Costs and Values of Fuel Deficits and Surpluses

21st August 2024

FuelEU deficit costs should belong to whoever paid for the fuel. But, likewise, so should the value of any surplus.

A modern LPG DF vessel sails on time-charter from the US to the EU.

In LPG-mode, this vessel will burn around 30mt per day of LPG and 6mt per day of LFO as pilot fuel. LPG has a carbon intensity of 73 gCO2eq/MJ, well below the 2025 target of 86 gCO2eq/MJ. LPG-mode will generate a potential €7,000 per day in FuelEU compliance surplus.

To whom does this compliance surplus belong?

On a time-charter contract, the charterer decides the fuel, pays for the fuel, chooses the vessel’s destination, and, if that vessel goes to Europe, pays the EU ETS. It makes perfect sense, therefore, for the charterer to also bear the costs of any FuelEU deficit. This is, after all, is a levy on the fuel itself (rather than the absolute emissions).

However, there does seem to be pushback from shipowners/DOC-holders who argue that, as the ultimate compliance entity (and therefore the party “at risk”), they are entitled to the surplus.

Imagine, then, after negotiations, the shipowner/manager agree to accept all FuelEU deficits and surpluses generated by the vessel.

How will this turn out?

Firstly, the charterer has no incentive to pay for more expensive, cleaner fuels. In fact, the charterer is incentivized to burn the cheapest and dirtiest fuel available for the dual-fuel vessel – and to let the owner/manager foot the environmental bill. If dirty bunker fuels are cheaper than LPG, LNG or biofuels, charterers should use them. This is both entirely against the spirit of the regulation and will become increasingly expensive for the owner/manager over time as the penalties increase.

Secondly, many fuels that are currently below the target will not remain so. Take low-pressure 2-stroke LNG-Cs, for example. By 2035, burning LNG in these vessels will create a deficit. If a newbuild coming onto the water next year sails for 25 years, the majority of the vessel’s life will be in deficit. Moreover, whatever surplus there is in the first 10 years decreases over time. Whatever deficits there are over the next 15 years only increase… So, an owner/manager that argues for the benefits of the surplus today will be stuck with the deficit for years to come.

It is in all parties’ interests, therefore, that the entity choosing and paying for the fuel is responsible for any surpluses or deficits that fuel generates. Unless this is the case, there will be no industry drive towards alternative fuels which, lest we forget, is the entire point of this regulation…

But say the charterer does “receive the surplus” after opting for low-carbon fuels. What does that actually mean? How can it be converted into cash?

To find out more, please get in touch with us.

Our FuelEU Maritime Exchange will be launching later this year.

Email: fueleu@hecla-em.com

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