Reed Smith partners Nick Austin and Alex Brandt explore today’s challenges faced by the shipping industry and discuss key areas where we are likely to see the most activity in 2025, including sanctions, decarbonisation and legal developments in the courts.

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Intro: Trading Straits brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges and topics of interest from Reed Smith litigation, regulatory and finance laws across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.

Nick: Hello, everyone, and welcome back to Trading Straits. I'm Nick Austin, a partner in the shipping team at Reed Smith in London. I'm joined today by my friend and colleague, Alex Brandt, who's also a partner in the London shipping team. Alex and I both have the privilege, some would say, of working in an industry, the shipping industry, which is heavily impacted by markets, geopolitics, technological change, decarbonisation, and a raft of legal and regulatory changes, and no more so, I think, than now. So in this podcast, we're going to be looking in broad terms at what 2025 might hold in some of these areas. And with a particular eye on where as lawyers we're likely to see the most activity. We don't have a crystal ball, and we can't possibly cover everything today, but we do think there will be some themes that will continue to emerge throughout the year. So, Alex, if I can come to you first, I mean, I know that you spend, some would say, indecent amounts of time advising clients on sanctions in the maritime and commodities world. Russia has, of course, dominated the headlines in that regard. How do you see 2025 developing?

Alex: Yeah, thanks, Nick. And it's nice to be back on Trading Straits. Yeah, well, look, as you say, 2024 was a big year for sanctions. And I think there were a couple of key themes that developed. The G7 really continued to clamp down on the trade and the transport of Russian oil. And I think having come up with a novel scheme, the G7 price cap, which allowed the carriage of Russian oil and support for that trade, albeit under sort of you know attestations and a regulated process what had happened from that was the emergence of the shadow fleet which is obviously dominated not just the trade news but but you know international news and particularly events going on in the baltic at the moment and so really you had this castle mouse game with the regulators concerned with the monster they'd created with the shadow fleet and trying to cut down on circumvention and that that really sort of you saw that in two ways. One is the guidance around the sale of tankers trying to stop vessels going into the shadow fleets. And the second is the increasing sanctioning of. Dark fleet, shadow fleet, parallel fleet actors, vessels, trading houses that have emerged in certain jurisdictions who are seen by the G7 as facilitating breaches of price cap and keeping that Russian oil flowing at levels that the G7 are uncomfortable with. So that's what 2024 was really framed by. 2025 from the sanctions landscape has already started with a bang. We had on the 10th of January, 183 more vessels designated by the US, a significant focus on Middle Eastern trading houses, focus on LNG projects by the US as well, and critically. Two large oil producers in Russia, Gazprom Neft and Surgutneftegas. We were only in the first month of January. Hard to know exactly where we'll end up with the Trump administration, But it's certainly the case, I think, that the first half of 2025 is going to see more of the same, more of a tightening on Russian oil, more of a tightening on circumvention, continued concern with the threat that the parallel fleet poses, not just from a sanctions perspective, but also safety environment. And now with this sort of the suggestion of sabotage of key infrastructure in the Baltic. So I think that will be one of the key themes going forward. I think the other interesting area will be Iran, harking back to 2018 and the first iteration of the Trump administration. Trump was really the architect of the modern sanctions program, particularly when looking at Iran and the withdrawal from the nuclear treaty. And I think we can expect to see what we saw then, which is interference with cargoes on board vessels that are believed to have originated from Iran. So, you know, it's going to be a complicated environment. You know, it's going to be a dynamic environment and we'll have to feel through it day by day, week by week, as we have been doing. So, you know, that's three, four minutes, whatever it was, crystal ball gazing. I know that you've been working with clients on various decarbonisation initiatives. Where do you see the main features of that? And I guess, indeed, the challenges going into 2025?

Nick: Yeah, thanks, Alex. And I mean, that's right. As if shipping didn't have enough to think about from sanctions, war risks and other geopolitical developments. Decarbonisation in the sector in terms of new regulation affecting the operation of vessels on a daily voyage-by-voyage basis is really continuing apace. And I think 2025 is set to be no different to the last two or three years we've had in that space. Before I get to the latest regulation, it's worth pointing out that the industry is still having to deal in depth with CII and EUETS. And a quick recap on both of those, a reminder that, of course, CII was introduced by the IMO in 2023 as part of its strategy to achieve net zero emissions in the maritime sector by 2050. And that's a rating scheme under which vessels, a bit like a fridge, get a rating from A to E based on their carbon intensity. And that's measured by an equation, which among other things takes into account the size of a vessel and somewhat controversially its distance sailed as we'll see. And 2024 was the first year, so the year that's just finished, in which ships were actually given ratings, from A being the best to E, the worst. And from a legal perspective, and I know you've been dealing with this too, but clauses in timeshaft parties, which is where tensions most obviously arise with CII. Have tended to be agreed now for a couple of years, usually some version of the BIMCO clause, but very varied around that standard wording. But of course, now that ships have actual CII ratings, the rubber hits the road, and the legal is meeting the commercial, in a sense, in terms of the impact that the rating is going to have on the marketability, the value of a vessel. For example, if it's re-delivered to its owners with a lower rating than it started with. And I think those issues are going to rumble on in 2025, and particularly if a vessel might have been sub-chartered by a time charterer and a rating thereby affected, which the time charterer isn't able really to visit on the voyage charterer under the freight regime. And it's fair to say that CII has come in for widespread criticism from the industry, really, from the moment it was launched, and in fact, before. There is going to be revision, most recently at the MEPC 82 meeting at IMO in September last year in London. That were very loud calls for a complete recalibration of CII, ensuring basically that it better represents true operational efficiency and actual emissions performance. And one of the issues, as I mentioned, in terms of distance sailed, is the so-called idle time, ships waiting around doing nothing, tend to be prejudiced in the calculation of CII ratings. And that has been perhaps the one-off, if not the central challenge. Ships are frequently spending time at anchor, in port, undergoing maintenance, dry dock, during which emissions will continue to accumulate without actually carrying any cargo. And that, rather artificially in the view of many, will give it a poor rating. So changes afoot with CII. The new Secretary-General of IMO has said in recent months that he is listening to the concerns of the industry on CII. And I think we'll see changes perhaps even before the official review date of 2026 so watch this space on that. EU ETS remains another show in town. From the 1st of January last year, shipping came within the already well-established EU ETS regime. As we've discussed on previous podcasts. And that's had really significant implications for the sector, not the least of which, of course, is cost. Again that's an EU concept it imposes obligations on shipping companies as they're defined who need to set up new compliance procedures, open operator accounts within the EU and they need to buy and surrender allowances to cover the emissions from voyages that are caught by the scheme 40% in general terms of this year shipping companies need to surrender after verification And it's this year that, of course, the performance and the compliance of EUETS is really coming into play in terms of the verification in March and surrender later this year of the 2024 allowances. Now again a bit like CII we've been working for a year or two now with almost all our clients in the shipping world on the mechanics of that setting up the accounts making the registrations and of course negotiating charter clauses to suit owners and charters needs and in fact anecdotally just today I heard from a colleague involved in setting up accounts for EUETS that it is taken in the Malta and the Netherlands. Some clients, over a year to establish the necessary accounts for the purposes of compliance. So it has not been easy for businesses to get used to this brave new world. In terms of the clauses, BIMCO is the standard starting point. Again, a big variety we've seen in the clauses that are being negotiated and agreed in the time charter market. Will all of that...