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IUA Market Briefing

In co-operation with the Association of Average Adjusters

26 March 2013

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The Rise in Claims Attributed to Cat Fines in Bunker Fuel What can be done about it?

Paul HillMarine Engineer

A Cat Fine

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Bunkers, are you getting more or less than you bargained for?

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What are Cat Fines?

Hard Ceramic Compounds of Aluminium and Silicon, Used as a catalyst in the crude oil refining process,To enable higher yield of distillate fuels to be extracted from the stockThe process is called catalytic cracking.The cat fines are expensive and are mostly recovered and used again, however small quantities may be carried over with the residual fuel

Catalytic Fines (from here on known a Cat Fines)

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How big are Cat Fines?

Cat Fines embedded in a fuel filter

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How small are Cat Fines?75 m down to 1 m

1 m (micron) = 0.001 mm

25 m

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What do Cat Fines do?They get embedded into engine components and cause abrasive wear

The main components affected are cylinder liners and piston rings

Can affect fuel pumps, injectors and valves

In extreme cases piston rods and stuffing boxes

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Are all engines at risk?Cat fine damage mainly occurs in large slow speed main engines: Why?

The larger fuel injection components allow sizeable cat fine particles into the cylinders

Cylinder lubricating oil is minimally applied to the liner surface, and doesnt wash cat fines away

Less probable to find cat fine damage to medium and high speed engines: Why?

More copious splash lubrication of cylinder liners can wash away cat fine particles

Closer tolerance of components prevents ingress of larger particles

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Why are cylinder liners vulnerable to cat fines?

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Close up view of the cylinder oil lubrication

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10 micron

Embedded cat fine25 micron diameter

The effect of cat fines embedded in the liner are shown

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Are Cat Fines a New Problem? The answer to this is simply NO

Up until the 1950s residual fuel oil was burnt in boilers, to create steam for turbines, the most common form of marine engine at the time.

Large slow speed diesel engines slowly became popular in the 1960s and 70s as the ability to burn residual fuels improved.

1973 Middle East War tripled the price of crude oil, refiners forced to squeeze more product from the crude stock.

Catalytic Cracking processes developed

1980s engine problems attributed to these Cat Fines started to be reported.

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Early Warnings!

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0

2

4

6

8

10

12

14

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

No

of C

ases

Year

Cat Fine Engine Damage Cases surveyed by Braemar SA

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Sulphur Emission Control Areas (ECAs)

Why The Recent Rise in Cat Fine Claims ?

Environmental Legislation Demands:

Commercial Demands:

Cheaper fuels

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MARPOL Annex VI Marine Fuel Sulfur Limits

0.00.51.01.52.02.53.03.54.04.55.0

2000 2005 2010 2015 2020 2025

Sulfu

r, %

Global

SOx ECA

Marine Sulphur LimitsSu

lphu

r %IMO MARPOL Annex IV

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Emmission Control Areas

1 % Sulphur in fuel oil at presentIn 2015 this is to drop much further to 0.1% Sulphur

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MARPOL Annex VI Marine Fuel Sulfur Limits

0.00.51.01.52.02.53.03.54.04.55.0

2000 2005 2010 2015 2020 2025

Sulfu

r, %

Global

SOx ECA

A Worrying TrendSu

lphu

r %Braemar SA cases against the sulphur limits

121110987654321

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What do the analysts say ?

The 2012 Global Cap of 3.5% sulphurApprox 11% of global HSFO will need to be blended to meet the new limit yet to be confirmed

August 2012 North American ECA in forceAnalysts suggest demand for LSFO will double at the onset of US ECAFurther more complex blendingIncreasing levels of Cat Fines as sulphur levels reduce further

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22.1

23.5

25.625.9

26.8

20

21

22

23

24

25

26

27

28

29

30

2007 2008 2009 2010 2011

Cat

Fine

s p

pm

Year

Average Worldwide Cat Fines Trend

Statistics courtesy of DNVPS

What do the experts say ?

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4845

4341

34 33 33 3230

27

22 21 20

27

34

27

33

19

2426

32

2219

27

2118

0

10

20

30

40

50

60

Average Cat Fines by Region 2011

LSFO

HSFO

The regional trends?

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979.5

980

980.5

981

981.5

982

982.5

983

2007 2008 2009 2010 2011

Dens

ity

Year

HFO Density TrendWhat else?- Density

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Who cares about all this anyway?

I guess you already know? Its you!

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What is being done?The International Organisation for Standardization

Since 1982 have published a specification for marine bunker fuels specifying the maximum limits of various characteristic, components and contaminants.

The standard is known as ISO 8217 and is currently in its fourth revision:

ISO 8217: 2010

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What does ISO 8217 do?It defines a specific quality standard for marine fuel oil

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HISTORYISO 8217 Cat Fine Limits

Date Version CAT FINE LIMITS

1982 BS MA 100 first published Not specified

1986 ISO 8217 published as BS MA 100:1986

Not specified

1996 ISO 8217 2nd edition Max 80 mg/kg

2005 ISO 8217 3rd edition Max 80 mg/kg

2010 ISO 8217 4th edition Max 60 mg/kg

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So why is the limit not set lower?

MAN B&W, Wartsila and the other main engine makers specify a maximum of 15 ppm Cat FinesThe answer to this question is purely commercial, with refiners saying yes we can produce 15ppm fuel oil, but it will cost you the customer more.

any how, all ships are built with a fuel treatment system that is capable of removing the Cat Fines to a level below the 15 ppmstated by engine makers, so whats the problem?

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What is the problem?The problems are many, such as, but not limited to:

Poor efficiency of purifiers (essential part of the onboard fuel treatment plant and a topic on its own)

Lack of knowledge of the current bunker fuel quality by the ships engineers

Lack of good maintenance practices, such as regular cleaning of fuel tanks

Minimal and insufficient capacity of purifiers provided by the shipyard during the build

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What can be done?To reduce the risk of engine damage due to cat fines? and by who:

Owners and Managers

Charterers

Ships Crew

Engine Makers/ shipbuilders

Classification Societies

New Technology

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What can ships staff do?

The ships engineers do not know if the fuel that they are using contains high level of Cat Fines

Until test results, if any are received onboard

All fuel received onboard should be treated as if it contains Cat Fines

The fitting of onboard Cat Fine analysis equipment should be considered:

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Has already been installed by a large shipping company with immediate positive results

What is onboard analysis?

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What else is currently being done?

The Joint Hull Committee have recently formed a working group to address the concerns of the Market on the increasing amount of claims due to Cat Fines, which I am a member of, Class, Regulatory Bodies and Engine Manufacturers are now being consulted in order to achieve a satisfactory solution to the problem for everyone.

BunkersBunkers

Paul Griffiths, Senior PartnerPaul Griffiths, Senior PartnerBentleys, Stokes and LowlessBentleys, Stokes and Lowless2626thth March 2013March 2013

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VESSEL OWNER

TIME CHARTERER

(FURTHER TIME CHARTERER(S)?)

VOYAGE CHARTERER

POSSIBLE TORT CLAIM?

BUNKER BUYERS

(BUNKER BROKER?)

CONTRACTUAL SUPPLIER

PHYSICAL SUPPLIER

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1946 NYPE 2 The Charterers shall provide and pay for all fuel except as otherwise agreed

BALTIME 4 The Charterers to provide and pay for all fuel oil

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1993 NYPE 9(b) The Charterers shall supply bunkers of a quality suitable for burning in the Vessels engines and auxiliaries and which conform to the specification(s) as set out in Appendix A.

Continued

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1993 NYPE The Owners reserve their right to make a claim against the Charterers for any damage to the main engines or the auxiliaries caused by the use of unsuitable fuels or fuels not complying with the agreed specification(s). Additionally, if bunker fuels supplied do not conform with the mutually agreed specification(s) or otherwise prove unsuitable for burning in the Vessels engines or auxiliaries, the Owners shall not be held responsible for any reduction in the Vessels speed performance and/or increased bunker consumption, nor for any time lost and any other consequences.

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SHELLTIME 4 Charterers shall supply fuel oil with a maximum viscosity of ----centistokes at 50 degrees centigrade and/or marine diesel oil for main propulsion and fuel oil with a maximum viscosity of ----- centistokes at 50 degrees centigrade and/or diesel oil for the auxiliaries. If Owners require the vessel to be supplied with more expensive bunkers they shall be liable for the extra cost thereof.Charterers warrant that all bunkers provided by them in accordance herewith shall be of a quality complying with ISO Standard 8217 for Marine Residual Fuels and Marine Distillate Fuels as applicable.

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Time bars

Their sample determines quality

Jurisdiction

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Avoid the problem

Deal with the problem

Consider defence / recovery position

Aon UK Limited is authorised and regulated by the Financial Services Authority in respect of insurance mediation activities only

IUA Market Briefing: 26th March 2013, Cat Fines Engine Damage: Cause, Liability and Coverage

Keith Jones

Bad bunkers / Wrong Specification

Issues

y Owners usually aware of problems pretty quickly

y Potential for recovery who supplied bunkers and where? Solicitors? F D&D cover?

y Any damage to machinery/ tanks require cleaning? / Contamination of good fuel due to

mixture with bad?

Cleaning tanks can be expensive operation Orjula 1995 leakage of hydrochloric acid on deck. R. v. Henderson & Batley (1984) Damage can be various kinds in the Concise Oxford Dictionary damage is defined as injury impairing value or usefulness

y Claim on hull policies??

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Bad bunkers / Wrong Specification

Claim on policies

y Causation key issue

y ITC 1.10.83 Named Perils

y 6.2.3 Negligence of crew? Could description of claim affect recovery position?

y 6.2.4. Negligence of Charterers in supplying wrong spec bunkers?

y Bunkers totally off-spec - deliberately fraudulent intent?

y ITC 1.10.83 with additional perils clause much easier:y Widens coverage considerably . loss of or damage to the vessel caused by any

accident or by negligence, incompetence or error of judgment of any person whatsoever

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Cat Fines

Issues

y Causation key issue

y Damage may occur over period of time possibly more than one occasion before cause identified

y Generally speaking cat fines can be eliminated by purification processes.

y How do they get there? In fuel delivered or sediment in bunker tanks? Agitated during periods of heavy weather.

y Adjuster may need to instruct consultant engineer.

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Cat Fines

Claim on policies

y ITC 1.10.83 Named perils

y Crew negligence failure to operate the fuel equipment effectively

y ITC 1.10.83 with additional perils clause loss of or damage to the vessel caused by any accident or by negligence, incompetence or error of judgment of any person whatsoever

y Due diligence proviso?

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Cat Fines

Claim on policies continued

y More than one incident? Deductibles? Generally seen as a continuing act of the same negligence.

y If multiple occurrences adjuster may need to reconsider vessel should no doubt have been taken out of service to determine cause.

y Damages may span policy period whereby different underwriters concerned but only one deductible applicable if as a result of a continuing act of the same negligence

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