Maersk is introducing contractual steps to ensure that its sales contracts include a strong financial incentive for ship recycling to be carried out responsibly.
Claus V. Hemmingsen: "We have actively participated in, and worked directly with, the yards in Alang, India, to improve conditions there and to influence the industry as a whole."
Maersk supports responsible ship recycling
As a minimum, yards that Maersk collaborates with must be certified according to the Hong Kong Convention. In the wave of discussions on Maersk entering the ship recycling sector in Alang, Maersk has faced criticism for its handling of two independent cases related to ship recycling. One related to the FPSO North Sea Producer that was sent by its new owner to a ship recycling yard in Bangladesh, despite Maersk stipulating in the contract that the production unit, at the end of its lifetime, was to be recycled according to the Hong Kong Convention. The other case relates to 14 chartered-in Starflotte ships whose contracts Maersk wanted to end ahead of time in 2014. In the final agreement with the owner, Maersk incentivised recycling at the best price, which effectively means recycling at sub-standard yards, which is what the owner chose to do when the vessels were returned.
In the latter case, Maersk has publicly acknowledged, and regrets that it indirectly incentivised the owner to recycle at sub-standard yards.
As outlined by the Head of the Sustainability Council, Claus V. Hemmingsen, the Group has responded to these cases by tightening its procedures: "We have actively participated in, and worked directly with the yards in Alang, India, to improve conditions there and to influence the industry as a whole. Therefore, it is regrettable that in spite of these initiatives there are examples of how we have pushed in the opposite direction of our own policy. In the future, we will ensure that our sales contracts contain a very strong incentive for ship recycling to be carried out responsibly,” says Claus V. Hemmingsen.
Minimising the financial incentive
In 2009, the Group introduced a responsible recycling policy and expressed its support for the Hong Kong Convention. Procedures were further tightened in September 2016, in order to minimise the financial incentive for buyers to recycle irresponsibly. Since then, the Group has been waiting unsuccessfully for ten years for a global agreement on ship recycling (note: the Hong Kong International Convention on ship recycling was signed the 15th of May 2009, but never entered into force). Despite having invested great efforts in the attempts to achieve a universal ratification of the UN’s Hong Kong Convention, which sets global minimum standards within safety and environment, the Group is still waiting.
The new contract terms are based on the value of the vessel at the time of sale. If the value is low (less than 25% of the highest recycling price), Maersk will not divest but will recycle the vessel according to its standards.
If the value is higher (25-40% above the highest recycling price), the new owner will be required to operate the vessel for a further two years or to recycle in accordance with Maersk's standards. When the vessel has been operating on behalf of others beyond a period of 24 months, Maersk can no longer take on this extended responsibility.
If the value is high (more than 40% above the highest recycling price), the vessel can be resold without restrictions, as there is no financial incentive for the buyer to recycle, at this point in time.
“With these adjustments, Maersk expands the responsibilities that the Group takes to ensure responsible ship recycling. The tightened policy further clarifies the fact that Maersk will not enter into contractual agreements that encourage the new owner to find the highest price for steel in the future,” says Claus V. Hemmingsen and underlines:
“We stand by our commitment and intention to continue working with and developing the facilities at the Alang yards just as we continue to support global initiatives to ensure equal international requirements and conditions. Only global regulation will ensure a definitive stop to the critical conditions that we see today.”
Facts on cases
North Sea Producer
- The FPSO North Sea Producer operated in the UK North Sea from 1997–2015 and was owned by the North Sea Production Company Limited (NSPC), an independent British company owned 50/50 by Maersk and Odebrecht, a Brazilian company.
- Following contract termination, the North Sea Producer was sold and transferred to a buyer in April 2016 on an "as is, where is" basis, whereby the buyer took over operational and legal responsibility for the unit.
- In August 2016, Maersk was made aware of the fact that the North Sea Producer had been sent to a recycling yard in Bangladesh, where conditions do not meet the requirements of the Hong Kong Convention. Maersk had contractually bound the buyer to the Hong Kong Convention but the buyer chose to violate the contract.
- An internal legal study has concluded that neither Maersk nor NSPC can prevent the recycling from taking place or impose a financial legal claim against the buyer.
- The Maersk Group has subsequently broken all commercial relations with the buyer.
- In 2005, Maersk acquired P&O Nedlloyd and with this company, a chartering agreement relating to 14 container ships, called Starflotte.
- Maersk later estimated that the ships did not meet its requirements for the remaining contract period and negotiated an agreement with the owners regarding the termination of the rental agreement and recycling of the ships, in return for compensation.
- The steel price the owner could obtain for recycling the vessels was included in the calculation of the commercial transactions between Maersk and the ships’ owner at the termination of the agreement.
- The vessels were subsequently recycled at sub-standard yards when their contracts ended in 2013.
In Alang the word is spreading
Ship recycling in India has been synonymous with poor working conditions and environmental risk. Then a few pioneers began investing in equipment and people, paving the way for first-mover Indian shipyard Shree Ram to win a contract to recycle two A.P. Moller - Maersk vessels. With help from the company's onsite team, Shree Ram is changing.