Suspected attacks on six tankers in the Strait of Hormuz over five weeks have insurance underwriters raising threat levels in the region and the industry worried about a reprise of the 1980s Tanker War
On 22 April 2019, as the US ended waivers on sanctions against Iran, Iran’s Islamic Revolutionary Guard Corps (IRGC) repeated a threat to close off the Strait of Hormuz oil trade choke point.
Between mid-May and mid-June 2019, six tankers have been hit by explosives in the Gulf of Oman.
On 12 May, four ships at anchor off the port of Fujairah in UAE – two Saudi-owned tankers, an Emirati vessel and a Norwegian tanker – were holed by what a 7 June report to the UN Security Council intimated was a well-planned operation that bore the hallmarks of a nation state in the region.
Presented by the UAE, Norway and Saudi Arabia, the report said there were “strong indications that the four attacks were part of a sophisticated and coordinated operation carried out by an actor with significant operational capacity, most likely a state actor”.
Later in May, US National Security Advisor John Bolton said the US was “almost certain” the limpet naval mines were from Iran.
Last week, two more tankers – a Norwegian-owned LR2 carrying a volatile crude oil derivative called naphtha and a small Japanese chemical tanker carrying methanol – were hit by what the US military’s Central Command said were limpet mines, causing explosions and fires on both vessels.
US Secretary of State Mike Pompeo again quickly laid the blame on Iran, offering grainy video purporting to show an Iranian IRGC vessel removing an unexploded limpet mine from one of the two tankers that suffered explosions.
The backdrop to these increasingly fiery incidents in the Middle East tanker trade and the increasingly fiery rhetoric from Washington and Tehran, of course, remains sanctions the US has imposed to try to prevent Iran from developing nuclear weapons.
Iran was continuously under sanctions between 1987 and 2015, when US president Donald Trump unilaterally decided to pull out of a multilateral nuclear non-proliferation treaty built during the Obama administration along with several European states. The Trump administration’s recent reinstatement of sanctions marked the end of a short sanctions-free period for Iran.
However, the origin of the nearly 30 years of consecutive Iranian sanctions go back to a dark period in tanker shipping. When the sanctions were initially imposed by Ronald Reagan in 1987, they were levied, at least in part, due to Iran’s targeting of commercial shipping vessels during the course of its protracted war with Iraq.
During the Tanker War of the mid-1980s, 400 civilian crewmembers lost their lives, hundreds of merchant ships were damaged and commercial shipowners suffered substantial losses.
In the wake of the current suspected attacks on tanker shipping, two of the industry’s largest shipowner associations have expressed worry that similar circumstances could be on the horizon.
Intertanko chairman Paolo d’Amico warned the western supply of crude oil could be at risk. Intertanko said international shipping industry is "caught in the middle of a geo-political conflict over which it has no control" and called on "the nations of the world to calm tensions in the region".
BIMCO, an association that represents some 60% of the world’s merchant fleet by tonnage, spelled out its fears in similarly stark language.
"The tension in the Strait of Hormuz and the [Middle East] Gulf is now as high as it gets without being an actual armed conflict," BIMCO’s head of maritime security Jakob P Larsen said.
In addition to the rising spectre of another Tanker War and the collateral damage to the industry, shipowners and charterers are facing the likelihood of increased insurance premiums.
In response to the 12 May incidents, London’s insurance underwriters’ Joint War Committee (JWC) met to discuss the issue. Following the meeting, London Market marine insurers extended the list of waters deemed high risk under Hull War, Piracy, Terrorism and Related Perils to include Oman, the United Arab Emirates and the Gulf. Saudi Arabia’s risk area, too, was broadened to include its coastline.
Following the more recent incidents last week, P&I insurer Gard, which insures one of the vessels affected, Frontline’s Front Altair, said Norwegian Shipowner’s Mutual War Risk Insurance Association had raised its assessment of threats in the region.
As DFW Law LLP partner Jonathan Moss told Tanker Shipping & Trade “Whilst underwriters use sophisticated pricing models, factoring in the potential for geopolitical stability to determine premiums, the Gulf attacks will lead to rate increases and more burdensome terms and conditions for Assured Owners and Charterers."
Norton Rose Fulbright partner and head of shipping Philip Roche told TST that most shipowners will be able to pass on the costs.
“There is usually a clause in a charterparty to say that the charterer is aware of any additional premium to be paid,” he said. “Most shipowners, unless they’re carrying goods for their own business will be able to pass these on.”
Exactly how the escalating war of words would play out in the sector, Mr Roche said, was more difficult to predict.
“The degree of risk is quite hard to determine at the moment. Front Altair clearly had some serious damage. You don’t need a big explosion to set these ships ablaze.”
His assessment of the incidents to date was that they were not aimed at loss of life or compete loss of a vessel but rather disruption of trade.
But additional attacks, Mr Roche said, could rachet up costs for the industry even further, explaining a potential Tanker War scenario that he said was still only a distant possibility.
“What’s going to be complicated is how this thing plays out and whether insurers will want to cover it or not. If these things keep happening, then they’ll have to reinstate convoys like they did in the tanker wars of the 1980s.”