The rising cost of removing shipwrecks

A shipwreck

Delegates at a Lloyd’s marine conference last week discussed the rising costs of wreck removal.

For insurers, ship owners, and salvage contractors alike the rising cost of removing wrecks is of equal concern. Wreck removal is now covered by an International Maritime Organisation (IMO) convention adopted at a UN conference in Nairobi in 2007. It has yet to come into force while coastal states undertake ratification in their own legislatures.

The effect of the IMO wreck removal convention is to harmonise acceded states’ attitudes to wrecks with the aim of reaching greater consensus around decision making about whether wrecks should be removed or left in situ.

At the event on Wednesday 7 November 2012, which was jointly sponsored by Clyde and Co and Lloyd’s, the implications of wreck removal were considered. Over 350 delegates attended and speakers included the Department for Transport Maritime Salvage and Intervention Representative Hugh Shaw.

Wreck removal has not only become more visible and expensive but also more common. In the past, coastal states were less concerned about environmental protection and, provided wrecks were not a hazard to navigation, they were simply left in place. Changing attitudes to the environment and marine management mean that today there is generally a presumption that a wreck should be removed.

More salvage, greater costs
Numbers from the International Salvage Union (ISU) (whose members are usually the wreck removal contractors) show that in 1999 ISU members generated USD 28 million in income from wreck removal operations. In 2008 (the most recent year for which statistics are available) ISU members’ income from wreck removal was USD 286 million.

Increasing costs are typically the result of more stringent requirements by shore-based authorities – often due to environmental concerns. Those requirements have also led to the development of more sophisticated approaches to the removal of a wreck and its bunker fuel, pollutants and hazardous cargo.

The well-known case of the containership MSC Napoli, beached off the south coast of England and the container ship Rena, grounded off the coast of New Zealand, are just two examples that have generated recent worldwide interest.

Calculating liability
Various forms of contract are used for wreck removal. Typically these are fixed price arrangements, often using Baltic and International Maritime Council standard contract forms. Wreck removal carries significant commercial risk for the contractor as there are often unknown factors and surprises once the work commences. But open-ended time and materials contracts are, unsurprisingly, not favoured. A significant side issue is the cost to contractors of preparing a bid in a complex case.

Liability insurers, typically the third party liability mutual Protection and Indemnity (P&I) Clubs, usually bear the cost of wreck removal. However the rising costs means that re-insurers in the Lloyd’s and composite markets are increasingly drawn in. It means that participants in these markets need to have a sophisticated understanding of wreck removal and the commercial opportunities and risks that it may afford.

Reviewing the rise
The International Group which represents the major P&I Clubs has launched a review into the rising cost of wreck removal. Its report is expected in the spring of 2013, but preliminary findings were revealed at a seminar on wreck removal held at the Lloyd’s marine conference last week.

In short, it has noted that contract controls are typically strong and contractors are competent but the ever-more stringent requirements of coastal states and shore-based authorities are driving the rising costs. The additional requirement to remove cargo – especially containers – can further rack up costs.

It’s a situation that won’t be turned around quickly or easily. Speaking at the Lloyd’s marine seminar, Michael Kelleher of the West of England P&I Club and Chairman of the International Group’s Large Casualty Working Group said: “I fear that trend will continue.”

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