Alternative Fuels: Shaping Future Shipping Charterparty Clauses

Recent news reports have announced that Maersk has joined Lloyds Register and Core Power to review the safety and regulatory considerations for a potential next-generation nuclear-propelled feeder containership. Potentially, this would add a further alternative fuel source to the current list:-

LNG and bio-LNG
LPG
Ammonium
Methanol
Wind
Biofuels
Hydrogen
Ammonia
Batteries.

At the moment it is estimated that about 5.5% of the global fleet is using an alternative power source to light fuel oil. Some commentators have estimated that by 2030, about a quarter of the energy used by European ships could come from that fossil gas.

The traditional time chartering market is based upon charterers paying the owners for the fuel on board a ship at the point of delivery, and then rebunkering the ship before redelivering it back to the owners. The charterers are involved in the choice of supplier and the location from which the bunkers will be loaded, as well as the price paid for the bunkers. The emergence of different types of fuels arguably raises more challenges for charterers and potentially more risks for owners in those re-fuelling exercises.

With the increase of specialised and alternative fuels which can not often be purchased “off the shelf” and can only be loaded at certain fixed points and places – there may be a forthcoming debate about which of the parties in a traditional time charter should be bearing the responsibility and risk issues associated with alternative fuels, for particular types of ships.

Traditionally, most shipowners have a myriad of charter clauses to allocate the risk of heavy and light fuel issues to a charterer based on the traditional allocation of risk.

In 2022, BIMCO announced a suite of clauses for ships on charter using LNG on dual-fuelled ships:

LNG Fuel Operational Clause
LNG Fuel quality clause for Time Charter Parties
LNG Fuel Gas Freeing and Cooling down clause
LNG fuel delivery and redelivery clause.

The LNG market has an impeccable safety record but it is a specialised market with owners and charterers within it whose vessels and sale contracts only deal with LNG. Imposing obligations on a charterer to supply fuel to a vessel, who are involved in carrying, buying and selling LNG for its own account and third parties, may not require a lot of adaption, to the traditional risk allocation in a time charter.

Fuel quality and fuel quantity issues in charter parties are not unusual.

It does not take very much for an LNG cargo to become a problem fuel, as anybody who has had to deal with an urgent gas-freeing issue will testify. There is a risk of explosion and fumigation, and, of course, gas freeing – cannot be done just anywhere. An investigation into an explosion at the Freeport LNG facility in Texas, USA, in 2022 blamed inadequate operating and testing procedures and human error. The explosion caused global LNG prices to spike. LNG itself can be contaminated by hydrocarbons, hydrogen sulphide (H2S), carbon monoxide and mercury.

The LNG market is well established and in North West Europe there are at least 58 LNG bunkering locations – which can also be adopted for bio-LNG operations. In a standard off-specification claim for bunkers – a shipowner can isolate the bunkers on board the vessel and make arrangements to discharge the fuel as and when necessary.

However, there is increasing pressure to adopt other alternative fuels such as hydrogen and e-ammonia, which move away from the fossil gas LNG.

From a practical point of view, there is going to need to be a substantial increase in the range of types of charter party clauses for different sections of the market as companies develop and focus on their chosen alternative fuels, including, perhaps, a Nuclear Fuel Quality clause for Time Charters. The scarcity of bunkering locations for competing types of fuel will no doubt play a role in the development of time charter clauses for alternative fuels in the future and the responsibility for supplying those fuels to ships.