Tanker trades remain resilient despite tighter OFAC price cap enforcement

The US has signaled tighter enforcement of the Russian oil price cap regime, with Pacific exports highlighted as a potential area for evasion, but industry participants suggested that tanker trades could remain resilient with no new tough, concrete measures.

The US Treasury's Office of Foreign Assets Control warned of possible deceptive practices taking place to evade the price cap on Russian crude in an alert issued April 17, and instructed US entities on how to ensure price cap compliance.

OFAC flagged that oil exported through the Eastern Siberia Pacific Ocean pipeline and from ports on Russia's eastern coast like Kozmino may be trading above the cap, with US entities potentially providing services to non-US firms in breach of the regime without the full knowledge of their transactions.

G7 and the EU have banned maritime services providers subject to their jurisdictions from servicing seaborne Russian crude exports from Dec. 5, 2022, unless the barrels are sold at no more than $60/b, and banned products from Feb. 5 unless sold at up to $45/b or $100/b, pending on the product types.

"The latest OFAC warming signals that G7, or at least the US, may take a tougher stance when it comes to ensuring compliance with the oil price cap," Gibson Shipbrokers senior market analyst Svetlana Lobaciova said. "As far as we are aware, ESPO crude has been trading above the price cap level since the introduction of the cap itself."

Platts, part of S&P Global Commodity Insights, has assessed front-month loading ESPO crude (Singapore) on an FOB Kozmino basis above $60/b in all but one session since Dec. 5, 2022.

US firms should use more sophisticated shipping intelligence services to improve their detection of Automatic Identification Systems manipulation that aims to disguise tanker calls at Russian ports, OFAC suggested.

"Tanker operators accordingly should consider whether it is appropriate to perform enhanced due diligence," law firm Seward & Kissel's counsel, Brian Maloney, said.

Freight rate cap

OFAC said shipping, freight, customs and insurance costs must be invoiced separately from Russian oil purchases and "at commercially reasonable rates," without providing further definition.

The alert does not necessarily mean there would be a freight rate cap, as industry participants should know when "a freight rate that is totally unreasonable," Claire O'Neill McCleskey, assistant director of OFAC's compliance office, said in a webinar April 20.

However, some analysts said what is reasonable or not can be highly arbitrary from OFAC's perspective, highlighting the risk of non-compliance.

"Freight rates for lifting Russian crude and products have been notably above levels for non-Russian trades even before the implementation of a price cap," Lobaciova said. "And now of course the picture is even more complex."

With reputational, legal and commercial risks, tankers lifting Russian oil have seen a bump in freight earnings since Russia invaded Ukraine in February 2022.

The Aframax rate for a 100,000 mt shipment from Kozmino to North China rose to $25/mt in early December 2022 from $5.80/mt on Jan. 3, 2022, according to Platts assessments. The price for the route was last assessed at $22.25/mt on April 21, 2023.

"The freight market is highly volatile and what is reasonable today can be unreasonable tomorrow," Erik Broekhuizen, tanker research head at shipbroker Poten & Partners, said.

Lobaciova said the OFAC alert could prompt more risk-adverse owners to gradually migrate back into mainstream, non-Russian trades to avoid any legal issues.

"Yet, as the vast majority of Kozmino shipments are extremely short haul to China, [the] impact on the tanker market is likely to be limited," Lobaciova added.

Jurisdiction issues

G7 and the EU have so far only threatened to impose primary sanctions on those not compliant with the price cap regime, meaning each authority would be enforcing the rules in its respective jurisdiction.

With OFAC targeting US entities, Lobaciova said US-based insurers would be in a "more challenging position and at [a] higher risk."

Earlier in April, mutual insurer American Club stopped servicing Gatik Ship Management, withdrawing coverage from 34 of its ships. VesselsValue reported Mumbai-based Gatik had acquired 53 tankers of various sizes with an average age of 17 years between December 2021 and early April for Russian trade, and S&P Global Commodity at Seas data showed Gatik-operated vessels frequently lifted from Russia in recent months.

The company did not respond to emails seeking further comment.

"OFAC has a very broad reach," Maloney said. "Although its alert is a warning to US persons ... many US persons in this market provide these covered services on a global basis."

Dan Tadros, chief operating officer of Shipowners Claims Bureau, which manages the American Club, said market attention will likely shift to how the EU and the UK enforce the price cap regime going forward, as most marine insurers are based in their jurisdictions.

The compliance landscape could be more complex in the EU, as the bloc generally leaves sanctions enforcement to individual member states.

"Sanctions in the EU is like a box of chocolates, you never know what you are going to get," Tadros said.