Russia will rely on ‘shadow’ tanker fleet to keep oil flowing



  • Whether the world’s biggest crude exporter succeeds in skirting harsh sanctions starting Monday depends on a non-Western aligned fleet

Shipping companies have snapped up dozens of secondhand oil tankers this year, paying record prices for ice-class ships that can navigate frozen seas around Russia’s Baltic ports in winter.

A driving force behind the purchases, say people familiar with the deals: To get Russian oil to market after the harshest sanctions to date strike Russia’s energy industry next week.

The frenzy in a quiet corner of the shipping market is splitting the tanker industry in two. One part deals with Western oil companies, banks and insurers. The other, known informally in the industry as the “shadow fleet," doesn’t, allowing it to trade with Iran, Venezuela, and increasingly with Russia, the world’s biggest exporter of crude and refined fuels.

“You’re starting a new kind of shipping market, in parallel to the normal compliant market that most of us are operating within," said Lars Barstad, chief executive of tanker owner Frontline Ltd.

Moscow faces a stifling of its oil exports from Monday when European and U.S. sanctions start to come into effect. Unless Moscow accepts a price cap set by the U.S. and its allies, the sanctions will cut Russian producers off from Western shipping and insurance markets they have long relied on to export oil.

The size and agility of the shadow fleet will help determine whether President Vladimir Putin succeeds in keeping Russia’s oil revenue flowing. Oil remains Russia’s economic lifeblood and key to funding the war in Ukraine now that Moscow has all but cut off natural gas sales to Europe.

It could also have a big impact on whether oil and gas prices soar in the months ahead. If Russian oil sales drop because there aren’t enough tankers in the shadow fleet, crude and gasoline prices could jump globally.

Dmitry Peskov, the Kremlin’s press secretary, said shipping sanctions would hurt both Russia and the countries imposing them. “Shipment of Russian oil will be organized in accordance with the new conditions," he said. “Destabilization of oil markets is inevitable, but the demand is still large."

The shadow fleet grew a decade ago to ship Iranian oil after the U.S. tightened sanctions on Tehran in 2012, said John Smith, a partner at Morrison & Foerster LLP and former director of the U.S. Treasury’s Office of Foreign Assets Control. It expanded again after then-President Donald Trump in 2018 hit Iran with sanctions, according to shipbrokers and companies that track vessel movements.

There isn’t a single definition for what makes a ship part of the shadow fleet. Some tankers change flags, turn off transmitters, send out decoy signals, or swap oil at sea, according to a 2020 U.S. Treasury report. Others paint over ship names, falsify documents and mask control over vessels through layers of ownership and management firms, the report says. Some also sail without insurance, according to shipping executives familiar with the practice.

Seventy tankers that once carried Iranian or Venezuelan oil have shipped from Russia since the invasion, said Armen Azizian, crude-oil analyst at ship-tracking firm Vortexa. Stripping out state-owned tankers in those two countries, he said the figure represents more than a fifth of the prewar shadow fleet. Shipbrokers said they expect that proportion to rise over winter.

Shipping executives including Mr. Barstad say they have been inundated with bids for old tankers this year. Often, they say, inquiries come from new shipbrokers inquiring on behalf of low-profile companies in Dubai and China.

Prices for aging vessels normally destined for the scrap heap are vaulting higher. The average price of 15-year-old, large crude carriers has risen 37% to $52 million over the past six months, said Stephen Gordon, head of research at Clarkson PLC, a shipbroker.

Late this summer, a Greek tanker owner sold a 22-year-old ice-class ship for $32 million. Last year, it was valued at $17 million, according to company executives who said they had never seen such a large premium being offered to a ship’s valuation. Another owner who sold an 18-year-old smaller Suezmax to a Dubai entity in September said the ship was now moving Russian oil from Novorossiysk to Turkey and then on to China.

Unlike Iran, whose oil sales are banned worldwide by U.S. sanctions, Russian crude will still be legal to buy and sell once the new restrictions come into effect. But traders will either have to take the risks of moving Russian oil without the safety net of Western insurance or to buy it at or below the price cap. India, China and Turkey have already picked up some of the Russian oil that previously was sold to Europe.

Russian oil became lucrative to trade after the start of the war in Ukraine because it could be bought at a discount to benchmark prices. Once refined, the end product trades at market prices, creating substantial profit margins for those involved.

Among the buyers of tankers include Teodor Shipping LLC and Koban Shipping LLC, according to some of the people familiar with the deals. Both shipping companies registered in Dubai in 2019.

Spokespeople for Teodor and Koban didn’t return requests for comment. A Wall Street Journal reporter visited Koban’s office in Dubai and was asked to leave.

John Hadjipateras, chairman of Stamford, Conn.-based Dorian LPG, which runs 19 ships, said he was approached by Teodor to buy a midsize Aframax crude tanker that Dorian had chartered to a client. Built in 2009, the ship was valued at $27 million last year. Teodor offered $33 million.

Mr. Hadjipateras didn’t sell, saying it wasn’t worth the trouble in case the transaction drew the attention of U.S. authorities who monitor Russian and Iranian oil trading.

Western sanctions target a vulnerability in Russia’s energy industry. The country depends on foreign ships, mostly insured and reinsured in Europe, to transport oil. Those exports are the lifeblood of the Russian economy.

Sanctions hobbled Russia’s state-owned shipping line PAO Sovcomflot last spring when it had to sell about a dozen ships to prevent the ships from being seized by Western lenders, the Journal previously reported, citing people familiar with the matter.

Koban bought five tankers from Sovcomflot earlier this year, the Journal reported. In June, one of those ships, the Cangjie, received Russian distilled fuel from the Vladimir Monomakh, chartered by Rosneft, in a ship-to-ship transfer, according to OPIS, an energy data firm that is part of Dow Jones & Co., publisher of the Journal. The vessels were moored outside the Russian port of Kavkaz.

Anoop Singh, who left as head of tanker research at shipbroker Braemar PLC on Friday, estimates Moscow lacks the boats to move its oil if it is cut off from the mainstream fleet, even assuming all the older tankers sold since the war ship from Russia. Depending on boat speeds and weather in the Baltic Sea, Russia could be left about 1.5 million barrels short a day, according to Mr. Singh, out of its recent exports of 7.8 million barrels a day. A typical large tanker carries 2 million barrels.

Shadow fleet ships may not move oil as efficiently. Older ships sail slowly and local authorities in chokepoints such as the Bosporus and Suez Canal might hold up those lacking insurance, traders said.


This story has been published from a wire agency feed without modifications to the text

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