Dark fleet: a disaster waiting to happen?

After President Trump withdrew the US from the Iran Nuclear Deal in 2018 and reimposed all previous sanctions on the country, Iran started to use a growing fleet of tankers to continue its oil exports (mainly to China). When President Trump sanctioned Venezuela as well in 2019, the dark fleet expanded to include tankers exporting Venezuelan crude oil.

The US-based organisation ’United Against Nuclear Iran’, which follows the Iranian oil trades closely, estimates the dark fleet has grown from 70 vessels in November 2020 to 257 just two years later.

Reputable shipowners do not want to get involved in these trades, which limits the supply of vessels available to those trading in sanctioned oil and products. This shortage in vessel supply has also made moving sanctioned barrels extremely lucrative. While this market is by nature very secretive, estimates from knowledgeable observers suggest that shipping rates for Venezuelan or Iranian barrels can be two or three times the market rate for legitimate voyages.

These premium earnings have created a strong incentive for opportunistic, less scrupulous owners to get involved in these trades. Given that the nature and longevity of these sanctions is very unpredictable, almost all tankers involved in these trades are older units. Owners of vessels buy them for the specific purpose of utilising them in these illicit trades, and they want to be able to earn their money back in a short period of time. In other words, the downside of an older (cheaper) ship is more limited. These owners buy old vessels (frequently vessels that would otherwise would have been recycled) and spend the bare minimum on repairs and maintenance.

The illegal nature of the business makes it impossible to use reputable crew managers and arranging proper insurance is difficult as well. To obfuscate the illicit nature of their employment, owners of these tankers frequently change the vessel’s name and ownership and flag them in jurisdictions that are known to be less strict. As a result of these factors, the risk that these vessels are involved in accidents is elevated and so is the potential harm that could be inflicted on the crews and the environment in case of an oil spill.

This dark fleet may grow substantially when the free flow of Russian oil is further restricted due to the implementation of the EU import ban and the G7 oil price cap, especially since President Putin has indicated he will not sell oil under the price cap mechanism. In apparent anticipation of the need for a larger dark fleet, sales of secondhand tankers have been brisk this year, despite the fact that prices for older vessels have increased markedly over time. At least 60 VLCCs, 42 Suezmaxes and 93 Aframaxes have changed hands year-to-date, with an average age of more than 15 years.

So far, Russian exports have only been impacted by limited sanctions. However, the average age of the Aframax tankers that carry the vast majority of Russia’s exports has already increased markedly. If Russia does start utilising more vessels from the dark fleet, the average age of their export tankers will rise dramatically and, unfortunately, so will the risk of incidents.

This article first appeared on Poten & Partners’ website.

Editor’s notes: 

In early November, Western governments announced further penalties and restrictions on the oil and tanker trades. 

The US Treasury’s OFAC designated members of what it called "an international oil smuggling network that facilitated oil trades and generated revenue for Hizballah and the Islamic Revolutionary Guard Corps-Qods Force".

“The individuals running this illicit network use shell companies and fraudulent tactics including document falsification to obfuscate the origins of Iranian oil, sell it on the international market, and evade sanctions,” US Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E Nelson said.

Among the individuals and companies targeted, prime among them is oil tanker trader Viktor Artemov, and the US Treasury said his "vast, complex and interwoven global network of front companies" are key to facilitating oil trades by the dark fleet.

"Mr Artemov used his companies to buy and sell oil tankers that were then used to transport blended Iranian oil on behalf of the oil smuggling network. Mr Artemov also planned oil sales to Asia-based buyers as of late 2021 with Muhammad Ibrahim Bazzi, a key Hizballah financier who was designated by OFAC in May 2018 for providing material support to Hizballah," the Treasury said.

On 3 November, the Group of 7 wealthy nations and Australia made further arrangements for a cap on Russian crude oil prices that is to begin in line with the onset of sanctions against Russia by G7 members and the European Union (EU), according to a Reuters report.

Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, as well as the European Union and Australia agreed that the price cap on Russian crude oil will reportedly set a fixed price on Russian crude oil and products that will be regularly reviewed. The initial price has not been confirmed and, with the price cap on Russian crude due to go into force 5 December 2022, shipping interests are eagerly awaiting further information.

On the same day, the UK Government introduced a ban intended to stop UK vessels and service providers from facilitating seaborne crude oil trades with Russia that fall outside of the G7-agreed price cap on Russian oil and products.

"New legislation announced today will prevent countries from using the UK’s services to transport Russian oil unless it is purchased at or below the oil price cap," a statement from the UK’s Department for Treasury said.

The ban on services, including insurance, brokerage and shipping, will be coupled with a General Licence, expected shortly, that lays the basis for an oil price cap exception that will allow third countries to continue accessing services only if purchasing Russian oil at or below the cap. The level of the price cap will be set by the coalition in due course.

Insurance is one of the key services that enables the movement of oil by sea, particularly protection and indemnity (P&I) insurance which relates to third-party liability claims – the UK is a global leader in the provision of P&I cover, writing 60% of global cover.

The legislation on crude oil will come into force 5 December, with further measures on refined oil products coming into force 5 February, to align with EU sanctions timelines. To enforce the scheme, the Treasury has set up a new team, based in the Office of Financial Sanctions Implementation. This team will set up the licensing and enforcement system for the oil price cap; engage with industry to ensure readiness for the cap; and monitor the level and impact of the cap on an ongoing basis.

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