Article: Casualties in the 21st Century - How Are We Coping?
23 April 2019
Sam Kendall-Marsden is global head of claims for The Standard Club. Sam has been involved in a number of high-profile major marine casualties during his 11 years at the club, including the MSC Chitra, Rena, Amadeo I, Perro Negro 6 and Maersk Honam. Sam also managed the Costa Concordia which with an estimate of $1.4 billion, is the largest and most complex marine casualty to date. This article is based on comments made during Sam’s opening address (with Douglas Martin, President Smit Salvage Americas LLC) at the 3rd Asian Marine Casualty Forum in Singapore on 11 April 2019. The event was attended by nearly 400 delegates from over 20 countries and has become one of the cornerstones of Singapore Maritime Week.
In this article I provide a ‘look ahead’ to emerging trends and significant issues in the world of salvage and wreck removal.
The Standard Club is one of the 13 clubs in the International Group of P&I Clubs which between them provide marine liability cover for approximately 90% of the world’s ocean-going tonnage. This means that if you are dealing with a casualty involving one of these ships then the chances are you are going to be dealing with one of the Group clubs. This is important because the clubs provide cover for liabilities arising in casualty situations (including pollution and wreck removal), but also because the clubs play a leading role in the management and response to maritime casualties.
The International Group clubs aim to be ‘collectively stronger’, and although they compete with each other, they also collaborate across a broad range of issues. One of these initiatives is a review of large marine casualties. This is a continuation of work that began in 2012 with a review of 20 large casualties, including the MSC Chitra, the Rena and the Costa Concordia. A further 6 casualties (including the Perro Negro 6 and Amadeo I) were reviewed in 2015, and a further 15 casualties will be reviewed this year.
The earlier reviews identified the main cost drivers in wreck removal operations and made recommendations to mitigate costs and improve claims handling. Perhaps not surprisingly, the main cost driver was the involvement of the relevant authorities which in some cases included the imposition of unreasonable requirements that were either unnecessary or disproportionate. It will be interesting to see whether this was a factor in the latest casualties under review, and whether some of the issues described below had a bearing.
Mega Boxship Casualties
The first issue I would like to introduce is that of casualties involving very large container ships, which is an increasing risk as ships continue to get bigger. Shipping may be getting safer but a major casualty involving a very large container ship could lead to an environmental disaster and would result in a huge financial exposure for the shipping and insurance industries.
The sheer size of these very large container ships – now in excess of 21,000 TEUs - amplifies the technical challenges faced in a salvage or wreck removal operation. It was fortunate in the case of the CSCL Jupiter grounding on the River Scheldt in August 2017, for example, that the ship could be refloated with the assistance of tugs alone. However, depending on the location, there may not be sufficient tugs of the required bollard pull available which could lead to the situation worsening and possibly developing into a wreck removal, or pollution occurring.
If a very large container ship were to run aground and require lightering before it could be refloated, that would present significant challenges in terms of whether cranes of sufficient height, reach and lifting capacity could be brought alongside to lift containers off the very high stacks. If the ship were listing, then that would present an even greater challenge still. Perhaps innovations in ship design could play a part here, or portable crane systems that could operate from the container stacks? Once the cargo is off, there is then the challenge of where to process and store potentially thousands of sound and distressed containers.
When people think of very large container ships, they generally think about the ship itself and the thousands of containers on board. But in terms of oil pollution, it is worth remembering that a very large container ship carries as much bunkers as a small tanker does cargo, having bunker tanks that may have a capacity of over 14,000m3. Whilst the risk of a catastrophic release of all bunkers on board should be remote, bunker removal costs are likely to be substantial. To put this in context (and although not involving a container ship), the bunker removal operation for the Costa Concordia cost in excess of $25 million.
A very large container ship successfully salvaged after a casualty is likely to require a port of refuge. It may be challenging to find a port suitable, and which is prepared to receive the ship and its cargo. The port may be concerned about the possibility of the ship running aground, sinking and blocking the channel, the risk of pollution and the length of time the ship is likely to stay at a berth. Issues of cranage arise here too, as well as whether there is sufficient room on the quayside to store the containers. Depending on the nature of the casualty, the container waste may be hazardous and a very large container ship could generate a substantial volume of material that must be disposed of safely.
Although not involving a container ship, the case of the Prestige in 2002 illustrates the catastrophe that can occur if a ship in need is denied a port or place of refuge. In that case, the ship broke her back and sank, and an estimated 63,000 tonnes of heavy fuel oil fouled the shores of Spain and France causing extensive pollution damage.
In a casualty involving a fire on board a very large container ship, significant volumes of firefighting water are likely to be required for extinguishing the fire and cooling. That water could affect the ship’s trim, stability and draft. If the ship is aground, the firefighting water on board could also have a bearing on the ground reaction and the ship’s residual strength. If containers have ruptured and cargo escaped into the holds, the ability to pump out the water is likely to be compromised, prolonging the operation.
There is also the issue of the ship’s own firefighting capability – an essential part of loss mitigation, particularly before professional salvors arrive on the scene. Have shipowners done enough to ensure their firefighting equipment has adequate range and overall effectiveness? Could ship design play a part here, with fire breaks between cargo bays to arrest the progress of a fire and buy time for salvors to respond? However, even if this were a viable technical solution, would shipowners be prepared to give up valuable cargo space, or spend money on these sorts of initiatives? We have also seen crews getting smaller as ships have got bigger. Could a crew of, say, 20 adequately respond to a fire on a very large container ship?
The fire on board the 15,000 TEU Maersk Honam in March 2018 whilst she was crossing the Indian Ocean illustrates a number of these issues. Fortunately, the fire was extinguished and the ship safely towed to a port of refuge in the Middle East, but five crew sadly lost their lives and approximately 3,000 containers were destroyed by fire in the first three cargo holds. In addition to facing substantial cargo claims, the club has also incurred substantial costs in relation to the removal and disposal of the fire-damaged cargo in a complex operation which is ongoing over a year after the casualty.
These issues are not unique to mega boxship casualties; it is more that they are amplified when dealing with a ship of that magnitude. Is the salvage industry is equipped to deal with a mega boxship casualty?’
Recent years have seen several high-profile casualties characterised not only by salvage and wreck removal costs but also the costs of discharging and disposing of contaminated firefighting water, and distressed cargo. The MSC Flaminia, Iron Chieftain and Maersk Honam are cases in point, and this seems to be an issue that is assuming increasing significance.
Whilst it is clearly of paramount importance to extinguish a fire, regard should also be had to mitigating the costs of the following phases of the salvage operation, and the damage to cargo caused by firefighting water. Firefighting water will become contaminated and will need to be pumped from the casualty and disposed of in an environmentally-sensitive way. Consideration should be given to whether reception facilities are available locally, and what permits and permissions are required to transport, treat and dispose of the water.
If it is necessary to charter-in a tanker to store contaminated firefighting water discharged from a casualty pending processing and disposal then that can significantly increase costs. The more water used, the greater the scale of the issue. From a technical perspective, might it be possible to extinguish fires and achieve cooling in other ways, reducing the use of water? What about recirculating used firefighting water? Could holds be ‘hot tapped’ to facilitate this?
Cargo damaged by fire or water ingress and even a damaged ship itself may be classed as waste under applicable law, bringing into play complex considerations in relation to its transboundary movement and disposal. This issue is assuming greater prominence in maritime casualties, can have a significant impact on cost and carries with it potential criminal penalties. The law in this area is governed by the Basel Convention which entered into force in 1992. The Convention came into force following international condemnation of toxic waste being exported for disposal in parts of the developing world where disposal costs were cheaper, levels of environmental awareness were lower and regulations lacking.
In practical terms, the Convention means that it is necessary in casualty cases to consider whether ‘waste’ has been generated, the classification of that waste and whether proposals for the movement and disposal of the waste comply with the Convention as incorporated into local law. The broad scheme of the Convention involves securing the permission of the exporting and importing countries to the transboundary movement and disposal of waste in accordance with a detailed submission that covers the parties involved, the mode of transport for the waste, the nature of the waste and its disposal in an environmentally-sound way. Non-compliance can result in severe penalties, including fines and imprisonment. Given the ever-increasing significance of environmental matters, this issue is likely to remain in focus but does the industry currently have the know-how and experience to address it?
We live in an increasingly connected world and this has affected the ways in which casualties are managed. One of the great strengths of Lloyd’s Open Form as an emergency response contract is that a master – on his own – holds in his hand a very powerful tool. With the stroke of a pen the contract galvanises salvors into action to provide immediate assistance. It provides that they have to exercise best endeavours – a high standard of care. It binds not just the ship but property interests. And it sets out a clear goal for salvors to salve the ship, take it to a place of safety and protect the environment.
However, with modern communications, a whole web of interests might be involved during those early stages of a casualty – the master, designated person ashore, casualty management team, salvors, underwriters, technical consultants and lawyers. The list goes on. Greater connectivity can bring benefits but it can also lead to delays in important decisions being taken, partly through undermining the authority and autonomy of the master who may be best-placed to make the call. Inaction in that crucial period in the immediate aftermath of a casualty can lead to things deteriorating badly. Has technology improved decision-making in the immediate aftermath of a casualty, or made things worse? We might see more shipowners entering into prior agreements with salvors as part of broader risk mitigation efforts, and also to reduce friction and delay in the event of a casualty.
In terms of reporting, traditionally, a club would receive written daily progress reports from salvors and their technical consultants. But what if instead reporting were done by means of a live dashboard that could be populated by salvors and technical consultants? This could either be web or app-based, and available on tablets, smartphones or laptops, with downloadable content. As well as traditional reporting, use could be made of a traffic light system to focus attention on key risk areas, graphics to show positive, negative and stable trends, there could be live streaming of significant operations and possibly a system for the approval of operational decisions and spend.
As technology improves, the ability to detect pollutants increases. This is likely to drive increased environmental requirements on the part of authorities and so increase costs. Environmental standards are also increasing. For example, in relation to the Costa Concordia, drinking water standards were applied to certain contaminants in the submerged hull of the wreck. Going back to the beginning of the Costa Concordia casualty, advances in technology can be seen to have had a fundamental impact on the nature of the wreck removal methodology and its consequent cost when the Italian authorities mandated the wreck must be removed in one piece if technically feasible. These days, there is a lot that is technically feasible if there is the money to pay for it.
The Changing Nature of the Salvage Industry
The salvage industry is changing in the face of strong headwinds but is it an industry in decline?
Recent years have seen fewer casualties, major pollution incidents and Lloyd’s Open Form contracts. Established players have exited the market, salvage companies have consolidated and there has been reduced investment in equipment, research and development. There has also been a growing realisation the ‘feast and famine’ model of yore is no longer viable, with salvors diversifying into different areas. There has also been a migration of talent from traditional salvage companies, with seasoned salvage masters setting up on their own. These would all be markers of decline in other industries – is the salvage industry any different?
Is the salvage industry doing enough to diversify and seek out new revenue streams, and to encourage fresh, young talent? And do we think that the salvage industry is sufficiently diverse? There is currently only one female Special Casualty Representative on a panel of just under 50, for example. And only one female Salvage Master. What, if any, steps are being taken by the salvage industry to address this issue?
We also see the emergence of different players threatening the hegemony of the traditional salvors in wreck removal operations. We are seeing offshore contractors entering the fray and competing with traditional salvors for wreck removal work. Why is this? There may be a correlation with the increased use of Quantitative Risk Assessment (known as QRA for short) on the part of certain clubs in wreck removal tendering and project management. Are these contractors more used to QRA than traditional salvors, and perhaps more receptive to it in principle?
There also seems to be a growing trend for Chinese salvors to be engaged on major wreck removal operations outside China, with Guangzhou Salvage engaged on the Thorco Cloud and Shanghai Salvage on the Kea Trader, for example. How much of a threat does ‘China Salvage’ pose to western contractors, how will they respond and why are clubs drawn to their offering? Competence, capability and available salvage assets aside, the assumption of risk, lump-sum contracting and competitive pricing are all attractive too. However, there needs to be sensible procurement on the part of clubs to ensure shipowners’ long-term needs are met.
These are more discrete issues that some may find controversial, some may find challenging but I hope all will consider worthy of discussion.
The first is ‘predatory pricing’, or what some might describe as capitalism in action! What do I mean by this outrageous slur on the noble salvage industry? It is this: the clubs support Lloyd’s Open Form in its unamended form for use in emergency situations, with SCOPIC available where salvors are concerned about their prospects of success or the residual value of ship and cargo. SCOPIC provides what are intended to be generous tariff rates for craft, personnel and equipment. In addition, a 25% uplift is allowed on top. To salvage a burning ship in rough seas – yes. But we have seen cases where routine, non-emergency salvage work has been offered not for commercial rates but on SCOPIC rates, in one case with an uplift of 50%! This is not reflective of the stated desire to be risk partners to the shipping and insurance industries that has been presented in recent years.
Secondly, equipment. Recent years have seen a decline in the investment in heavy salvage and wreck removal equipment on the part of the salvage industry. Portable salvage equipment may be flown or trucked to site relatively quickly but there have been cases of lengthy deployments which have delayed operations and driven up costs. Rather than individual salvors holding their own stocks of equipment, is there a case for pooled resources that individual contractors could draw on in case of need? This is the model used by one emergency response contractor operating within a larger company – why could it not be made to work across the broader salvage industry?
Lastly, we have IMO 2020 – the tightening of sulphur fuel regulations due to come into force in less than a year now, on 1 January 2020. Some shipowners have chosen to fit exhaust gas scrubbers and continue to burn regular heavy fuel oil; others to switch to low sulphur fuel. There are concerns about whether different parcels of low sulphur fuel will be compatible, whether they might separate over time and whether the formation of sludge could block filters. Also, could fuels with a much higher presence of catalytic fines damage engines? From a casualty perspective, will we see an increase in engine breakdown cases involving ships burning low sulphur fuel? Could there be a consequent increase in collisions and wreck removals? What if one of these incidents occurred at a bottleneck like the Suez or Panama canal?
Returning to the opening theme of providing a ‘look ahead’ to emerging trends and significant issues in the world of salvage and wreck removal, from an insurer’s perspective, I think that despite improvements in safety we are likely to see wreck removal costs continuing to increase. The influence and involvement of the authorities will continue to be an important factor, driven by environmental concerns and greater visibility through modern news media. Advances in technology will provide solutions where perhaps none existed before and this, too, is likely to increase costs.
However, as much as insurers seek to mitigate the rising costs of wreck removal it is equally important that as purchasers of salvage services the clubs exercise responsible procurement practices to ensure the ongoing viability of the salvage industry is not undermined. An appropriate response capability must be maintained, not least in the face of challenges posed by emerging risks including a casualty involving one the latest generation of very large container ships.
It is also important that the different branches of the industry work together in maintaining expertise and the retention of seasoned professionals, whilst at the same time attracting the next generation to join the industry and investing in their and our collective future through training and other support.
Lastly, it is vital the industry continues to work with coastal states through outreach initiatives, emergency response exercises and ongoing dialogue to build the relationships that will form the foundations of an effective response should a major incident occur. The International Group will continue to be active in all of these areas to support its shipowner members.