The FuelEU Maritime Regulation introduces additional complexity in both charters as well as SHIPMAN contracts. With BIMCO’s recently published FuelEU Maritime Clause for Time Charter Parties and the approaching end of 2024, the industry is now facing discussions and negotiations for exactly these clauses. This not only elevates the actuality of the regulation’s legal framework but also the internal strategies for compliance that are strongly influenced by those considerations.
Building on our newsletter from 26th August, this week’s newsletter dives into different charter setups and periods under the newly released BIMCO clause and explores the impacts on compliance strategies, the division of responsibilities, and the operational challenges.
Key Chartering Setups and Their Implications Under FuelEU
The maritime industry came up with many different charter setups. While these are highly individual, the following three categories shall help generalize their implications under FuelEU Maritime. It is assumed below that the owner (even if not ISM company) has to manage compliance as per the agreement in the corresponding SHIPMAN contract, for which the BIMCO draft is expected in the upcoming weeks.
Voyage Charters
Under a voyage charter, the owner charters out the vessel under pre-agreed terms (e.g., route or cargo) for a particular voyage. The owner keeps responsibility for the fuel supplier and other operational responsibilities. The status of the ISM company is not transferred to the charterer.
Legal Considerations: The owner is fully responsible for compliance. Charterers may face an additional surcharge.
Bareboat Charters
Under a bareboat charter, the owner transfers full operational and technical responsibility to the charterer for a long period. Typically, the status of the ISM company does not remain with the owner.
Legal Considerations: This may be treated as a long-term time charter in which the charterer receives decision power over the FuelEU compliance options.
Time Charters
Under a time charter, the owner charters out the vessel to an operator who takes over the operational responsibility of the vessel for a set period, it is a time-bound agreement. It is often further distinguished between short-term and long-term time charters. Charterers typically assume responsibility for supplying fuel to the vessel, but in almost no cases assume the status of an ISM company.
Legal Considerations: Charterers may receive decision power over FuelEU compliance options depending on the length of the time charter. The exact responsibilities and risks are explained in more detail in the next chapter.
Pooling Considerations for Various Chartering Setups
Depending on the chartering setups, pooling comes with different benefits and risks:
Status | Risks | |
Time Charters | Depending on the charter period, charterers may be able to trade surplus. | Pooling rights for charter periods shorter than the full compliance year or spanning across incomplete compliance years must be handled carefully. |
Voyage Charters | Owners retain control over surplus allocation and trading. | Charterers will have no influence over pooling but might be exposed to a FuelEU surcharge. The definition of compliance cost in this surcharge is crucial. |
Bareboat Charters | Charterers will likely be able to trade surplus. | Alignment with ISM company (if not transferred to charterer) |
Time Charters and Chartering Periods under FuelEU Maritime
The BIMCO FuelEU Maritime Clause highlights the importance of charter period length in determining how responsibilities for compliance actions are allocated. The charter period length is a crucial aspect to consider in the FuelEU charter clauses. Again, it can be distinguished between three categories that differ based on their coverage of a Reporting Period, defined by BIMCO as:
"Reporting Period" means a period from 1 January to 31 December of the year during which information referred to in FuelEU Maritime is monitored and recorded.
Long-Term Time Charters (Minimum One Reporting Period)
For simplicity, this case assumes the coverage of full (minimum one) reporting periods. As per the BIMCO clause, the charterer receives decision power over the trading or banking of surplus. The transfer of decision power is reasonable, considering the charterer’s influence over the vessel’s compliance status in this particular reporting period, and allows the charterer to choose the most cost-effective compliance option.
(i) If the Charter Period covers a complete Reporting Period, the Charterers shall have the right to instruct the Owners to bank or pool any Compliance Balance in accordance with FuelEU Maritime. (…)
This also creates an inheritance risk for charterers if the vessel paid penalties or borrowed compliance balance in the previous reporting period, especially considering the multipliers applied under FuelEU Maritime for such cases.
If the long-term charter spans across a minimum of two consecutive reporting periods, the charterer is further empowered to decide upon borrowing compliance balances.
(j) If the Charter Period covers at least two consecutive Reporting Periods, the Charterers shall have the right to instruct the Owners to borrow from the following Reporting Period provided the following Reporting Period falls entirely within the Charter Period. (…)
Long-Term Time Charters (Non-Integer Reporting Periods)
This refers to a specific but common case in which the long-term time charter spans across full (minimum one) reporting periods but also ‘non-full’ reporting periods. A practical example is a vessel that is taken over by a new charter party on a 3-year charter contract in May.
It would be reasonable to transfer decision power over FuelEU compliance options to the charterer as outlined above but bears the risk of assigning two charterers with the same abilities during one reporting period (the final and initial one). This is especially complicated for pooling as the pooling rights might potentially be shared across multiple stakeholders for overlapping periods, which is not recommended. Further, borrowing compliance surpluses from future periods may be restricted if the following reporting period falls outside the charter duration.
BIMCO’s clause does not provide clear guidance on such cases, but the previously cited (i) points towards the implementation of a ‘transition period’ during which the owner remains with the decision power over compliance options for the reporting periods with two long-term time charters. It would be handled similarly to short-term time charters.
Again, inheritance of compliance status from previous charter periods bears a risk for all parties involved both owners and charterers, and must be paid particular attention to in such transition periods.
Short-Term Time Charters (Less Than One Reporting Period)
Any time charter with a duration of less than one full reporting period falls under this category. The charterer does not receive any decision power upon FuelEU compliance options such as pooling. Instead, the owner is required to report the vessel’s compliance balance on a per month or per voyage level and is entitled to a surcharge.
(d) Within the first fifteen (15) days [of each month/after each Voyage]* and upon redelivery, the Owners shall notify the Charterers in writing of the aggregated Compliance Balance of the Vessel incurred during the Charter Period in the then current Reporting Period. If the aggregated Compliance Balance has a negative value, the Owners shall provide to the Charterers the calculation and independently validated information used in the calculation of a surcharge equal to the FuelEU Penalty expected for that previous month or that Voyage (whichever applies) and upon redelivery (the Surcharge). (…)
The explanatory notes further outline information regarding the surcharge itself:
The surcharge(s) represents the owners’ exposure to payment of the FuelEU penalty and should follow the aggregated compliance balance since both elements are dynamic.
This may be seen as critical by the charterer as the owner may also decide to pool the vessel at a lower cost than the actual FuelEU penalty, which alludes to a general problem of any FuelEU charter clause, the definition of compliance costs.
The Definition of Costs and Benefits Under FuelEU Maritime
All stakeholder interactions that include reimbursement for either created deficit or surplus will face the question of pricing. As explained in various previous newsletters, the main available options for compliance for FuelEU can be categorized as (a) paying the penalty, (b) pooling, and (c) alternative fuels. When considering a reimbursement, the main question is how to price any of these options.
Paying the penalty is straightforward. The FuelEU Maritime regulation sets the penalty at 2400 €/t VLSFOe. Alternative fuels can also be considered somewhat straightforward, although their pricing is not as clear as fossil fuels. Options could be to include a UCOME index in the clause. Lastly, the value of the surplus and, as such, the price for pooling remains hard to assess but might be the cheapest option for compliance.
Especially, in cases in which a surplus is created during a charter period, the reimbursement for such a surplus and its value will be hard to define. BIMCO’s clause left this open in (m):
(m) ***If the aggregated Compliance Balance incurred during the Charter Period for any Reporting Period is positive, the Owners will pay the Charterers a sum equal to [insert currency and amount] per tonne of CO2 equivalent of positive Compliance Balance (remaining after any banking and/or pooling) up to a maximum of [insert currency and amount] within [X**] days after 30 June of the corresponding Verification Period or upon redelivery (whichever is earlier).
Key Considerations for Chartering Under FuelEU Maritime
Chartering under FuelEU Maritime requires alignment and consideration of several key aspects, whether companies decide to use BIMCO’s clause or draft their versions.
Pre-Charter Compliance Balance: Validated FuelEU compliance balances must be shared when chartering a vessel from 2025 onwards. Pricing of previous deficits or surpluses must be considered.
Compliance Balance during Chartering: Owners must provide the vessel’s compliance balance with a pre-defined frequency, e.g. per voyage or month. Note, that timely reporting might be influenced by delay in delivery of the fuel’s Proof of Sustainability (PoS), which can take up to 90 days.
Previous Compliance Periods: Chosen compliance options in previous reporting periods might influence compliance in the current reporting period. First and foremost, borrowing and penalties and their related multiplier effects.
Reimbursement: In charter setups in which reimbursement between the parties is reasonable, the exact value of reimbursement both for deficit as well as surcharge cases must be defined, considering all potential compliance options and scenarios.
Pooling, Banking, and Borrowing Rights: It is crucial to outline the ownership of surplus or deficit and as such the right to pool for a minimum of one full reporting period. Particular emphasis must be laid on the above-described ‘transition periods.’ Further, the right to bank and borrow must be assigned. Note that in the event of a transfer of rights, the banked surplus remains with the vessel rather than the responsible party of a specific period.
Conclusion
Charter contracts under FuelEU Maritime introduce complexities that require careful coordination among counterparties. Compliance data visibility specific to FuelEU Maritime throughout the full reporting period and beyond across different responsible entities and stakeholders is key to making the right decisions, maintaining compliance, staying ahead of reimbursements, and managing rights.
BetterSea’s FuelEU Maritime Compliance Platform with integrated marketplace provides exactly this to help you streamline your chartering process and ensure that you have full visibility of the ship’s compliance status across all relevant counterparties. Book a product demo to explore BetterSea’s FuelEU Compliance Platform below!
Stay tuned for more insights on navigating these complex challenges in our upcoming newsletters. If you have any questions or need further guidance on your charter contracts, feel free to reach out!
Best regards,
The BetterSea Team
Contact Us: info@bettersea.tech
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