FuelEU Maritime Compliance Pooling – the next pinnacle of complexity in shipping’s decarbonisation transition

FuelEU Maritime is considered to be one of the most complicated and technically challenging pieces of maritime decarbonisation legislation. Pooling, a flexibility mechanism embedded into the regulation, offers a novel route to compliance, while presenting potential risks and opportunities to counterparties active in the shipping space.

 

Commercial pooling is well-established within the shipping industry. However, so-called “compliance pooling” is an entirely new and distinct approach utilised in the FuelEU Maritime regulation. It serves as a means of achieving compliance, while also providing flexibility, by allowing for a market mechanism that enables vessel pool participants to share the cost of bunkering fuels with a lower greenhouse gas (GHG) intensity.

 

FuelEU Maritime came into force on 1 January 2025. Under this EU regulation, ships above 5,000 gross tonnes calling at European Economic Area (EEA) ports must reduce GHG emissions (carbon dioxide, methane, and nitrous oxide) intensity by 2% in 2025, or risk paying a penalty for the shortfall. For intra-EU/EEA voyages, 100% of the energy used by a ship (including the vessel’s time at sea and at berth) is covered by the regulation, while for extra-EU/EEA voyages 50% of the energy used by the ship is covered. Under the regulation, GHG intensity reduction targets will increase every five years until 2050.

 

Due to their energy intensity profile, it is unlikely that vessels exclusively using Very Low Sulphur Fuel Oil (VLSFO) or Marine Gasoil (MGO) on trading routes covered by FuelEU Maritime will be able to meet compliance requirements. Instead, vessels can switch to lower GHG intensity fuels such as bio-LNG, eligible biofuels and Renewable Fuels of Non-Biological Origin (RFNBOs). These fuels, to varying degrees, are likely to exceed FuelEU Maritime’s GHG intensity reduction target, creating a so-called compliance surplus, which can be traded in a compliance pool in order to spread the risk and higher cost of utilising compliant fuels between pool participants. Numerous FuelEU Maritime compliance pools are understood to have been established, although some of them are noted to be “internal pools” within the same beneficially owned fleet to meet their own vessels’ FuelEU Maritime compliance obligations.

 

FuelEU Maritime compliance pooling can take place between two or more vessels of any type and/or size and is permitted between vessels with different owners and/ or different document of compliance (DoC) holders (see below). This has seen the formation of third-party compliance pool managers. These third-party compliance pool managers may be relatively new market entrants with software platforms that broker compliance trading (buyers may also pay an admin fee for participation) while providing other back-office tasks such as real-time monitoring of compliance balances, supporting EU-mandated verification processes and providing contractual frameworks necessary to transfer responsibility from the DoC to another entity if required.

 

Under the regulation, the DoC holder (likely the vessel’s technical manager, registered owner, or bareboat charterer) on record as of 31 December is responsible for FuelEU Maritime compliance for a full calendar year, irrespective of the DoC holder having held the position for the period. Therefore, contractual arrangements are being forged that enable the DoC to transfer the indirect responsibility for compliance to other entities including current and previous registered owners, who in turn, would be passing on the obligation to time charterers. This approach creates new risks for DoC holders who face compliance risks and the associated penalties in case their counterparties renege on their contractual commitments.

 

We understand that within certain FuelEU Maritime compliance pools that have been established, the compliance surplus volumes are mostly produced by bio-LNG fuelled vessels. Biofuels contribute to a lesser extent due to their higher GHG intensity and come in many variants (each with their own technical characteristics) that could make them less reliable as contributors to a pool’s compliance surplus, and are expected to provide fewer surpluses as the intensity targets become stricter.

 

Compliance buyers pay for the surplus either on a fixed price basis or a floating basis, depending on the spread between fuels. In order to improve cash-flow management and reduce exposure, pools may look at shorter settlement periods (such as monthly). As such, sellers are exposed to counterparty credit risk from buyers if they cannot recover the cost paid for lower GHG-intensity fuels via the trade of the compliance surplus generated. In addition, there is a degree of price risk inherent in the structure wherein significant price volatility in the fuel spreads may lead participants to appear willing to pay the penalty instead of the increased cost of fuel.

 

Buyers within FuelEU Maritime compliance pools (i.e., those burning conventional fuels and choosing to reduce the GHG intensity of their vessels via pooling) also face compliance risks if the vessel(s) they are relying on to produce the compliance surplus fails to deliver adequate volumes, possibly in the event of a collision, arrest, or sanctions violation, for example. This could render the entire pool non-compliant. Accountability for the liability in such scenarios needs careful contractual consideration alongside an adequate enforcement mechanism that effectively transfers the FuelEU Maritime penalty to the seller, in the event that the compliance surplus is not delivered at the end of the FuelEU Maritime annual compliance cycle.

 

Clearly, FuelEU Maritime is a complex environmental regulation. As a result of the increased demand for lower GHG intensity fuels, Infospectrum has seen increased inquiries for compliance checks on these fuel suppliers, some of whom are facing maritime counterparty risk for the first time, and thus their principals may be unfamiliar with shipping’s unique maritime operation structures.

 

In addition, the novel pooling mechanism brings together incumbent market players and new market entrants in an entirely new context, creating new credit and counterparty exposures and risks that should be fully assessed prior to participation.

 

 

If you would like to know more about how Infospectrum can assist you in assessing your counterparty risk in the above scenario, please contact us.