Spotlight Falls on a Heavily Globalised Industry

After the oil tanker, the Prestige, broke in half off the Spanish coast and began gushing forth its slick contents, thousands of fishing families and businesses who depend on the ocean and pristine beaches began asking who should be held liable. As this Financial Times article notes, "the Prestige, registered in the Bahamas, owned by a Liberian company, managed by a Greek company and chartered by a Swiss-based Russian commodities trader, is a classic case" of a ship that is allowed to roam the seas without regular, reliable enforcement of basic regulations to ensure its seaworthiness. Although responsibility for ship inspections is supposed to lie primarily with flag states, in practice it has generally fallen to port-side inspectors who are only able to conduct sporadic checks on ships arriving at their docks. Although the European Union has tightened inspection regulations effective next year, how effective will it be in preventing a similar disaster in future? - YaleGlobal

Spotlight Falls on a Heavily Globalised Industry

Daniel Dombey
Wednesday, November 20, 2002

Spain's Atlantic shores were dressed in mourning on Wednesday. A black sludge of highly toxic industrial fuel coated 300km of pristine coastline in one of the biggest European disasters caused by an oil spill.

Military aircraft detected four new oil slicks where the Prestige, an ageing tanker, sank on Tuesday carrying 70,000 tonnes of fuel - twice the load of the Exxon Valdez, which caused America's worst oil spill when it sank off Alaska in 1989. Oil leaked by the sinking ship on Tuesday was already less than two miles away from the Galician coast.

On Wednesday, in the deep inlets that form one of Europe's richest fishing banks, the mood was one of indignation and despair. The slick, which the Spanish govertment estimates has caused €42m ($42.1m) worth of environmental damage, has destroyed the livelihood of more than 4,000 fishermen and countless businesses which depend on summer tourism for a living.

Galicia's coastal communities want to know who will compensate them for the damage to their economies and their environment. Some demand immediate action to stop such a disaster from happening again. When thousands of tons of oil leak from a ship travelling under a flag of convenience and plying its trade between Latvia and Singapore, the catastrophe appears, at first sight, to offer proof of national authorities' inability to regulate a globalised industry.

In that sense, the Prestige, registered in the Bahamas, owned by a Liberian company, managed by a Greek company and chartered by a Swiss-based Russian commodities trader, is a classic case.

World seaborne trade has increased from 3.9bn tonnes in 1990 to 5.4bn tonnes in 2001, according to the European Community Shipowners' Association - a rise of 37 per cent. It forecasts a further 4 per cent increase by the end of 2003. Yet the sea, famously, has no borders; much of it lies outside national jurisdictions and under the supervision of weak international authorities.

"We have a system of rules that corresponds to the 19th century but we are in the 21st century, with an exponential increase in shipping, with cargo that can greatly pollute," says Loyola de Palacio, Europe's transport and energy commissioner. "These things just didn't exist when these rules were set up - this kind of cargo didn't, nor did this kind of volume."

Yet a more coherent system is being pieced together, by Ms de Palacio among others, largely in response to past disasters. It will begin to come into force by next year.

"The new rules should make such accidents less likely but you still have to work out how you react to them - particularly with regard to liability," says Jörg Beckmann at the European Federation for Transport and Environment, an environmental grouping. He, like the Commission itself, and oil industry executives, believes that legislation rushed through the European Union after the Erika disaster of 1999, when more than 15,000 tonnes of fuel oil polluted coast of Brittany, will do much to reduce the risks. But it will take time to implement a more structured global approach. And more remains to be done to determine who bears the brunt of the clean-up costs.

Historically, the whole issue of making sure that ships are seashape has been plagued by problems of enforcement. Responsibility is split between the countries where the ship is registered - the flag state - and the docks at which it calls. In theory, the flag state should be more important in enforcing law. In practice, since many shipowners gravitate to jurisdictions where rules may be more lax, port-side inspections have proved more effective in recent years.

As Jon Whitlow of the International Transport Federation says, though it is 50 years since his organisation began campaigning against "flags of convenience", there is still no real sanction on flag states that allow substandard vessels through inspections. That is despite the declaration by the UN's International Maritime Organisation in 1992, after a series of shipping disasters, that there was "an urgent need to improve maritime safety through stricter and more uniform application of existing regulations".

Mr Whitlow points out that some of the flag state registries are poorly staffed and unable to oversee statutory inspections. There is also no international audit of the "recognised organisations" that carry out inspections for flag states that do not do the job themselves.

Much of the time, the work is contracted out to respected vessel classification societies but there is no such requirement. Some countries may delegate the work to as many as 20 different organisations. Checks range from the provision of safety radios to the load lines that indicate how low in the water a ship may sit without being overloaded.

Largely as a result, it has been through the alternative of port-side checks that the EU, the US and the international community as a whole have sought to grapple with the problem of rogue ships. Even here there are loopholes.

The IMO describes such checks, carried out by a network of regional port state control organisations, as a "safety net to catch substandard ships". But these examinations, to ensure that vessels entering ports meet international standards, inevitably fall short of inspecting every vessel. Instead, targeting criteria are used, based on factors such as previous history, flag state, length of time since last inspection.

According to Richard Schiferli of the port control organisation responsible for Europe and the North Atlantic, the Prestige, which had not been checked by one of his members since 1999, would have been a "priority ship . . . not what I would call alarming but on the other hand an old tanker and we haven't seen it for a while".

Such decisions are, in most instances, local and discretionary; there is no statutory co-ordination between the regional authorities. And in international law, port state control is a voluntary, not an obligatory function. The chances of a seriously substandard vessel being detained depend to a large extent on where it is sailing.

This, to a large extent, is where the EU comes in - and the basis on which it has built its legislative programme, named after the Erika. Yesterday Ms de Palacio complained that EU member states had dragged their feet in agreeing the proposals that the Commission rushed out after Erika, contrasting their response with swift action in the US after the Exxon Valdez disaster. But by European standards, the legislation, now mostly agreed, but not yet in force, has come in near record time.

Under current EU law, member states must check a quarter of all the ships that call at or just outside their ports, but have complete discretion about which ones they target. From July next year, they will have to give priority to inspections of ships that are ageing, fly flags of convenience or have been involved in accidents in the past. As a result, Commission officials argue, ships like the Prestige will be scrutinised.

From 2004, EU countries will have to designate "ports of refuge for vessels" in distress, such as the Prestige lacked as it struggled to survive on the choppy seas away from Spain.

In line with an agreement the EU pushed for at the IMO, ships with single hulls, which can be pierced at a blow, will be phased out by 2015. Tankers as old and as poorly protected as the Prestige should disappear around 2005.

"It's a damn shame that this latest accident happened, but the changes on their way will deal with these cases very soon," says one oil industry executive.

On Wednesday Ms de Palacio spoke of talks with Russia as a natural next step in extending the EU's regime. Her officials argue it is up to member states to enact the legislation that is in place. Privately they contrast the call by Jacques Chirac, the French president, for "draconian" maritime security measures with France's failure to observe even current law. The Commission is pursuing a legal case against France for checking only 9 per cent of all ships in 2001, and has begun a similar action against Ireland.

The Commission is also bitterly disappointed that it has not made greater progress towards establishing clear rules for liability, an issue many member states feel is better suited to the IMO. Despite the damage caused by the Erika disaster, the shipowners' insurer was liable for only some $11m in compensation. By contrast, approximately $145m is available from a mutual fund of oil companies to deal with the disaster. As one oil executive says: "If you attach liability to a shipowner's wallet, he'll pay a lot more attention."

The total cap for compensation settlements is increasing from $200m to $300m per accident and a diplomatic conference will be held to discuss a supplementary fund next year, but Ms de Palacio is pushing for a level of $1bn.

In the US, where the government passed the 1990 Oil Pollution Act in the wake of the Exxon Valdez spill, environmental liability is more onerous. Exxon paid $2.2bn in clean-up costs and $300m in damages to Alaskans.

One consequence of the Prestige disaster may be that Ms de Palacio has more hope of getting her way. But in Galicia the fishermen worry that competing claims could be tied up in litigation for years. In the meantime, the causes of the sinking have yet to emerge; when they do, they will determine whether the ship is remembered as one of the last great oil disasters or, instead, as a grim warning that much more needs to be done.

© Copyright The Financial Times Limited 2002