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What We Know About the Shadow Fleet Handling Putin’s Oil – Bloomberg

Russia's oil tankers shadow fleet
Russia’s oil tankers shadow fleet (Jeremy Suykur/Bloomberg)

Asad Zulfiqar, Bloomberg

Energiesnet.com 02 24 2023

Has a “shadow fleet” of oil tankers been amassed to help Russia evade sanctions and price caps on its energy exports? That’s the belief of a growing number of observers in the oil trading community who have been tracking mysterious purchases of hundreds of old tankers by undisclosed buyers and other signs of suspicious activity. In addition to weakening the sanctions, the growth of this shadow fleet could drive up shipping costs in general, they say. 

1. Why would Russia want a shadow fleet? 

The Group of Seven nations, the European Union and several other countries have banned or restricted imports of Russian oil and fuels to punish President Vladimir Putin for his war in Ukraine. They’ve also moved to curtail Moscow’s profits from selling oil to countries that are still buying it, such as China and India. This is achieved by blocking insurance and other key services for shipments of Russian petroleum sold above a certain price. Their leverage derives from the fact that virtually all tankers in the conventional global fleet are covered by a handful of big insurers based in Europe and the US. The shadow fleet appears willing to operate without insurance from the big firms. 

2. How could the shadow fleet weaken sanctions? 

Enforcing the sanctions and price caps depends on ship operators being transparent about the ownership of their vessels and the origin of what’s on board. If a tanker’s new owners are hard to trace and the operator is willing to forgo insurance that meets international standards, they’ll be able to skirt the price caps. For example, they could deliver a load of Urals crude sold to a Chinese or Indian firm for more than the $60-per-barrel limit. Shadow ships can also transport Russian oil to buyers in nations that would prefer to keep their dealings with Moscow under the radar. 

3. What’s the evidence of a shadow fleet?

Piecing together the exact size of the fleet is almost impossible, with ownership details — and most individual vessels’ commitment to Russia — shrouded in secrecy. However, commodity giant Trafigura estimated in February that there were about 600 shadow, or “dark,” vessels: 400 carrying crude oil and 200 transporting refined fuels. Some were used previously to trade oil from sanctioned Iran and Venezuela, according to EA Gibson Shipbrokers. Maritime data tracker VesselsValue counted more than 100 oil and fuel tankers sold often at exorbitant rates to undisclosed buyers in 2022. Many ships were acquired by undisclosed entities based in locations such as Dubai, Hong Kong, Singapore and Cyprus, said shipbroker Braemar Plc. Svein Moxnes Harfjeld, chief executive officer of crude oil tanker company DHT Holdings Inc., said many of the firms buying older ships are backed by Russian capital. 

4. Where did the ships come from?

Many appear to be older tankers that were previously part of the regular fleet. Owners are choosing to offload them for more money than if they were sold for scrap metal and parts, said Harfjeld. Shipping company executives said it’s likely these vessels will never return to the conventional market.  

5. How can the new owners hide their activities?

While it’s hard to prove specific cases of law breaking, the undeclared ownership and insurance status of the vessels makes it easier to operate under the radar and avoid following official procedures that make the market more transparent. An unusual number of Russian-flagged vessels switched their flags to other countries after the invasion of Ukraine, possibly to conceal their ties to Moscow, according to maritime consultancy Windward Ltd. In February, there was an increase in the number of Russian ships hiding their destination. There have also been more ship-to-ship transfers: switching a cargo onto another vessel at sea before returning to collect more. 

6. Can the shadow fleet make the sanctions fail? 

Not necessarily. The measures were never designed to halt Russia’s oil exports, given their importance to the world economy. The idea was to allow them to keep flowing to some markets but at a lower price. By February, there were signs that a significant proportion of Moscow’s exports was being shipped at capped prices. The EU’s ban on seaborne Russian crude that took effect in December forced Moscow to divert shipments thousands of miles to China and India. A lot of that oil was being transported using the shadow fleet. With those ships tied up for weeks at a time, Russia still had to use European-registered vessels for a big chunk of its exports. The proportion of Russian oil transported using those ships actually rose in the second full month of curbs.

7. What does this mean for the shipping industry in general? 

If the shadow ships never return to normal duties, that would leave fewer vessels available in the regular fleet to carry non-Russian oil, potentially inflating shipping costs. Crucially, the EU ban on almost all Russian seaborne petroleum imports has meant that ships are having to sail further. That’s made the fleet less efficient, further boosting demand for vessels and the cost of freight. 

–With assistance from Julian Lee and John O’Neil.

bloomberg.com 02 24 2023

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