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EU Russia Tanker Ban Threatens Supply Crunch

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An EU ban on insurance and financing for tankers that carry Russian oil come winter will make it near impossible for many shippers to move this oil. Moscow and friends could try to assemble a fleet of non-Western tankers, which could perhaps handle much of Russia’s crude, but not the refined products. The EU is also discussing a possible loophole, in which tankers could carry Russian oil if bought at a discount under a potential US-backed "price cap" — but traders still see a supply crunch in the making.

An EU shipping insurance ban is creating a huge obstacle to export Russian crude oil and refined products a couple months from now. This could create massive price spikes for oil worldwide, on top of expensive natural gas. Under the ban, Russia’s total 5 million barrels per day of seaborne fuel exports — 3 million b/d of crude oil and 2 million b/d refined products — must be shipped on tankers without any ties to EU insurance and financing. But the bulk of the world’s fleet has ties to the EU — and UK — banks, brokers and insurers. Brokers say there won’t be enough tankers to handle Russia’s oil.

That’s not all. The world is facing a double conundrum. The shipping ruling accompanies another sanction that bans most of Russian crude and product imports into EU countries — impacting the 2 million b/d that still flows from Russia to the EU. Russia has already diverted some 1.5 million b/d of crude and products that no longer goes to the US, EU and UK and now mainly sails to India and China. But Russia must find a new market for the remainder. Even if new buyers appear, tankers are the bottleneck to get the oil to market.

Some assess that 80% of the global vessel fleet is connected directly or via reinsurance to Western companies that ultimately connect to Lloyd’s in London. Sources say Lloyd’s, even absent parallel UK sanctions as yet, will have to align with EU rules. Says one UK insurance official: “Obviously Lloyd's has European partners. And we are subject to all the sanctions regimes there are and have to abide by all of them, of course. It gets very complicated.” The US Treasury Department reckons that 75% of Russian product exports via its European ports are still linked to the Western financial system.

Loop the Hole

Three scenarios can develop between now and December (for crude oil) and February (for refined products) when the two-step import and insurance bans take effect. Perhaps the most obvious but politically hard-to-stomach option is for the EU to abandon the insurance ban and avoid lower Russian exports that would tighten balances, especially for refined products. The EU’s whatever-it-takes approach to punish Russia for the war can cause price spikes or rationing for oil products, on top of historically high natural gas prices. Dropping the ban would be a massive crack in the alliance against Russia. But keeping it in place might destabilize EU governments, undermine support for the anti-war effort, and deepen inflation and an expected economic recession.

To keep oil flowing, the US is driving an effort to allow shippers the use of Western insurance and financing if traders buy Russian oil at a price set by members of the G7 and allies. The price cap — higher than cost but lower than market value — should limit Russia’s oil income. The US, UK, EU (with France and Germany G7 members), Canada, Japan and also South Korea are mulling a system with flat prices for oil and products. An EU official says that “ensuring the security of energy supply worldwide is a key priority.”

For now, the EU thinks a price cap is the way to go. Traders, however, don’t see it working and think it can be undermined with bogus paperwork — one paper showing the capped price, another paying the Russians extra money under the table. Russia has signaled it would make the plan fail and could limit supply.

A Darker Way

A third option is that Russia and other nations like China and Iran link up their fleets and get certification, insurance and finance outside Western financial networks. Western brokers call this a dark fleet, as tankers at times also conceal where they are. Such a fleet would divorce the trade from the direct impact of sanctions. Already, Russia’s state-controlled Sovcomflot (SCF) has been putting its substantial tanker fleet out of direct reach via intermediaries that register vessels outside Russia. It opened an office in Dubai in November. SCF said it’s a vital part of its “fleet management system.” Much of the Russian oil trade moved there as well. SCF was forced to sell and reflag a number of its ships from Russia to Liberia or Cyprus after US sanctions. Iran also has a large fleet that operates outside the Western system. China, among others, could join.

A London shipbroker thinks Russia, or others, could create new companies that buy old tankers and sail them with sovereign insurance and financing. By pooling non-Western vessels, Moscow might be able to get much of the crude to market via ship-to-ship transfers in Europe or off Morocco, but not the products, is the broker’s assessment. Efforts to go outside the Western system are growing. In recent months, India has started certifying SCF vessels for safety and seaworthiness. This is required by insurance companies (including non-Western insurers) to cover the risk of a cargo — which can be worth $200 million on board a very large crude carrier, and cause billions of dollars in damage in case of a spill.

Abandon Ship

The plethora of sanctions, from the US, EU and UK, makes it hard for Western shipping companies to decide if they can carry Russian cargoes — even now. Dozens of companies and individuals have been sanctioned and cannot be dealt with. They could be connected to a cargo of oil. The London broker says there are two camps of shipowners. One has stopped loading anything Russian. It doesn’t want to be caught in the net of sanctions as the smallest oversight can result in financial punishment. The other takes a more pragmatic approach: If the insurance company approves the cargo, the ship will carry it. “No legitimate company will sail a cargo without insurance,” the broker says.

John van Schaik is the editor of Oil Market Intelligence and Energy Intelligence's New York bureau chief. Rafiq Latta is a senior correspondent with Energy Intelligence’s Middle East team. A version of the article originally appeared in Energy Compass.

Topics:
Oil Tankers, Crude Oil, Oil Products, Policy and Regulation, Sanctions
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