Chaos in Russian oil logistics as sanctions approach in the next weeks
To serve Moscow’s needs, a sizable shadow fleet of tankers with unidentified owners is being built. Time is running out on months of intense US-led diplomatic struggle to ease harsh European Union sanctions.
The oil market is increasingly focused on one question: can the petroleum industry’s supply chain withstand the harshest sanctions against Russian exports in history? Traders, tanker companies, and the world’s most powerful governments are all asking this question.
To serve Moscow’s needs, a sizable shadow fleet of tankers with unidentified owners is being built. Time is running out on months of intense US-led diplomatic struggle to ease harsh European Union sanctions.
Will it be sufficient? It is unclear whether the bloc’s measures, which are set to go into effect in roughly six weeks, will be enough to assist the third-largest oil producer in the world deliver most of its output to consumers and avert a supply shock.
Chaos in Russian oil logistics as sanctions approach in the next weeks
For months, the US has been warning that Europe’s sanctions against Russia may result in such a shock. It is advocating that businesses be permitted access to EU services, particularly insurance, in order to prevent a price increase prior to the midterm elections in November. Customers would have to agree to a contentious oil price cap in order to do that.
What appears to be a given is that a significant portion of Russian flows will be managed via a sophisticated — and frequently covert — network of ships, owners, ports, and safe passages, which is predominated by entities still prepared to do business with Russia.
“It’s very clear that a fleet is being built up to transport this,” said Christian Ingerslev, chief executive officer of Maersk Tankers A/S in Copenhagen, which operates a fleet of 170 ships, none of which serve Russia. “If you look at how many ships have been sold over the past six months to undisclosed buyers, it’s very clear that a fleet is being built up to transport this.”
The most crucial question is whether there will be enough ships in the lead-up to December 5, when the EU is scheduled to ban Russian crude imports and stop providing shipping, financing, and insurance coverage to connected deals.
Many of the recently-transacted ships will need to be added to the 240 ships — 102 Aframaxes, 58 Suezmaxes, and 80 very-large crude carriers — that have carried Iranian and Venezuelan crude in the last year to form a sizable shadow fleet to support Moscow, according to shipbroker Braemar, in order to support four million barrels per day of Russian exports to the far east.
According to Anoop Singh, head of tanker research at Braemar, “there has been a substantial increase in the tanker trading after the war and in the lead-up to the Dec. 5 deadline by undisclosed organisations domiciled in locations like Dubai, Hong Kong, Singapore, and Cyprus.” Many of the ships are elderly and will end up in the shadow fleet, while Russian shipowner Sovcomflot PJSC also supplies some tankers.
In addition, there will very probably be a rise in ship-to-ship transfers, or the switching of cargo between tankers while at sea. This is a result of the requirement to combine a few small cargoes onto larger tankers for long-haul voyages as well as the risk of sanctions associated with handling exports directly from Russian ports.
But it presents its own logistical difficulties, particularly from the Baltic Sea, which is Russia’s main export market.
During ship-to-ship transfers, one ship manoeuvres next to another while a pipe is connected to allow the cargo to be pumped between the two ships. It can take up to two days, and the calmest waters and ideal weather are optimal for it. Some may entail moving oil in stages, first from a tanker to a floating storage facility and then, in a subsequent step, to another ship.
Although ships frequently sailed directly to European consumers, Asia, particularly China and India, seems poised to overtake Europe as the top destinations after December 5.
The so-called STS transfers will very definitely be prohibited once the sanctions take effect, and conducting them inside the Baltic Sea won’t be very advantageous for Russia or its purchasers. This is so that oil destined for Asia can, in theory, be transferred onto enormous supertankers that are too large to leave the Baltic with commodities on board.
A shuttling effect was created when the initial vessel turned around after transferring its cargo to the supertanker and went back for additional Russia oil.
Safe harbours or generally quiet offshore waters that are not subject to Kremlin-related restrictions or sanctions can serve as these STS destinations.
While some shipbrokers mentioned feasible destinations like Gibraltar and Ceuta, others expressed scepticism because to those locations’ ties to the United Kingdom and Spain, which impede trade with Russia.
Even in the middle of the Atlantic Ocean, where the waters are outside the maritime jurisdictions under the control of European nations, there may be another STS transfer option available. Shippers focused on a region in the middle of the North Atlantic in the Azores, an autonomous part of Portugal, as a potential location.
While STS operations can be expensive and risky, they are essential for securing the ongoing flow of Russian crude both logistically and to aid some purchasers in maintaining their privacy.
Shippers are not ruling out the prospect of two transfers — one inside the Baltic, and one outside — to help get the barrels to market, even though it is typical for shipments from sanctioned regimes to transit through one STS.
The used tanker market has seen a flurry of buying activity over the past several months, with a focus on the kind and class of vessels that will be heavily employed to transport Urals and ESPO from their export terminals.
The smallest mainstream international tanker, the Aframaxes, is one of these types that can transport between 650,000 and 750,000 barrels of oil across shallower waters and out of smaller ports.
Aframaxes with ice-breaking capabilities have drawn attention since this winter, Urals shipments from the Baltic will depend on them. Aframaxes of the Ice class are selling for twice as much as they did a year ago, with buyers seeking to remain anonymous.
Shipbrokers have also noticed an increase in the trading of non-ice class aframaxes that are 15 years of age or older. Some of these tankers are anticipated to arrive in east Siberia, where they will aid in the transportation of Russian ESPO crude to customers, including refineries in China and India.
As if acquiring industry-standard insurance weren’t difficult enough, many of these problems will become far more complicated.
The International Group of P&I Clubs, which has 13 member organisations, many of which are located in Europe, insures the majority of tankers against hazards such as oil leaks. Due to the EU’s sanctions, companies within the bloc would be forced to quit offering insurance, and the IG itself would no longer be able to rely on reinsurance from EU corporations.
Since the UK hasn’t adopted the EU completely, some coverage might still be accessible. London is the location of the IG.
Companies that pay to abide by a price ceiling for Russian oil would be able to access European services and insurance under the price cap. Regardless of whether Russia would support the cap programme, it will be difficult for the EU to participate.
Two significant conditions had to be met by the bloc before joining.
First, the inclusion of shipping businesses, which includes the enormous Greek fleet. In other words, in theory, a trader could only employ a Greek tanker if the trader paid an oil price cap.
Second, according to the EU regulations as they stand, a tanker operating anywhere in the globe is prohibited from using the insurers and reinsurers of the union for any future cargo, including non-Russian oil, if it was not purchased in accordance with the cap.
Without it, owners run the danger of being under-insured against hazards like oil spills because Europe is a hub for insurance and reinsurance. Because of this, following EU sanctions and the cap is a very divisive and uncertain topic for tanker owners. The formal implementation of a cap by the EU is still pending, and it also depends on other G-7 countries acting similarly. And there are still a little over six weeks left.
