerations – selecting the most financially viable compliance route, and structuring fair and transparent contractual agreements between shipowners, managers and charterers.
Emerging best practices for compliance
Grell points out that paying the current FuelEU penalty of €2400 per ton of VLSFOe above the GHG intensity reduction threshold is “not a financially viable option”, both because it is three to four times more expensive than alternative compliance options and the penalty increases 10% annually with every consecutive year of payment, thus eroding thin operating margins.
Furthermore, the DOC holder – typically the technical manager – can be liable for heavy penalty payments due to a compliance deficit incurred by the charterer if these liabilities are not reimbursed under a worst-case scenario, given the ‘polluter pays’ principle does not apply with FuelEU.
OceanScore, with a team of 35 specialists focused solely on compliance and regulatory strategy, is seeing industry best practices emerge in terms of compliance strategy based on extensive analytics and interactions with leading shipping companies worldwide. These are based on three main strategic paths – compliance through bunkering of biofuels, procuring compliance surpluses through pooling, and banking surpluses for use in future years.
The use of biofuels has become the most prevalent strategy among companies with control over fuel bunkering, mainly using waste-based UCOME biofuels, according to the firm. When blended and procured in sufficient volumes, these fuels can ensure FuelEU compliance for a vessel or an entire fleet – assuming internal pooling – while also contributing to lower EU ETS costs.
Biofuel use has increased as concerns over technical compatibility in relation to engines and fuel tanks have diminished and availability at major bunkering ports has become less of a constraint.
Navigating variables and trade-offs
However, Grell says: “A strategy based on simply procuring surpluses by pooling with other shipping companies is legally as well as commercially viable – and in many cases appears advantageous versus a biofuel-based approach.”
He claims this offers comparable or better cost-efficiency than biofuels as increased use of the latter on fleets to generate surpluses has reduced demand for pooled surpluses, thereby lowering the cost of this compliance method that also benefits from significant flexibility around pooling in the regulation.
With current low prices for pooling, companies operating in the LNG and LPG trades that generate surpluses may view banking of these surpluses as the most viable option in anticipation of rising prices with higher pooling demand as thresholds tighten towards 2030.
Grell points out though that there are different variables and trade-offs that need to be considered in evaluating compliance strategies, based on factors such as the GHG intensity of specific biofuels, biofuel premiums, currency exchange rates, EU ETS phase-in dynamics and vessel deployment patterns.
“All these effects need to be understood and constantly monitored. Already complex decisions also need to be made under fluctuating price conditions and uncertainty. Any solid strategy should therefore be reviewed by senior management at least quarterly and adapted accordingly,” he says.
Complex web of contractual risk
The commercial and technical complexities of FuelEU are compounded by the contractual risk element as compliance responsibility and financial liability must be properly allocated to the responsible parties under robust agreements that mirror operational realities. A best-case set-up is when charterers reimburse owners, who then reimburse managers.
FuelEU clauses in Shipmans or charter parties are though not just about passing on costs and must also account for surpluses and deficits, while factoring in various pooling, trading and cash settlement options, according to Grell.
“Each generate risks for the involved parties and require careful simulation of possible scenarios and financial implications. Poorly drafted clauses could lead to unexpected losses,” he says, adding that leading players now employ detailed regulatory and financial modelling, as well as legal expertise, to navigate these regulatory challenges.
Simulating alternative strategies
OceanScore is supporting over 70 clients across five countries with its ETS Manager. In addition, the FuelEU suite launched last September incorporates the FuelEU Planner that simulates exposure under different operating patterns and compliance strategies, as well as the financial impact of charter party clauses, to precisely determine risks and opportunities and assess the optimal route.
Another element of this suite is the FuelEU Manager that has now been combined with the ETS Manager in the newly launched Compliance Manager, an integrated solution that enables shipowners, managers, and charterers to simulate, implement and manage compliance strategies across both the EU ETS and FuelEU Maritime. The soon-to-be launched FuelEU Marketplace tool matches demand and supply for compliance surpluses with no intermediary fees.
Grell concludes: “Every shipping company engaged in European trade needs to define its compliance strategy as the cost of not doing so is too high. There is a clear need for action in line with evolving regulation and, with pending global carbon intensity rules now on the horizon after the recent MEPC83 agreement at the IMO, OceanScore is staying tuned to regulatory changes to quickly adapt its solutions accordingly.”
Source: OceanScore
