Q&A: Russian EU sanctions and shipping insurance ban
As we approach the 5th December deadline, we are attempting to shed light on 10 key questions and distil the determinants that could influence the new environment of Russian operations in shipping and trading
1.What if vessels load before 5th of Dec and discharge before 19th of Jan? Will they get sanctioned from the EU?
The US provided guidance that vessels loading Russian-origin cargoes before 5 December and unloading before 19th January 2023 are exempted from the price cap. The EU and UK have aligned with this US-proposed period. The EU/UK shipping insurance ban will also incorporate this clause. Tankers loading sanctioned oil loaded prior to 5 December and unloading before 19 January will have EU/UK coverage.
2. Are the alternative vessel candidates enough to sustain 100% of Russian crude exports?
First of all, if Russia accepts the oil price cap there will be no matter of a fleet replacement. If not then on the crude side, according to our investigation published earlier in the month, the alternative fleet will be virtually able to absorb Russian crude requirements if all Venezuelan and a big portion of Iranian tankers are used alongside vessels of Russian interests, but this could be unlikely. However, practically, this might not be the case, due to ice-class restrictions. If Russia manages to find enough buying interest and insurance coverage for potentially 3.7 mbd of Europe-facing crude exports then the sustainability of exports could be solely dependent on ice.
When talking about the alternative fleet and the market dynamics going forward the prospective denial of Russia in accepting the oil price cap mechanism will likely lead to a three-tier market. One the one hand, there would be the vessels competing in non-Russian related voyages and then on the other would be the vessels carrying Russian cargoes, however the latter could be split into two depending on their characteristics:
- The so-called “dark” fleet, which is composed of vessels that have been subject to sanctions, i.e. vessels involved in the Iranian and Venezuela trade. These vessels could face repercussions from the EU on these grounds and face the risk of arrest, and hence an attempt of hiding their trails is likely.
- Vessels from S&P activities, which are actually covered from class and insurance out of the EU/UK boundaries, and have not been involved in sanctioned activities before. These vessels are operating within all legal boundaries, at least in accordance with current regulatory frameworks. That means that these vessels could transport Russian oil with reduced risk as opposed to their dark counterparts and it is likely that these tankers demand higher freight rates.
3. Are non-ice class vessels allowed to go to ice-classed regions (i.e the Baltic) during the winter months?
In short the answer is yes. IWL, or Institute Warranty Limits, are often included in charterparties and name some geographic areas as completely off limits year-round or seasonally. Tankers that want to enter these IWL areas would have to notify and receive approval from their respective insurers in order to get coverage from entering such areas. Hence in an area like the Baltic Sea even for the winter period, if ice formations are not present then an insurer could give the green light for an non-ice class Aframax to load. In essence, if ice is not present then ice class vessel restrictions might not be a determining factor for Russia to maintain their exports.
4. Are vessels able to carry cargoes via the North Sea Route during winter?
Not sustainably. Ice-classed vessels of IMO type A (which can withstand the heaviest ice conditions) can transit through 80cm of ice maximum. Ice in the NSR is around 1 metre the least. Hence any ice-classed vessel would need to be accompanied by an ice-breaker which makes it even more costly and limits the number of transits to a very few or even zero.
5. What will be the key logistical bottlenecks?
For the crude market the main logistical bottleneck is the Baltic. Russia exports most of its exports from there, while it has also to accommodate around another 1.1 mbd, a combination of currently Europe-facing crude and Druzhba pipeline flows. It will be challenging for these volumes to be satisfied by the Aframax and Suezmax alternative candidates, as the requirements without the usage of VLCCs are far too many. Hence, this will require the usage of STS. However, the most convenient STS locations close to the Baltic are Skaw STS and the Netherlands STS. Both locations would unlikely provide any STS assistance for any Russian-related operations to avoid penalties. This leaves the North Atlantic as another option, however in the presence of ice in the Baltic, this kind of STS operations would require more ice-classed vessels to bring the cargoes from the Baltic Sea to the Atlantic Ocean. These ice-class vessels have historically travelled on short-haul voyages (i.e to Finland or Poland). According to our estimations the ice-class requirements to do these long voyages would be triple the amount of the current ice-class vessels owned by Russian interests. This is posing a severe downside risk on crude Baltic exports. At the same time, during the winter months, STS operations in the Azores or other parts of the North Atlantic could be limited due to adverse weather conditions.
Arctic Sea crude exports are lower than the Baltic, and Kola Bay could provide a viable STS location. However, according to our data these exports, which are heading towards India, are occurring solely on Aframax and Suezmax. In the presence of ice however, as Kola Bay STS is in proximity with Murmansk, maintaining the same level of exports will require a small amount of ice-class vessels.
On the DPP and CPP side, the majority of STS are currently occurring in Kalamata. The majority of STS providers in the Kalamata region are local Greek players. As STS is considered a technical support, these theoretically should be stopped once EU sanctions get into force, otherwise these providers might not be able to be employed on operations involving other countries according to the policies laid out by the EU. However, the fact that 70% of volumes transferred via STS in Kalamata are stemming from Russia could incentivise the providers to keep operating. If these STS operations come to a halt, then these will likely move eastwards towards Turkey or Fujairah.
6. Is it possible for vessels to do STS transfers without a provider?
It is possible to handle STS ops with ship crews only provided they are experienced enough and they have the necessary equipment onboard (i.e suitable crane, hoses/manifolds, and the fenders are already rigged). Typically, apart from the ship’s crew, one needs a mooring master and a crew to assist in rigging up the fenders and the mooring master is normally on the daughter vessel while the fenders are rigged on the mother.
7. Does the EU ban provision of services perpetually for tankers after loading a Russian cargo?
According to recent reports, vessels will be able to receive insurance and shipping services 90 days after unloading their last Russian cargo even when it was sold above/outside the price cap mechanism. This seems to imply any vessel seeking insurance from the West can essentially have a probationary period whereby it is not allowed the provision of additional shipping services following its participation in the Russian trade above the price cap. The main aim of these regulations is to allow for the transition from one tier to the other to avoid any capacity restriction in oil logistics which could end up in hiking oil prices.
8. How will the insurers know that a cargo is sold below the price cap level?
This was initially unclear, but the UK government issued some clarification from their end, which aligns with EU sanctions. Instead of a FOB basis the price cap will be implemented at a trading basis, meaning the entire trading chain must be below the price cap. Charterers are required to request the price, and insurers and owners and insurance brokers are expected to receive the price attestation from charterers.
9. Will Kazakh origin grades such as KEBCO blend or CPC blend be exempt from the EU ban?
Both blends will still be allowed to trade after 5 December, even for EU destinations. All facets of the importing chain, such as charterers, ports, refineries, on-land storage, will have to provide a certificate of origin proving the crude is these blends.
10. Do vessels passing through the Bosporus strait need to show insurance?
According to the Turkish Transport Ministry, all vessels passing via the Turkish straits would need to show full coverage. However, what is the amount that determines a full coverage has not been identified. At the same time there is no clear guidance as to whether this coverage should come from a member of the International Group of P&I companies or otherwise. If the former is true then any Russian-originated cargo will not be able to be exported out of the Black Sea to any destinations apart within the Black Sea.
Although the landscape is getting clearer as we approach the December 5 deadline, judging from the above there is still an uncertainty defining the way Russian operations will unfold (i.e. Russian oil STS locations, insurance on Bosporus straits, number of insurers willing to undertake Russian cargoes, presence of ice in the Baltic. At the same time once these operations kick start, it begs another question: What will be the reaction of EU and G7 to further stop or boycott Russian oil carrying vessels? As we mentioned above, the usage of sanctioned vessels or the necessity to perform STS in EU waters could leave certain weak points from a Russian perspective. It would be interesting to see whether the EU and its allies would attempt to exploit these Russian “pain points” to further reduce global exposure on Russian oil, e.g. via detaining vessels, or if they will observe unfolding developments from the sidelines.