Settlement Terms in Charter Party Agreements under FuelEU Maritime

FuelEU Maritime compliance brings new commercial challenges. While the regulation defines penalties and created a surplus trading market, it leaves open how owners and charterers should settle costs and benefits in charter parties. The result? A wide range of FuelEU addendums now circulating in the market. In today's newsletter, we shed light on the different settlement options.

General Recap: Charter Party Agreements under FuelEU Maritime

End of 2024, BIMCO released its standard FuelEU Maritime Clause for Time Charter Parties 2024 providing charterers and owners with a starting point for the required charter party addendums due to FuelEU. Decision power over compliance options and financial reimbursement represent the key factors in these addendums. BIMCO suggests that decision power over compliance options shall be with the owner if the charter period is less than one reporting period and with the charterer if the period spans across a minimum of one reporting period. Reimbursement is left open except for non-compliance in which case the penalty (surcharge) is applied. For further details about the BIMCO clause, please head back to our previous newsletter.

Settlement Terms under FuelEU Maritime

It is interesting but also understandable that BIMCO left the financial settlement terms open. The working group did not have a data backed view on the new FuelEU surplus market and lacked price information. Yet, the financial settlement terms within the FuelEU charter party addendums are the most discussed. A tremedous amount of variations exist in the market underlining that up until today no specific option prevailed as a market standard. So let's decipher the options!

Financial settlement terms should essentially mirror the cost of created deficit or the value of created surplus. The former can also describe as the cost of compliance. As described in a number of previous newsletters, we can distill the compliance options down to three available to all ships: (a) paying the penalty, (b) using biofuel, and (c) pooling.

Settlement based on the Penalty

Most straight-forward is the settlement at penalty level. This idea assumes that the responsible party after the reporting period decides to pay the full penalty and further allow for a 10% penalty increase in the following year. The penalty costs can be roughly set at about 640 EUR/t CO2e deficit. While straight-forward it can be claimed that it is unlikely that the responsible party will choose the most expensive option for compliance with the FuelEU Maritime regulation.

Settlement based on Biofuel

Another option to comply with FuelEU is biofuel. This option is available without retrofits but comes with previously described technical and availability issues especially when to be sourced cheap. Further, when looked at commercially, this option is exposed to market dynamics, more precisely the price of eligible biofuel. Therefore, settlement terms must refer to a corresponding biofuel index (e.g., Platts) to ensure accuracy. Note also that the timing of the settlement (or its calculation) may become relevant. Despite its increased complexity, this approach is favourable for the company paying the settlement as, at the moment of writing this newsletter, the compliance costs would roughly be around 330 to 340 EUR/t CO2e deficit instead of the previous 640 EUR/t CO2e.

Settlement based on Surplus Value

Lastly, the responsible party could opt for external pooling by trading surplus with another, over-compliant counterparty. This compliance option is completely without technical or sourcing challenges, but it does come with the complexity of an intransparent market. Similar to the above biofuel case, the surplus price is dynamic and the market new. Only thanks to BetterSea's FuelEU Index, stakeholders are now able to assess the current surplus price based on real executed trades. This allows for a settlement based on surplus value, which is even more favourable for the company paying the settlement as surplus is currently the cheapest compliance option at about 185 EUR/t CO2e.

Reimbursement for created Surplus

Similar to the above settlement options, created surplus can be reimbursed at (a) penalty levels, (b) cost levels relevant for surplus creation, or (c) the surplus price. Again, it is a question of data availability and the contract parties' interest.

Other Options

With the lack of data availability on surplus prices, especially in the beginning of the year, the market has created a few versions of preset settlement terms. Here, the charter party agreement simply sets a cost of compliance or a price of surplus usually located around 300 to 400 EUR/t CO2e. Often, such clauses are accompanied by a maximum which caps the reimbursement for created surplus to, for example, 100,000 EUR.

Summary: Settlement Terms under FuelEU Maritime

The settlement of FuelEU deficits and surpluses under charter party agreements is following the previous storyline of EU ETS addendums, proofing to be a tricky alignment execrise before compliance clarity is created. While BIMCO’s Standard FuelEU Clause provides a foundation, market practice shows significant divergence in settlement approaches, timelines, and correspondingly occurring costs.

BetterSea supports shipowners and charterers in this process through its monthly FuelEU Index, our FuelEU Pooling Platform, and our expert advisory services. Reach out to our in-house lawyer below if you need help with your charter party agreements!

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BetterSea's FuelEU Maritime Platform helps you find the best compliance pathway considering all complexities of FuelEU. Utilising alternative fuels can be tricky, or the fuels may simply not be available in the ports you sail to. Check out our FuelEU Pooling Marketplace for effortless and fast compliance. It provides you with a fast, streamlined, end-to-end process covering all potential compliance options, including external pooling and surplus trading. Book a demo below and get access afterwards!

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Stay tuned for more insights on navigating maritime decarbonisation compliance in our upcoming newsletters. If you have any questions or need further guidance, feel free to reach out!

Best regards,

The BetterSea Team

Contact Us: info@bettersea.tech

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