Crude Tankers: 3-tier fleet reveals itself post-EU ban
What are the first signs of the tanker profiles that have surfaced in the transportation of Russian crude post-EU sanctions?
There has been much talk about Russia building up a “shadow or dark fleet” ahead of the sanctions, implying that there is some sanction-breaking activity going on. Historically, the term “shadow fleet” was used primarily in the context of vessels involved in sanctioned trades, hence shipping Iranian and Venezuelan crude to China, thus breaking US sanctions by doing so.
However, so far, the implementation of the EU sanctions and with the price cap mechanism have allowed for three profiles of crude tankers to surface since December 5th:
Vessels servicing Russian crude exports under the price cap mechanism, allowing the use of European reinsurance and other shipping related services, if Russian crude is exported at prices below currently $60/b, as set by the G-7 group. In this case, the standard vessel fleet – what could be called Tier-1 segment – can be used. Currently we have no clear evidence that this clause is actively made use of (cargoes may nevertheless be sold below $60/b due to market conditions and/or bilateral agreements). However, some countries are exempted from sanctions, including for example Bulgaria, and certain shipments to Japan. These shipments as well as all shipments of Kazakh-originating from Russian territory (CPC Blend and Urals exports denominated as KEBCO based on the share of Kazakh-stemming crude in the Russian export system) are handled on the Tier-1 fleet.
Vessels servicing exports that are handled without EU/UK shipping-related services to destination markets outside the EU, UK, the US and other countries that have banned Russian crude oil imports. These shipments are not per definition illegal, hence it is dubious whether the fleet should be called “dark” or “shadow”, albeit it consists of predominantly older vessels, many of which have recently changed ownership. According to our recent data, the majority of Russian crude exports post-sanctions are being facilitated by this fleet. However, it may well be that some of these shipments do not hold proper insurance coverage or try to hide their origin, e.g. by turning off AIS signals. Only in the latter case, the term “shadow fleet” is more applicable, especially if the vessels have been involved previously in Iranian and Venezuelan crude trades. Based on our early observations, it is likely shipments to China may fall under this category. In contrast, most voyages to India are properly signalling their destination and position, suggesting compliant operations.
These are vessels servicing exports that are actually in breach of US, EU or UK sanctions. This would include the unlikely case of Russian crude exports to these markets however, it would also include cases where EU/UK shipping services are used to export Russian crude to third-party countries above the price cap set under the mechanism.
For the coming months the crucial questions are 1) whether Russia can find sufficient buyers for its crude oil and whether 2) there is a sufficient fleet to export Russian oil to international waters. The segmentation of the fleet could lead to significant inefficiencies of the market, however, the size of the 3rd tier could prove to be critical in the way the latter question is addressed.
In other words, is there a case of a vessel being able to move between Tier-1 and Tier-2 depending on market changes, and if yes, how easily can this move be accomplished? This can be partially reflected in the EU decision that vessels operating in the Russian trade / Tier-2 segment can return to EU/UK insurance cover after a 90-day period, and therefore to the Tier-1 fleet. However, when taking into account that the penalty scheme for breaking sanctions for the EU flagged/operated vessels is left to each individual member country, the boundaries of each tier and the level of flexibility become more unclear.
As an example, what would be the penalty in the case an EU-flagged vessel, insured by a Western, non-EU P&I (i.e Norwegian) breaks the sanctions while the operator belongs to a country which depends heavily on shipping? The severity of such penalties would define the operational boundaries of each tier, however it is possible that these might vary on a vessel-by-vessel basis.
Regardless, it is still early days and the number of tiers or the tanker profile in each could change going forward depending on market needs and policy changes. There are other factors to also take into account such as the leniency on non-EU Western P&I on sanction violators or the vetting policies of each chartering entity towards vessels priorly loading Russian crude.
As we are entering 2023 with new regulatory frameworks influencing the design and the operation of ships which will also weigh on chartering decisions, these recently introduced policies and the forthcoming ones on CPP tankers in February are bound to shape shipping markets into a landscape less standardised, more uncertain and perhaps more volatile than before.