An important decision looms for the Group of Seven (G7) coalition regarding the future of its Russian oil price cap. Last Thursday, it was reported that for the first time since its imposition, the price of Ural crude oil rose above the G7 levied price cap of $60 per barrel, necessitating a decision on the future of the price cap, and clarity for the maritime service providers affected.
Context
Before invading Ukraine, Russia exported 7.8 million barrels of petroleum products per day, 5 million of which were crude. Europe was the largest buyer by far, importing approximately 2.4 million barrels daily, roughly a third of Russia’s total petroleum product output.
Following the invasion of Ukraine and the subsequent departure of Western companies from Russia, oil and gas- always a large part of Russia’s economy- became even more critical. In the EU’s sanctions documentation, the contribution of hydrocarbons to the Russian economy was estimated to amount to approximately half of the nation’s total revenue.
Not able to intervene militarily, Western powers targeted Russia economically. On the 8th of March 2022, the President of the United States signed an Executive Order banning the import of Russian oil into the country. In June 2022, the European Union introduced its sixth package of sanctions against Russia, including a phased ban on purchasing, importing, or transferring Russian crude oil. The EU embargo went into effect on the 5thof December, 2022.
The G7 Price Cap
The G7 Price Cap on crude oil was introduced on the 5th of December 2022, complementing the EU’s embargo. Its goal was and remains to further reduce Russia’s economic ability to fund its war, while simultaneously allowing Russian oil to be exported to third countries. A total embargo on Russian oil would have the unwelcome effect of spiking global oil prices, having significantly reduced the volume of oil entering the markets.
While Russian crude cannot be transported to the US or EU, providing it is sold below the $60 per barrel price cap, Western shipping and insurance companies can insure and provide services and vessels to transport oil between Russia and third countries. Service providers are responsible for proving that they have carried out due diligence to the best of their abilities, and that the vessels they deal with abide by the price cap.
The $60 price cap does not apply to shipping and insurance firms based outside the G7, though most of these industries are traditionally located in the West. As such, Western services remain invaluable to vessels engaged in the shipping of Russian crude. In March 2023, Bloomberg found that between 50% and 60% of Russian oil tankers were still insured with partners of the International Group of P&I Clubs (administered from the United Kingdom).
Premium Insurance
Without high-quality guarantees of insurance, such as those provided by the International Group of P&I Clubs, vessels maybe limited to where they can travel. States know that without insurance, any oil spill in their territory, or which drifts into their territory, will become their responsibility- a sobering thought bearing in mind that the 1989 Exxon Valdez oil spill cost an estimated, and according to some sources lowball, figure of $4.4 billion in clean-up and compensation.
Much of the Russian oil fleet is made up of aging, uncared-for, dubiously registered hulks, guilty of frequently turning off their automatic identification systems (AIS- a collision avoidance tool)and engaging in reckless open-ocean ship-to-ship (STS) transfers. As such, states are understandably unhappy when such vessels transit through their territory uninsured.
In December 2022, Turkey angered Moscow by demanding that all Russian vessels transiting through the Bosphorus Straits present evidence of their insurance, which resulted in large queues of m twenty or more Russian vessels waiting to show paperwork. Turkey also sought specific assurances from insurance providers, guaranteeing that the Bosphorus Straits would be covered in the event of an oil spill.
Implementation or Prevarication?
Now that the price of Ural crude has risen above $60 per barrel, it is clear that the G7 must make a decision. Do they stand firm and insist that Western providers withdraw their services from vessels carrying Russian oil, or do they swallow their pride and increase the price cap?
It isn’t as easy or straightforward a question as it might first appear. If the G7 clamps down and forces Western businesses to cease all dealings with Russian crude dealt above the cap, the amount of oil exported from Russia will be dramatically reduced. This will, in turn, force the price of non-Russian-produced oil up; something deemed unfair to less economically stable countries and something Western governments are uncomfortable with in the current economic climate of persistent inflation.
If they pursue this course of action, Western maritime industries will lose a great deal of custom, which will be forced to insure their vessels through an expanding network of firms in non-coalition countries, eager to increase their market share. Already, we have witnessed arise in maritime service providers independent of traditional Western infrastructure, with China, the UAE, and India swooping in to claim large shares of the Russian market.
This, combined with the ongoing threat of de-dollarization, could see the West, particularly the United States, becoming less critical and central to the international maritime and energy markets, which they view as far from desirable.
The G7 has not yet made a ruling, but when announcing the price cap on the 2nd December 2022, they stated, “We will be prepared to review and adjust the maximum price as appropriate. When reviewing the price, we should take into account a variety of factors, which can include the effectiveness of the measure, its implementation, international adherence and alignment, market developments, and the potential impact on coalition members and partners, including low- and middle-income countries.”
Theia: Actionable Maritime Intelligence
Implementation is, of course, the sticking point. If the G7 cannot effectively use the sanctions to prosecute breaches, then they are not worth the paper they’re written on, and the price might as well be set at whatever best suits the Russians.
Vessels transporting ESPO crude (East Siberia Pacific Oil blend), which has traded consistently above the $60 per barrel cap, have employed multiple subversive and dangerous shipping tactics in an attempt to continue to export oil while using Western service providers, including the previously mentioned open ocean STS transfers and AIS spoofing.
And it is in implementation that SynMax’s maritime domain intelligence product, Theia, comes into its own. Theia is capable of automatically locating, attributing, and tracking all vessels over30 meters, across (currently, though this is continually growing) five million square kilometers of ocean. Data agnostic, Theia can draw upon multiple intelligence streams, including signals intelligence (SIGINT) and daily ingested satellite imagery, allowing for effective near-real-time monitoring with multiple layers of redundancy. Machine learning and artificial intelligence process the data streams, bringing otherwise unimaginable scalability and ensuring that actionable intelligence can be created, disseminated, and acted upon almost instantly.
By utilizing Theia, insurance providers, vessel owners, and other responsible parties can carry out effective due diligence on the vessels under their care, thus vindicating them if and when breaches take place outside of their control.
The EU’s eleventh and most recent package of sanctions focuses almost exclusively on preventing the Russians from circumventing its previous sanctions packages. Vessels suspected of engaging in STS transfers or suspected of having manipulated or turned off their AIS when carrying Russian oil will be banned from EU ports, further raising the stakes for Western shipping firms.
Inbuilt modules mean Theia can automatically detect STS transfers and spoofing patterns, further reducing the workload for analysts. Historic imagery means that a vessel’s past movements can be analyzed before a deal is closed, allowing service providers to confirm beyond doubt that the people they are in business with are above the law.
Contact us to book a demonstration, and see how Theia can bring clarity to the maritime environment.
