Maritime Environmental Law Update (November 2017 Edition)

November 7, 2017

As we near the end of 2017, we are providing this update on significant developments in regard to international environmental maritime laws and regulations.  Our prior update was issued in July 2017 and can be found here.  Ballast water management and treatment continues to top the list of concerns for ship-owners and operators.  State and local governments have stepped up their environmental efforts, even as the US federal government considers regulatory reforms aimed at easing the compliance burden.

International Developments

International Maritime Organization’s (IMO) Ballast Water Management Convention Goes into Effect

The International Convention for the Control and Management of Ships’ Ballast Water and Sediments (BWM Convention), as first adopted in 2004, took effect on September 8, 2017.  The BWM Convention requires ships to manage their ballast water to remove, render harmless, or avoid the uptake or discharge of new or invasive aquatic organisms and pathogens within ballast water and sediments.

Under the BWM Convention, ships over 400 gross tonnes generally must comply with a “D-1 standard,” requiring the exchange of ballast water only in open seas and away from coastal waters.  Ideally, this will occur at least 200 nautical miles from land and in water at least 200 meters deep.  By doing this, fewer organisms will survive, and ships will be less likely to introduce potentially harmful species into ports and coastal waterways.

The “D-2 standard,” which specifies the maximum amount of viable organisms allowed to be discharged, goes into effect immediately for new ships.  Compliance for existing ships will be based on the date of the ship’s International Oil Pollution Prevention Certificate (IOPPC) renewal survey, which must be undertaken at least every five years.  This means that all ships have to comply with the D2 standard between September 8, 2019, and September 8, 2024.

For most ships, compliance with the D2 standard will involve installing on-board systems to treat ballast water and eliminate unwanted organisms.  Costs are estimated at up to $5 million per ship.  More than 60 type-approved systems are available that meet the D2 standard. 

Shippers Consider Options for Meeting Low-Sulfur Fuel Standard

On January 1, 2020, a 0.5 percent global sulfur cap on marine fuel consumption will take effect.  Ship-owners will have limited options for meeting the new standard.  They can run on liquefied natural gas; be fitted with exhaust gas cleaning systems, better known as scrubbers; or switch from heavy bunkers to low-sulfur fuel.  Each option carries with it significant cost, and shippers are concerned that market dynamics won’t yield the additional revenue needed to fund the switch.  One estimate put the price to the maritime industry overall at $60 billion annually.  According to the International Chamber of Shipping, the cost of compliant low-sulfur fuel is currently about 50 percent more than the cost of residual fuel, and as demand for low-sulfur fuel grows after 2020, it is expected that the differential will widen.

While scrubbers are viewed by many as the low-cost option, others are concerned that continued use of high-sulfur fuel along with scrubbers will weaken the effort to make ships more fuel efficient. 

US Developments

Regulatory Reform Efforts Could Focus on Maritime Reform

A recent survey of leaders in the US maritime industry has identified regulations that they believe are ripe for reform.  The list includes ballast water treatment; air emissions; dredging and infrastructure; navigational safety issues as they relate to offshore energy development; duplicative or conflicting state regulations; local zoning and land use, and their impact on port property development; anchorages and safety zones; the Jones Act (allowing US‑flagged vessels to carry cargo between US ports); regulation of towing vessels; and the Transportation Worker Identification Credential program, particularly the proposed requirement to require electronic identification-card readers on all vessels. 

While the Trump Administration has indicated a desire to reduce the regulatory burden, it is unclear what regulatory efforts will be undertaken in the maritime arena and whether they will be successful.

Public–Private Partnerships Help Finance Port Development

In its 2017 Infrastructure Report Card, the American Society of Civil Engineers (ASCE) noted that ports are badly in need of certain critical improvements.  ASCE estimates that shore-side facility improvements will require $29 billion in expenditures through 2020, but estimates that only $11 billion will be available.

Ports have been increasingly looking to public-private partnerships (P3) to bridge the funding gap.  One of the more common financial structures is known as “Design-Build-Finance-Operate-Maintain,” where significant funding comes from institutional investors and construction risk stays with the private participants.  Operations and maintenance are often subcontracted to private concessionaires, and ownership, which may initially vest with private contributors, often eventually reverts back to the government.  While P3 is not typically enough to totally supplant government spending, it can provide sufficient resources to move infrastructure projects forward.

Green Port Efforts Pick Up Steam

Harbor commissioners for the ports of Los Angeles and Long Beach will soon consider a new clean-air plan that, if adopted, will make the complex a zero air pollution emissions operation.  Terminal operators and other port businesses are worried about the price tag—estimated at $14-16 billion—and whether the increased costs will make the port complex less competitive. 

About 40 percent of the container cargo imported to the US comes through the LA and Long Beach ports, which generate about $398 billion of economic activity a year and support one out of every nine jobs in the region, according to port officials.

The Clean Air Action Plan provides a framework for transforming the massive hub for freight-moving trucks, trains, and ships to cleaner technologies through 2035.  It will encourage the phase-out of diesel trucks in favor of natural gas and, ultimately, zero-emissions trucks and cargo-handling equipment.  Projections show most of the 17,000 trucks serving the ports becoming near-zero or natural gas-fueled by 2024.  Zero-emissions trucks would become the majority by 2036.  The plan requires that terminal operators begin deploying zero-emission cargo-handling equipment in 2020 with a goal of making a full transition by 2030.  It also calls for expanding the use of emissions-capturing devices to reduce pollution from docked cargo ships.

Other ports, including Hong Kong, have focused on voluntary commitments, particularly with regard to fuel switching while in port, from high-sulfur bunker oil to 0.5% sulfur diesel fuel.  However, this has put Hong Kong at a disadvantage with respect to ports in mainland China, where fuel switching is not promoted or required. 

Fuel switching is not without its problems.  California requires fuel switching to distillate fuels within 24 miles of the coastline.  This has led to an increase in loss-of-propulsion incidents.  No serious incidents have occurred as a result, and it is anticipated that marine engineers will develop improved procedures for fuel switching to avoid such incidents.

While efforts to reduce emission levels at ports continue, congested transportation systems outside the ports, particularly roads and railways, continue to exacerbate regional emission levels, encouraging many in the maritime industry to call for more balanced regional approaches to cleaning the air. 

Fuel Tankers Could Be Banned from the Hudson River

Petroleum tankers could be prohibited from entering or anchoring on certain parts of the Hudson River, under a bill signed on October 24, 2017, by New York’s Governor.

The bill allows the state to establish “tanker avoidance zones” in areas of the river that present navigational hazards, environmental risks, or meet certain other statutory conditions.  New York State would have to consult with the US Coast Guard (USCG) before establishing the restrictions.

Several oil-storage facilities and active ports could be affected by the bill.  The state intends to evaluate each case individually to determine whether access should be continued.

Ballast Water Treatment

As discussed above, the IMO’s BWM Convention entered into force on September 8 of this year.  In the US, the regulations, administered by the USCG, were already in place.  The regulations require compliance with the treatment standard at the first scheduled dry-docking after January 1, 2014, or January 1, 2016, depending on the vessel’s ballast water capacity, and at delivery for newbuilds.  Before any type-approved systems were available, the USCG allowed ship-owners to apply for an extension of their compliance date.  Now, there are five USCG type-approved systems.  The USCG has not removed the extension option for ship-owners, but obtaining an extension due to lack of type-approved systems will now be more difficult because ship-owners must prove that none of the systems available are suitable for their vessel.

Previously, vessels could receive an extension of five years by employing an Alternative Management System (AMS), normally an IMO type-approved system that had received an AMS approval from USCG.  At the end of the five-year extension period, if the AMS has not received USCG type approval, the AMS extension will not be automatically renewed.

New Maritime Technologies

Maritime Data Security

The USCG has released a draft cyber guide for maritime facilities.  Coming in the wake of the Petya ransomware attack on several maritime entities in June 2017, the draft Navigation and Inspection Circular, entitled “Guidelines for Addressing Cyber Risks at Maritime Transportation Security Act Regulated Facilities,” provides guidance on incorporating cybersecurity risks into Facility Security Assessments, and includes recommendations for policies and procedures that may reduce cyber risk to operators of maritime facilities.  (Posted July 12, 2017; available here.) 

The USCG efforts come in the wake of the IMO’s Maritime Safety Committee resolution requiring ship-owners and managers to incorporate cyber-risk management systems by 2021.  The guidance explains USCG’s interpretation of existing regulatory requirements under the Maritime Transportation Security Act.

The maritime industry—both onshore and offshore—is considered susceptible to computer malware attacks.  Often, attacks are not limited to the company’s main computer.  Some malware, once released, will attack any computer in any computer system that is unprotected.  Shipboard incidents, while still relatively few, have resulted in ship groundings and even a total shutdown of all shipboard operations, leaving the ship without the ability to even place a distress call.  Establishing cybersecurity governance protocols, providing proper employee training in cybersecurity, and promptly installing patches and other protective software appear to be the best defenses against a cyberattack.

Natural Gas as a Marine Fuel

Proposals to provide a “transitional period” for enforcement of the January 1, 2020, enforcement date for the global 0.5% sulfur cap were rejected at the July meeting of the IMO’s Maritime Environment Protection Committee (MEPC).  Ship-owners and operators continue to examine their options for meeting the impending sulfur-cap regulations deadline.  Options include liquefied natural gas (LNG), scrubbers, or low-sulfur fuels.  Natural gas is considered the cleanest option with respect to air emissions.

Litigation

First Circuit Revives Insurer Suit

The First Circuit partially revived Ironshore Specialty Insurance Co.’s dispute over subrogation claims in connection with a $2.8 million oil spill from a US Navy ship, stating that the lower court wrongly dismissed the insurer’s general admiralty and maritime claims against the government, as well as its Oil Pollution Act (OPA) claims.

The court acknowledged that, as a “public vessel,” the Navy ship was exempt from OPA.  However, OPA states that it does not affect admiralty and maritime law unless it expressly states otherwise.  The court determined that any preexisting admiralty- and maritime-law claim that applied to public vessels before OPA’s passage survives its enactment.  This will allow portions of Ironshore’s case to move forward.

The insurer contends that the Navy and the General Dynamics Corp. subsidiary, American Overseas Marine Co., are both responsible for the spill of 11,300 gallons of diesel fuel while the military cargo ship was being refueled under the care of the insured, Boston Ship Repair LLC, and both must therefore reimburse Ironshore for the $2.8 million it paid out for cleanup costs.

Barge Company Settles Massachusetts Oil Spill

After 14 years of negotiation, Bouchard Transportation Co., Inc., an oceangoing oil barge company, and the US Fish and Wildlife Service, National Oceanic and Atmospheric Administration, and the states of Massachusetts and Rhode Island signed a consent decree calling for the company to pay an additional $13 million on top of an earlier $6 million to restore bird populations.  The funds would be used to create a restoration plan for rebuilding bird populations that were harmed by the 2003 spill of 98,000 gallons of oil into Buzzards Bay, near Cape Cod.

Enforcement Actions and Civil Penalties

California Cargo Companies Fined for Excess Diesel Pollution

The California Air Resources Board has fined three shipping industry companies for failing to control diesel air pollution from their heavy-duty cargo handling equipment.  A fine of $726,250 was levied against Seaside Transportation Services, Penny Newman Grain Co., and CEMEX Construction Materials Pacific for excess diesel emissions from heavy-duty vehicles that move cargo and other equipment around California ports.  A significant portion of the fines will go toward reducing diesel emissions from school buses in California’s Central Valley, with the rest going toward the state’s general air pollution control fund.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Eric Rothenberg, an O’Melveny partner licensed to practice law in New York, and Bob Nicksin, an O’Melveny counsel licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

© 2017 O’Melveny & Myers LLP. All Rights Reserved. Portions of this communication may contain attorney advertising.  Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York’s Rules of Professional Conduct to O’Melveny & Myers LLP, Times Square Tower, 7 Times Square, New York, NY, 10036, T: +1 212 326 2000.