Navigating geopolitics in a crisis

The maritime industry is international by its nature and has played an indispensable role in improving lives and living standards by moving goods around the world. Nation states have long been beneficiaries of international trade, but that success has largely been built upon free trade and cooperation between states.

In recent years, rising geopolitical tensions and outright conflict have been reflected in momentous changes in trading patterns.

The war in Ukraine has brought upheaval to energy markets and limited the exports of foodstuffs from Ukraine, one of the world’s largest exporters of grain. Tensions between China and the US over Taiwan are felt by a wide range of industries reliant on Taiwan’s semiconductor manufacturing.

Soured Relations

The souring of international relations and re-emergence of politically aligned blocs has visible impacts on trade flows, but also creates an immeasurable risk to the safety of the environment, vessels, and their crews.

These are factors that often remain overlooked even as governments and the maritime industry seek to advance ambitious goals of environmental conservation, decarbonisation and greener operations across global supply chains.

The growth of the dark fleet in the tanker sector, in response to international sanctions and the consequential deterioration of Venezuela’s tanker fleet, is a catastrophe in-waiting.

Ageing vessels with the capacity to cause untold environmental damage have been pushed beyond the reach of the regulations, inspection regimes we rely on to prevent disaster, and insurance coverage should the unthinkable happen.

In the Black Sea region, a UN-brokered deal has allowed grain to flow out of Ukraine under an inspection regime that brings together Ukraine, Russia, Türkiye and the UN to clear incoming and outgoing vessels and cargoes for export.

After intense negotiations the deal has once again been extended for 60 days. But, the uncertainty was a stark reminder of how international shipping, and the food security it enables, is at the mercy of geopolitics and diplomacy.

What’s more, when an incident arises, an efficient salvage operation relies on co-operation and co-ordination between an astoundingly long list of stakeholders. Unfettered access to necessary data and information, as well as transparency and trust between those involved is crucial.

It is an unfortunate fact that geopolitics can muddy all of these criteria for success which, in the salvage industry, means the protection of property and the environment.

Emergency In A Crisis

What if, in the midst of the negotiations to renew the Black Sea Grain Initiative, a vessel had run aground in the Black Sea, or a fire had broken out on a vessel transiting the grain corridor?

Getting a salvage tug or properly equipped, specialised vessel to an incident in such a hotspot would require a significant diplomatic effort that would inevitably hinder time critical incident response. Depending where in the world an incident occurs, there may also be added insurance considerations or the restrictive reach of sanctions which could have an impact on access and operations.

Beyond the equipment itself, specialists and experts must often be brought in to help deal with a situation or emergency. International tensions can significantly delay the arrival of operations experts when time is of the essence. All the while we must be mindful of our duty of care to our crews, staff, and contractors and do our utmost to ensure their safety and wellbeing.

This encompasses risks arising from challenges inherent in marine salvage operations, like hazardous tasks, remote locations, harsh weather and ever-larger vessels, and complying with complex international regulations, as well as possible risks resulting from geopolitical matters.

As trust between nations erodes, the ability of salvors to respond to crises quickly and effectively is impacted as well. Ship casualties do not adhere to national borders and territorial waters, and their potential impacts do not respect the current geopolitical mood.

A vessel in distress off one country’s coastline may be only a change in the wind away from becoming its neighbour’s problem, and the same applies doubly to pollution from cargo and oil spills.

Mitigating impact is not merely a priority for the stakeholders involved, but, has knock-on effects across the supply chain for the global community when it comes to preserving the marine environment.

Prompt and responsible salvage operations are not simply the unfortunate end point of an incident, but, also a key impact point for ensuring minimal long-term effects for shipping operations and our planet.

Mitigation And Resolution

While the ideal way to resolve the impact of geopolitical influence on the maritime industry is diplomacy, the reality is that this can be an arduous and unpredictable process with an extended timeline before outcomes are realised. As a result, salvage often has to be agile and flexible, and able to respond to the circumstances at hand.

For example, our own team at Marine Masters have adopted a pragmatic approach to operations that forestalls delayed actions and often assists us in mitigating environmental impact. For instance, the flexibility to employ alternative methods can reduce the area and number of nations from which equipment must be drawn.

We have used this customised approach when heavy lifting equipment would prove too costly, opting to use locally-sourced barge and winch solutions and/or pressurising tanks and void spaces instead of mobilising heavy lift gear.

This delivers cost-effective solutions, and since the necessary equipment is readily available in most countries, it also ensures a timely response that is not dependent on the goodwill or risk tolerance of other states.

Local contractors and suppliers are often invaluable sources of support during a tight timeline. Our understanding of this vital contribution is reflected not only in our ethos of sourcing personnel and equipment from local contractors and suppliers wherever possible, but also in our company’s commitments to ESG.

In circumstances where a specificity of knowledge and experience is key, we have a global network of contractors who are able to work effectively with local incident responders.

Working in tandem with local entities also helps to build and/or reinforce local expertise — a key component of maritime’s goal of a just transition. This offers significant benefits to the industry as a whole, as well as upskilling and equipping the local economy for the future.

Upcoming Challenges

A softer method of mitigating the complexities of geopolitics is leading by example in our work. We work with, and rely on, contractors the world over and cooperation and transparency underpins these relationships. By fostering and encouraging collaboration and understanding—whether it be between governments, companies, industry associations or other stakeholders—we help to create the professional relationships and mutual respect that ultimately benefit the job at hand.

When acting at a policy level for national and international activities, collaboration has the potential to speed up the flow of information and clarify the frameworks we operate within – and of course, to allow for a coordinated response to incidents whenever possible. It is the bedrock upon which our global industry is built.

In the future, decarbonisation of the shipping industry, with attendant new fuels and cargoes, will impact on the risks involved in operating and salvaging vessels. A lithium-ion battery fire on a vessel is a potential catastrophe on its own. How is that situation changed if the vessel is ammonia-powered? Or methanol-powered? What are the risks to crew and salvage teams if there are tanks of liquefied captured carbon onboard?

There are so many changes coming to the industry in the coming years and decades that we cannot afford for safety-critical knowledge to end up siloed in individual companies, countries or geopolitical power blocs. At a time when international co-operation is showing signs of seizing up, collaboration is the grease that keeps the wheels of global trade moving.

At the end of 2019, and as the world was looking into the new decade, there was anticipation that we could be moving into a new “Roaring” or“Golden Twenties”. With rapid inflation, instability in the currency markets and growing global discontent, the socio-political climate is perhaps more akin to 1929, than the decade that preceded it.

The World Economic Forum published an article in July 2022 entitled “Why are supply chains facing disruptions and how long will they last?” Global disruption has perhaps been the overriding factor in this decade thus far, with the obvious drivers of the global pandemic and the war in Ukraine.

With these global events alone affecting the free flow of materials and products, the knock-on effect has created a supply chain disruption that, in itself, has put increased pressure on supply.

This result has led to an increased demand as the world has exited a pandemic at a time of disrupted supply, resulting in predictable cost and price volatility.

Commodity Prices

The combined varying cost of commodities is an oftenquoted indicator of global inflation. A quick summary of a select few relevant materials’ estimated average inflationary prices from March 2020 to March 2023 are:

> Steel (the principal material used in most modern marine and offshore assets) seeing an increase of circa 30%;

> Copper price inflation resulting in a circa 96% increase;

> lead at a 27% increase;

> WTI crude oil experiencing a gross inflation of 310% from circa US$ 25 per barrel; and

> Natural gas seeing a 72% increase, albeit from an artificial low during the early days of the pandemic. There are clearly complicated and varying reasons behind inflationary prices. It is beyond the scope of this article to separate trading speculation and demand, but there is enough commentary to suggest the global markets are in a situation that would have been deemed unprecedented before the start of the decade.

The start of 2020’s came head-to-head with a global pandemic and, as the world was emerging from that initial disruption, the Russo-Ukraine war. Both contributed to the economy in which we now find ourselves.

Sobering Analysis

This ultimately provides a backdrop for a sobering analysis when it comes to reviewing marine and energy repairs, costs and, subsequently, claims.

The global cost of materials has a direct impact on damage repairs, equipment procurement, and replacement – impacting the costs of claims.

Marine and offshore energy activities provide a decent bellwether, because of the global nature of both industries meaning they have a particular sensitivity to cost fluctuations on the global markets.

Reuters reported in May 2023 that the US supply chain is |potentially healing from “early pandemic shocks that sent shipping costs sky rocketing and squeezed supplies of everything from toilet paper to pasta...”, although material and labour cost increases linger.

MatthewsDaniel has seen an escalation in cost and claims across the marine and offshore energy sectors. A breakdown of the cost increases on specific offshore claims has seen circa 20% increase in materials, circa 35% increase on labour costs and another 35% on energy consumed during fabrication and fuel on installation.

These cost increases have the potential to take the assured and the insurer by surprise, with the increase in repair and replacement costs often outstripping any annual increases in declared values.

Offshore vessel rate increases seem to have principally been driven by a trio of factors. The first two being a direct result of global disruption with fuel costs rising and the maritime labour market heating up. Reports of seafarers leaving the industry after the uncertainty and unique sacrifices as well as the isolation experienced by ships crew during the pandemic years. This combination of factors has led to a decrease in the skilled workforce available in the maritime labour market, further exacerbating delays. The third factor is perhaps a secondary knock-on effect from the rising costs of energy, which has seen increased demand for specialist offshore vessels.

As offshore energy companies have looked to engage and take advantage in a suddenly buoyant energy market market, with a quickening of the drive into offshore renewables oil, gas and renewables operators are now often competing for the same vessels with offshore wind infrastructure now larger, deeper and looking towards floating.

Delayed Repairs

In the event of a claim, (and outside the question of escalating values, underinsurance and application of an average clause, rarely seen in marine or energy policies), cost increases become most contentious where repairs have been delayed for months or years including ongoing cases from the pandemic. This has an effect on cost and claim escalation.

The delay of repairs is often undertaken for very valid reasons, but disruption in recent years has made bench marking claims costs, assessing potential claim escalation, the potential blurring of the line between escalation due to delay and expediting expenses, particularly challenging.

Although disruption can be positive or negative, in this context at least, it is hard to imagine why anyone would hope for a continuation of the disruption the world has seen throughout the first third of this decade. However, the scene has been set for demand to continue to grow in the offshore sector, with the continued rise of renewables looking to increasingly draw raw materials and labour into the offshore sector.

As global disruption hopefully eases as we enter the middle of the decade, even if costs and subsequent claims continue to rise, one would hope that at least this will occur in an environment where the global movement of goods and services are predictable, ‘economic coercion’ is limited, costs can be accurately estimated, repairs can be conducted at an opportunity as chosen by the interested parties and the wider expectation on values and costs is realistic.

This year’s Marine Claims International event will once again take place at The Grand Hotel in Malahide, Dublin. The event was SOLD OUT in 2022 and is set to sell out again for 2023. This all-inclusive, three-day residential event will bring together the key players in the global marine claims sector to discuss the market landscape and take an in-depth look at the challenges and opportunities that lie ahead for 2024 and beyond.

To find out more contact Daniel Creasey on +44 (0)7702 835 831 or email daniel@cannonevents.com www.marineclaimsinternational.com

Day One

28th September 2023

09.02-09.45: PANEL DISCUSSION: How is the Market Shaping Up?

09.45-10.05: PRESENTATION: Buyer Beware, or is it Insurer Beware?

10.05-10.30: INTERVIEW: Our Friend in Ukraine – Taking the Longer-Term View

Arthur Nitsevych, Partner, Interlegal

11.00-11.20: PRESENTATION: Working in the Shadows – The Dark Fleet

Ruby Hassan, AVP, Claims Knowledge Management and Digital Development, Skuld

11.20-11.40: PRESENTATION:

The US – Judge, Jury and Executioner?

George M. Chalos, Partner, Chalos & Co, P.C. - International Law Firm

11.40-12.00: PRESENTATION: Make your Claim ‘Reinsurance Ready’

Anthony Menzies, Partner, DAC Beachcroft LLP

13.00-13.45: PANEL DISCUSSION: Who’s to Blame for Engine Room Claims?

John Poulson, Director and Chief Surveyor, Poulson Marine, Helene Peter-Davies, Partner, Hill Dickinson LLP

13.45-14.00: PRESENTATION: Planning a Different Approach – The Nordic Plan?

Herman Steen, Partner, Wikborg Rein Advokatfirma AS

14.00-14.50: PANEL DISCUSSION: Would the Nordic Approach Work in London?

Joseph Shead, Average Adjuster, Aon, Melis Otmar, Marine Claims Director, BMS Harris & Dixon Marine

15.35-15.55: PRESENTATION: In the Courts – Climate Change Litigation on the Rise

J. Clifton Hall III, Partner, Hall Maines Lugrin

15.55-16.15: PRESENTATION: Know Your Enemy – Climate Activists at Work

16.15-17.10: PANEL DISCUSSION: Where are the Claims? Part II…

Francesco Zolezzi, Claims Manager, CR International

Day Two

29th September 2023

09.00-09.30: PRESENTATION: From the Courts – The Most Recent Cases Explored

Richard Sarll, Barrister, 7 King’s Bench Walk

09.30-10.00: PRESENTATION: Ship Master or Drug Mule? The Risk of the Unexpected Cargo

Simon Jackson, Partner, Clyde & Co

10.00-10.50: PANEL DISCUSSION: Bite-Sized – From Casualties to Talent

Amy Dallaway, Claims Manager, Lancashire Group

11.20-11.40: PRESENTATION: Salvage –Not in That Backyard

11.40-12.00: PRESENTATION: LOF Update. What’s Next?

Ben Harris, Head of Claims- London Branch, Shipowners’ Club

12.00-12.20: PRESENTATION: Making the Right Fuel Choice – The Salvage View

Henk Smith, Consultant, Marine Masters

12.20-13.00: PANEL DISCUSSION: General Average – Does it Remain Fit for Purpose?

David Richards, Deputy Global Head of P&I Claims/Head of Legal and Expertise, NorthStandard

Workshops

PRESENTATION: Fitting the E-Bill

PRESENTATION: Maintaining the Principles – Ready to Foot the Bill?

PRESENTATION: Ferrying the Batteries

PRESENTATION: Overboard – Cargo Going Missing

PRESENTATION: Can you Insure Something you do not Own?

Peter MacDonald Eggers KC, Barrister, 7 King’s Bench Walk