International law in jeopardy from EU

There are countless arguments against the EUs unilateral action to bring forward the internationally agreed phase-out dates of single hull tankers. Intertanko, the representative body for independent tanker owners, has heard them all. But one seems to raise its ire more than others.

“The flouting of international law is a major concern to us,” explains Peter Swift managing director of Intertanko. “Most owners fear moving into a world where rules can change and destabilise the environment.”

A major concern, according to Swift, is that EU member nations will have to denounce their Marpol treaty obligations if Europe goes ahead with its plans. Furthermore he can see potential for government’s taking subsequent unilateral action, destabilising the international law of the sea framework still further.

If the EU pushes ahead with implementation of an accelerated phase-out without IMO backing, a single-hull oil tanker will still be able to load oil in Russia, for example, and come within a close distance of EU member states’ coastlines. The reaction, inevitably, would be for individual nations to force such ships to sail outside their 200-mile economic zone.

However, in the world of politics, which is the mire in which the shipping industry currently finds itself, such actions against individual nations and their commercial concerns rarely go unanswered. A tit-for-tat response could be for the nation acted against to retaliate by, for example, excluding ships carrying EU nuclear waste from its economic zone – a wholly unsatisfactory situation given the nature of the cargo and the need to maximise safety by staying relatively close to shore.

Swift clings to the hope that Europe, while likely to pass its proposals into law in the next few weeks, may suspend the legislation to give IMO the chance to catch up – the earliest date at which IMO could approve any amendments is the MEPC meeting in December. However he also recognises that IMO may not pass into law a phase-out timetable that Europe is satisfied with, meaning European law still diverges from international law in the way that US law did post-Exxon Valdez.

“This has the potential to lead to dispute after dispute after dispute,” says Swift.

He also raises the question of how banning single-hull tankers will impact the dynamics of fleet usage. A lot of flexibility will be removed from the transport system if single-hull tankers can operate in one part of the world, but not another, points out Swift. He agrees that in response to this many traders and big oil companies have seen that they have to position to the changed dynamics and reduced flexibility – for example, through increasing the fleet under their direct control.

Swift recognises that law needs to be dynamic to respond to changing times. However he is adamant that as far as shipping is concerned the dynamism should not come from individual nation states. “The international shipping community is very determined that there is full cognisance of international law,” he says.

As to the proposals themselves, Swift can empathise with Europe particularly as they relate to the carriage of heavy fuel oils. However he expresses bitter disappointment with Europe over the fact it drew up the proposals without undertaking any detailed analysis of their impact.

On the shipbuilding side he points to a “cliff effect” in the sense that while yards have the capacity to meet replacement demand post phase-out to 2010, most of that demand will concentrate on the end of the period. To get ships built many owners will have to accept deliveries in 2007, 2008 and 2009, when their preferred date is 2010, if shipyard capacity is to deliver what is required to replace the phased-out fleet. This can have a substantial negative impact on the company’s balance sheet.

On the scrapping side there are supply concerns, not to mention how group’s like Greenpeace will handle what they will see as a positive: the banning of single hull tankers; with what they will undoubtedly see as a negative: the increase in ships heading for scrapping facilities on the Indian sub-continent. Scrapping prices may tumble and many owners may put their ships into lay-up rather than accepting deflated scrap prices. The insurance industry will also keep a keen eye on casualty rates post phase-out. Some owners may seek to convert their single-hull tankers for other uses, such as offshore or mariculture, but the opportunities are limited.

Swift says an owner’s ability to make returns is dependent on an initial set of assumptions relating to the business environment of the time. Law changes such as this, which mean some ships built assuming a 25-year earning life may be phased out after 15 years, can affect a company’s business and its relationship with bankers, investors and boards who have bought into a project based on the initial set of realistic assumptions they were presented with.

This though is the case however new laws are applied – by IMO or by the EU. But, while this argument doesn’t necessarily stand up to scrutiny, many others do and Europe would do well to listen to them. Otherwise it could find itself being taken to court by an IMO member state unsympathetic to the accelerated phase-out proposals.