Russia's 'Shadow' Fleet Retains Access to G7 Insurance

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The "shadow fleet" of tankers that handles a substantial chunk of Russia's oil exports has retained access to Western insurance services under the G7 price cap mechanism, although some media reports may have overstated the extent of such coverage.

Some shadow-fleet vessels have been cut off from Western insurance — notably those that were operated by Gatik Ship Management, before the Indian company was split up into several different entities.

And reports of some other shadow-fleet firms using insurance from Western protection and indemnity (P&I) clubs appear to be inaccurate.

The club cited as covering Dubai-based Radiating World Shipping Services (RWSS), for example, denies any such involvement with RWSS.

On the other hand, Energy Intelligence has confirmed that Geneva-based Fractal Shipping has coverage from the International Group of P&I Clubs for its 24 tankers.

Fractal is one of the more prominent companies to have popped up to provide alternative shipping services since Russia's invasion of Ukraine in February of last year.

The shadow fleet emerged at significant scale after the G7 nations imposed restrictions on the provision of shipping and related services for Russian oil, unless export cargoes are valued below a certain price, which was set at $60 per barrel for crude from Dec. 5.

A price cap and similar restrictions for Russia's exports of refined products took effect from Feb. 5.

The price cap mechanisms have helped to maintain flows of Russian oil to global markets after the ban. However, the recent rise in the price of Urals — Russia's main export crude — to above $60/bbl has raised questions about enforcement and potential supply impacts.

The price cap was designed both to limit revenue for Moscow and keep Russian oil flowing to the global market in order to prevent price spikes that would harm oil-importing nations.

Mixed Data

Before Urals pushed above the cap price, Energy Intelligence estimated that ships owned by companies based in G7 and EU nations (mainly Greece) were handling roughly 20% of Russia's seaborne exports.

Various reports have suggested that an even larger proportion of Russia's exports are covered by G7 insurance, but it is more difficult to verify the source of a vessel's insurance than the country in which the owner of that vessel is based.

Media reports typically cite shipping safety database Equasis as a source, but Energy Intelligence reporting indicates that at least some vessels listed in Equasis as covered by P&I insurance do not actually have such cover.

RWSS — another newcomer to the world of Russian oil exports — is thought to be connected to Russian oil producer Lukoil. It owns about two dozen aging tankers, up from none at the end of last year, according to a source familiar with the company.

The Equasis database says 11 of these vessels are covered by P&I insurance providers, including eight covered by the North of England club, which merged with the Standard club in February.

But Mike Salthouse, NorthStandard's head of external affairs, says RWSS is not a member of the merged NorthStandard and was not associated with any of the international group of P&I clubs.

Energy Intelligence was unable to obtain a comment from Lukoil's trading arm Litasco on a possible connection to RWSS.

By contrast, Fractal does have P&I cover. One of its ships, the Suezmax tanker Tyche 1, which has regularly shipped Russian oil over the past year, discharged a 1 million bbl cargo of Urals in India this past week.

The cargo was loaded at Russia's Black Sea port of Novorossyisk on behalf of state-controlled Russian oil giant Rosneft, according to Kpler.

The West of England Shipowners, a member of the International Group of P&I Clubs, confirmed that it has provided that vessel's P&I insurance cover since February.

When contacted by Energy Intelligence, it also noted that P&I clubs and shipowners do not have direct knowledge of the price paid for a cargo, and that as "Tier 3 actors" under the price cap mechanism they rely on price attestations from brokers and sellers.

Growing Risk

Nevertheless, there is a general awareness that there is a growing risk of price cap violations as a result of the run-up in global oil prices over the past month and the proliferation of obscure trading firms that have replaced traditional players.

One P&I club urged its clients in mid-July to proceed with extra caution when contracting to handle Russian crude exports.

Another, the American Club, is investigating information about one of the vessels it covers, the Suezmax tanker Leopard 1, and sources say it may soon drop the vessel.

Reuters reported last week that the Leopard 1 shipped a Urals cargo from Russia's Baltic Sea port of Ust-Luga to India in May on behalf of Bellatrix Energy.

Bellatrix is one of numerous obscure firms, mostly based in Dubai or Hong Kong, that have come to dominate the trade in Russian oil since established Western firms withdrew.

But nobody has suggested that the Bellatrix trade violated the price cap or breached Western sanctions.

In April the American Club dropped the P&I insurance cover it was providing to at least 34 vessels belonging to Mumbai-based Gatik, which had emerged as a significant shipper of Russian oil.

The move came as Urals briefly topped $60/bbl for the first time since the price cap came into force in December.

Credible Insurance

Because the trade in Russian oil has now become so opaque, it is hard to know for sure what proportion of tankers involved in it are still using Western insurance.

When the price cap first took effect, the share of Russian oil shipments using Western service providers was estimated at around 90%.

That number has since fallen — most sharply in the Pacific, where the price that Asian buyers pay for Russia's premium Espo export grade has consistently exceeded $60/bbl.

US officials insist that there is still significant "buy-in" to the price cap scheme among private-sector companies, but they decline to put a figure on compliance.

"One of the reasons that we have confidence in the policy generally is that we think the buyers of [Russian] oil do place a very large premium on the quality of the services they have historically received from the G7 countries," a senior US Treasury official said.

"That includes the better ships. It includes the more credible insurance … And it includes a trade finance system that those buyers know and understand well."

Another senior US official said that sellers have received requests to provide additional bonds at certain non-Western ports because of concerns about the quality of alternative insurance cover provided by companies outside the G7 countries.

Enforcement Risks

Sources say a key weakness of the price cap scheme is that Western shipping and insurance firms don't know what price was paid for a cargo of Russian oil and rely on a process of self-attestation, requesting documents from traders that confirm a sale complied with the cap.

"We as P&I clubs, and marine insurers in general, none of us have direct contact with or deal at all with those brokers and sellers," said a senior executive at a P&I club.

"There are times when we miss things. They fall through the cracks. We just have no idea. And the number of non-cap-compliant vessels falling through the cracks is likely to increase as prices rise."

"All the P&I clubs are worried, legitimately so, about what the repercussions might be if they miss something," he added.

Meanwhile, the senior US Treasury official said the price cap's attestation policy was deliberately designed to encourage Western services providers to remain involved in the Russian oil trade.

"We set it up that way because we don't want to create a chilling effect on the trade of Russian oil to parties like the UK P&I clubs, by making them do a lot of onerous due diligence," he said.

"Our enforcement efforts are not directed at good faith service providers."

'Outrageously Ambitious'

Despite the relatively soft approach to enforcement, the evolving nature of the trade in Russian oil and the possibility of further price increases does heighten the risks for Western service providers striving to remain compliant with the G7 regulations.

"The price cap scheme is outrageously ambitious," said NorthStandard's Salthouse.

"You're trying to control the market in one of the world's most widely traded commodities, and you're trying to do that through the narrow window of Western services and shipowners, recognizing that the shipowners and the insurers do not have access to the price."

Salthouse said it is fairly easy for insurers to withdraw insurance cover when they become aware of a breach of sanctions.

"But it's not great if you have a vessel that's done all its due diligence, got its attestation, loaded a cargo and then information comes to light that the cargo has been sold above the price cap."

"It can lose all its financial and technical services, including insurance," he added. "It's a commercial disaster."

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact

Topics:
Oil Supply, Oil Trade, Oil Prices, Crude Oil, Oil Tankers, Sanctions, Ukraine Crisis
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