December 8, 2022

CII: An Opportunity To Reinvent the Owner-Charterer Relationship

The Carbon Intensity Indicator (CII) was announced by the International Maritime Organization (IMO) as part of a set of mandatory measures to aid the shipping industry towards the target of achieving at least a 40% reduction in carbon intensity by 2030 and a 70% reduction by 2050 compared to 2008 levels. A measure of a ship’s carbon efficiency, CII will be calculated by linking the carbon dioxide emissions to the amount of cargo carried over distance traveled, and will result in a letter grade from A to E. The IMO’s ambitious targets were always going to require an industry-wide effort, as well as significant shifts in mindsets, but the introduction of CII has necessitated a change at the foundation of ocean supply chain: the owner-charterer dynamic.

The charter parties that contract owners and charterers are relics from shipping’s extensive legacy. The language of these agreements has barely changed over time, complete with enduring clauses that continue to cause many of shipping’s structural inefficiencies. It is no secret that incentives between owners and charterers have historically been misaligned: owners feared sharing too much information with charterers and risking claims; charterers were obliged to follow rigid speed or ETA requirements that ran counterproductive to operational optimization and fuel efficiency. For too long, this oppositional relationship has impeded collaboration, and resulted in a zero sum game where one must lose for the other to win.

Tackling these structural inefficiencies is a natural first step, albeit a difficult one given the historic lack of collaboration. The introduction of CII is an opportunity to realign incentives for owners and charterers with both parties having skin in the game. On November 17, the Baltic and International Maritime Council (BIMCO) made their long-awaited announcement on how the responsibility for CII should be distributed among owners and charterers in a time charter. The decision that time charterers should be responsible for a vessel’s CII emerged after months of discussions and consultations with stakeholders. Owners will need to collaborate with charterers to maintain an acceptable CII grade; charterers will be obligated to collaborate with owners to manage the chartered vessels emissions. The two will have to share information to allow the vessel to run as efficiently as possible. Contractual obligations aside, cooperation will come with added advantages for both parties: charterers will minimize costs by operating more efficiently, while owners will see more competitive rates for vessels with a better CII grade.

The economic benefits are clear. The technology is available: with artificial intelligence it is possible to build digital twins of vessels and simulate voyages to find the optimal parameters to meet ETA or TCE goals. Data can be leveraged as an unbiased mediator between owners and charterers, a source of truth and insights for transparent conversations in the spirit of finding win-win outcomes. The technology can even be scaled up from optimizing individual voyages to optimization on the fleet-wide level, empowering operators to select the best vessel for each voyage, and resulting in the best overall CII scores for the whole fleet. The last obstacle to address, then, is change management.

Implementing new ways of working requires some assistance. With digital transformation, the “transformation” element is just as important as the “digital” element. Driving adoption, at every level, for the solutions that boardrooms bring into the business is crucial for success. At Nautilus, we keep the human element at the forefront. We build solutions that fit into our clients’ workflows, because we know that it is unrealistic to expect clients to rearrange their workflows around us. We devise change management programs tailored around the organization’s processes, and provide 24/7 support to minimize disruption, ease the transition, and deliver value for stakeholders from ship to shore.

CII comes into effect on 1 January 2023, and as we race towards the end of 2022, it is clear that the owner-charterer relationship has to evolve. Decarbonization is a team sport, and we have all the bats we need to win this game – we just need to collectively step up to the plate.


Related Video: Enabling Decarbonization through Owner-Charterer Collaboration

This presentation was filmed for the Maritime Decarbonisation Conference, Asia 2022.

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