According to maritime data analyst OceanScore, shipping companies must evaluate a range of compliance options under FuelEU Maritime that can have a significant financial impact if not managed properly.
Continuous forecasting is essential for an effective compliance strategy in order to manage risk and costs arising from different operational and price scenarios with variable parameters.
OceanScore MD Albrecht Grell said: “The entry into force of FuelEU is once again transforming the way emissions data must be managed —often in ways not yet fully understood by the industry. This regulation is not merely about efficient processes and transparency; it is about making informed decisions.”
After more than a year of implementation, the EU Emissions Trading System (EU ETS) has underscored the fact that incorrect data comes at a cost because this can lead to disputes with charterers and customers over the volume of EUAs, or carbon credits, to be surrendered, resulting in unnecessary compliance liabilities. Consequently, many companies have made significant investments in data management systems and data quality to establish efficient administrative processes and monitoring routines so that they can gain better control over their financial exposure.
But Grell points out that FuelEU represents a more dynamic challenge than just data management as it requires commercial decisions to be made on options such as fuel switching, pooling, banking and borrowing of surpluses to optimize compliance commercially as well.
Grell added: “These decisions can have substantial financial implications and must be made under uncertainty, given that key economic parameters continue to fluctuate. This goes beyond financial reporting obligations, and is making precise forecasting a commercial necessity.”
Factors such as biofuel price spreads, prices for FuelEU compliance pools, USD/€ exchange rates, deployment patterns, the phase-in of EU ETS, and charter-party clauses agreed with different charterers require constant monitoring and fine-tuning.
Grell said: “The need for agile shifts between biofuel-based and pooling-based compliance strategies, as well as the decision to bank surpluses for future years if prices evolve favourably, presents a new challenge for executive teams in shipping.”
OceanScore is supporting customers globally with expertise and tools to navigate regulatory complexity and optimise compliance, and has outlined three forecasting horizons – budgeting, continuous forecasting as the year progresses and charter-party risk simulations.
Budgeting is seen as the most common forecasting horizon as it aligns with existing processes, but annual planning must exceed simply providing figures for a budget due to the complexities of compliance options and uncertainties surrounding the most commercially viable path.
Grell said: “A comprehensive compliance strategy must align with the company’s broader strategic objectives. Additionally, thresholds must be set to determine if and when a shift in compliance strategy is necessary.”
For example, a strategy could involve burning B30 biofuel on a certain number of vessels to achieve neutral compliance for the fleet. However, if a pooling-based strategy becomes significantly more cost-effective, the executive team may decide to switch strategies. Keeping track of biofuel spreads and prices for commercial pool slots to re-evaluate the analysis based on budgetary parameters would be part of such an agile strategy.
Forecasting in relation to compliance can be affected by changing patterns of deployment, such as a vessel that uses biofuels being redeployed to a non-European trade route, or other vessels trading in Europe generating a larger compliance deficit than anticipated. Continuous forecasting is therefore necessary, particularly in the latter half of the year, to prevent hefty penalty payments of as much as €2400/Mt of VLSFOe if above the FuelEU thresholds.
Grell said: “Expected compliance surpluses can evaporate if deployment patterns shift, or surpluses may emerge unexpectedly if a charterer alters its bunker strategy. Such surprises can be costly — and certainly not the kind that investors and lenders want to hear about.”
Simulations of different scenarios are required to mitigate the risk of FuelEU clauses in charter parties by addressing complex issues such as the price applied to compliance deficits caused by the charterer, costs for the owner if a charterer opts for pooling or compensation due from the owner to charterer if the latter generates surpluses by switching to biofuels.
This requires a comprehensive understanding of FuelEU mechanics, access to relevant pricing data, and the necessary tools to ensure that charter parties do not turn into financial traps.
Grell concluded: “FuelEU Maritime entails far more than budgeting, forecasting, and simulating. However, the need to develop new skills and routines in these areas underscores the extent to which FuelEU is reshaping best-practice compliance strategies.”
Image: Ship deployment patterns represent a key factor affecting FuelEU compliance costs (credit: Shutterstock)
