Considering the downside of scrubbers

Malcolm Latarche
Malcolm Latarche

10 July 2018


Over recent weeks there has been some heavyweight support thrown behind the option of installing a scrubber to meet the 2020 imposition of a 0.5% cap on sulphur levels in fuels. As well as some notable orders from the likes of Star Bulk, Spliethoff and Frontline, there has been mention of the competitive advantage they could confer from two well known shipping banks and also from shipbroker Gibson.

According to the latter it seems that time charterers are prepared to pay premium rates for scrubber equipped tonnage especially VLCCs. The same report also said that around a third of all new VLCCs will have a scrubber and 9% of all new orders will be built ‘scrubber ready’. Since the vessels built with scrubbers cannot by definition be scrubber ready that means the 9% actually becomes a little higher as they must be from the remaining 67-70% that will be delivered without scrubbers. Thus a round 40% of the newbuild fleet will be considered as premium vessels by time charterers. That number may even be higher since many scrubber contracts are not publicised.

There are a small number of tankers being built with dual fuel engines that will be able to run on LNG but presumably around half will be forced to use one of the new ultra-low sulphur fuels now in development or run on MGO.

The upside of scrubbers is of course that they allow running on low cost fuel and if fuel differentials remain as they are then a payback time of less than two years can be expected. There is a caveat – the payback time is based upon the differential price of fuels. When running on their owners’ own account the benefit will all accrue to the owner but the same is not true of time-chartered vessels.

The attraction to the time charterer of such ships is also that they can run on cheaper fuel, but while they might be prepared to pay a premium daily hire rate, they will expect to benefit from the cheaper cost. Therefore, the owner must be prepared for the premium to be only a part of the differential and not the whole – otherwise the attraction to the time charterer disappears.

When things go wrong

There are two main reasons often advanced for rejecting the idea of installing scrubbers and they are the possible future regulation on the discharge of wash water and uncertainty over availability and price of conventional HFO after 2020. Both are legitimate concerns although the first can be overcome by using a closed loop or hybrid scrubber and the second has been countered by the argument that producing more compliant fuels from crude oil will actually result in more oil being refined and a larger quantity of residuals being produced as a result. That discussion has yet to be resolved.

One argument that must be considered and which has yet received little coverage is the reliability of scrubbers and what can be done if they fail for any reason. Quite clearly a ship with a scrubber that is inoperative can only comply with the rules by burning MGO or some other compliant fuel that is on board at the time. If there is no such fuel, or insufficient quantities onboard, then the ship must continue on its voyage and resolve the situation at the earliest opportunity either by way of repairs or by taking on compliant fuel. This could be an expensive test for the owner although there may be some recovery under scrubber warranty. The danger would be if an unsympathetic port state chose to penalise the ship for something beyond its control.

There is a further issue at stake for the scrubber equipped ships that are operating under time charters. Any breakdown of the scrubber under these circumstances will inevitable result in the vessel being put off hire. Unlike a main engine problem that can be discounted while the vessel is in port or at anchor, if the scrubber is also allowing generators to run on HFO any failure will affect port time as well. If repairs are needed to the scrubber, then the time charterer may consider running on MGO in the meantime but will of course be looking for compensation for the extra costs involved.

Sharing the cost

It is very likely given the length of some time charters entered into, that the time charterer may negotiate with the owner and pay for the installation of a scrubber on an unequipped ship. The charterer will thus gain the full benefit of any fuel savings and the owner may also be contributing as well based on the fact that when the ship is redelivered it will eb more attractive to future employers.

If this does occur to any great extent, then owners will need to consider what protection they might need written into the charter party. Will the scrubber be considered as part of the ship’s equipment or not? And what will be the liability in case the scrubber fails and the owner is faced with penalties from port state authorities? Who will be responsible for maintenance and should crew be recompensed for any work they may need to do?

All of these points will need to be covered in charter parties and although they should be settled in early negotiations, the clauses need to be made watertight. In time some standard clauses will appear but until then owners, charterers and brokers will be drafting their own.