Scrapping ships, drilling rigs and other offshore assets

Ship being scrapped, Alang, Gujarat, India

Ships, drilling units and other offshore assets almost inevitably contain quantities of hazardous substances – asbestos, mercury, PCBs, NORMs and others.

When these assets reach the end of their operational lives, under international conventions and local laws they are very likely to be regarded as hazardous waste creating a risk of damage to the environment and human life.

Movements of such waste are regulated, and failure to comply with the applicable legal regime may expose owners and possibly others (including directors, officers and agents) to criminal and civil liabilities and significant reputational damage.

Environmental campaign groups and local prosecutors are taking an increasingly aggressive stance on environmental compliance and owners of end-of-life assets would be well advised to approach the scrapping of such assets with particular care.

The Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal (Basel Convention)

The decision to scrap an end-of-life vessel, drilling unit or other offshore asset is very likely to engage the Basel Convention.

The Basel Convention is a United Nations treaty that requires the generator or exporter of waste to provide written notification to the relevant authorities in the states of export and import (and transit states where applicable) and to secure appropriate permissions in advance of any movement of waste. 185 states (out of 193 UN members) are parties to the Basel Convention, so it is effective in most jurisdictions.

Importantly, the EU (pursuant to the EU regulation implementing the Basel Convention) and other jurisdictions (under the Basel Convention or related regional conventions) can hold the generator of the waste (i.e., the owner prior to sale for recycling) and possibly other parties involved in the movement of the waste, liable for breach of the relevant regulations.

The Hong Kong Convention for the Safe and Environmentally Sound Recycling of Ships (Hong Kong Convention)

Adopted in May 2009, the Hong Kong Convention is designed to ensure that when ships are recycled at the end of their operational lives, they do not pose any unnecessary risk to human health and safety or to the environment. Although the Hong Kong Convention has not yet come into force, the International Maritime Organisation (IMO) has issued guidelines to assist states with the implementation of the Convention.

What does this mean for ship and drilling rig owners?

1. In respect of vessels, drilling units and other offshore assets located within the EU:

Regulation (EC) No.1013/2006 (the “Waste Shipment Regulation”) implements the provisions of the Basel Convention into the respective national laws of the EU Member States.

Importantly, the Waste Shipment Regulation also prohibits the export of a number of hazardous substances commonly found in vessel structures from the EU to non-OECD countries (that is to say, every major shipbreaking country except Turkey). Its scope is not restricted to EU-flagged vessels: any vessel leaving an EU port destined for a recycling facility will be caught by the Waste Shipment Regulation and must comply with it.

The EU List of Recycling Yards

On 19 December 2016, the European Commission issued Decision (EU) No.2016/2323 of 19 December 2016 (the “Decision”), establishing the European List of ship recycling facilities pursuant to Regulation (EU) No.1257/2013 (the “Ship Recycling Regulation”). The Decision entered into force on 9 January 2017.

Pursuant to Article 6.2(a) (which is not yet applicable) of the Ship Recycling Regulation, ships flying the flag of an EU Member State can only be recycled at one of the ship recycling facilities listed in the European List. Until such time as Article 6.2(a) of the Ship Recycling Regulation becomes applicable, the prior informed consent regime set out in the Waste Shipment Regulation will continue to apply to ship movements for recycling originating from, transiting through or destined for an EU Member State.

However, in accordance with the transitional provision at Article 26 of the Ship Recycling Regulation, EU Member States may as from the date of publication of the European List and before the Ship Recycling Regulation becomes fully applicable, authorise the recycling of ships flying the flag of an EU Member State at any of the ship recycling facilities included in the European List. In such circumstances, the provisions of the Waste Shipment Regulation will not apply. It is not clear from the Ship Recycling Regulation which EU Member States need to have exercised the transitional powers under Article 26 in order for such provision to apply to a proposed transboundary movement. At this stage, it seems the safest course is to assume that all EU Member States potentially affected by the proposed movement need to have exercised such powers.

In order for any ship recycling facility to be approved for inclusion in the European List, such facility must comply with the requirements set out in the Ship Recycling Regulation. The newly published European List includes 18 ship recycling facilities, all of which are located within the European Union. The currently approved facilities are located in the following European Union Member States: Belgium (1), Denmark (2), France (3), Latvia (1), Lithuania (1), the Netherlands (2), Poland (1), Portugal (1), Spain (1) and the United Kingdom (3). Full details of each facility including, among other things, the types and sizes of ships that each facility can recycle are set out in the Annex to the Decision.

The European Commission has also received applications from ship recycling facilities located outside of the European Union. These applications are still under consideration. The European Commission is expected to make a decision regarding their inclusion in the European List during the course of 2017. However, the inclusion of such facilities in the European List may raise issues in the light of the Basel Convention regime and the Ban Amendment (as implemented in the EU by the Waste Shipment Regulation).

The prior informed consent regime resulting from the Waste Shipment Regulation remains applicable in respect of:

(i) ships flying the flag of any state other than an EU Member State; and

(ii) ships flying the flag of an EU Member State, until such time as the Ship Recycling Regulation is fully applicable (unless the transitional powers in
Article 26 of the Ship Recycling Regulation have been exercised by all the relevant Member States).

The Waste Shipment Regulation and the Ship Recycling Regulation are complex pieces of legislation. A particular difficulty is that the Ship Recycling Regulation seeks to introduce derogations from the Basel Convention regime, which derogations may not all be compatible with international law. The implications of a proposed transboundary movement under the Ship Recycling Regulation should, therefore, be considered extremely carefully.

2. In respect of vessels, drilling units and other offshore assets located outside the EU:

Several regional conventions introduce regulatory regimes in Africa, the Mediterranean and elsewhere. For owners of end-of-life marine assets, local due diligence is required to understand and manage the various and potentially conflicting requirements in states of export, import and transit.

Comment

International conventions and local regulations combine to create a complex regime, which is often ignored.

The sale of a ship or drilling unit to an intermediate (cash) buyer, who then sells the asset on to a shipbreaking facility, will not necessarily insulate the original owner from future liability or reputational damage.

We recommend obtaining legal advice early on the issues that may arise in relation to recycling projects. Please contact Renaud Barbier-Emery, Ina Lutchmiah or your usual Ince & Co contact if assistance is required.

Article authors:

Renaud Barbier-Emery, Ina Lutchmiah

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