Oil Executives Warn G7 Price Cap Could Lead To Stranded Tankers

Yves here. Is G7 managing to undo what little progress it had made on key details of how the “fire, aim, ready” Russian oil price cap will work when it goes live on December 5?

Get a load of this, from the Financial Times in G7 says Russian oil price cap to be ready ‘in the coming weeks’ a week ago:

The G7 decided in September that the cap will work by allowing western companies to provide insurance to seaborne Russian oil exports, so long as the crude has been sold at a price below the cap.

“We will finalise implementation of the price cap on seaborne Russian oil in the coming weeks,” the ministers said in a joint statement following two days of talks in Germany….

The pledge comes a day after the UK said it would cut off the vital Lloyd’s of London insurance market for ships carrying Russian oil, with a waiver for any countries that sign up for the price cap.

Pull out a calendar. The sanctions go live in less than four weeks. Both insurance and international trade are complex, legally and documentation-intensive businesses. Parties need time to prepare procedures and forms. But the G7 big kahunas seem to think if they can reduce a plan to PowerPoint, that’s the same as making it happen.

Note that one James O’Brien, head of sanctions co-ordination at the US state department, gave the pink paper airy assurances that the industry was providing input and everyone was a grown up, they can see what is coming. That is clearly contradicted by the OilPrice story below. The normally bland OilPrice shows annoyance at how the feckless oil price cap designers haven’t bothered sorting out key details, which are, contrary to O’Brien, causing headaches and probably problems for industry participants.

A turf war of sorts has contributed to this sorry outcome, meaning sloppy implementation on top of bad concept. The US Treasury is the lead player in the US on sanctions and anti-money laundering; my impression is they’ve also been the party in charge of international sanctions regimes like those against Iran.

We reported on September 7 that the Treasury had published guidance that took positions on issue that now seem to be open. As we’ll see below, it appears UK upset the apple cart, perhaps because it saw itself as the big fish in this process as the dominant provider of insurance for oil tankers and cargoes.

In any event, as you can see from the extract below, the procedures seem far more in flux than they looked to be two months ago:

Moreover, the G7 plans to use its bank sanctions weapon to force other countries to comply. From Maritime Executive:

Marine insurers, bankers and tanker owners may not be liable if their customers violate the new G7 price cap on Russian oil sales, according to the U.S. Treasury – so long as they rely on their customers’ word for shipment price compliance. The ruling addresses some of the shipping industry’s main concerns about the potential effects of the ban.

On Sept. 2, the G7 finance ministers proposed “a comprehensive prohibition of services which enable maritime transportation of Russian-origin crude oil and petroleum products globally” – except for oil purchased below a certain price. The idea is a form of a “buyer’s OPEC”: unless the oil is sold below an artificial price threshold, it can’t be insured or moved without risking sanctions.

The Treasury’s guidance, issued Friday, sets up three tiers of service providers for seaborne Russian oil transport: refiners and oil brokers with direct access to price data (Tier I); bankers and shipowners with occasional access to price data (Tier II); and those who have no access to price data in the normal course of business, like insurers and P&I clubs (Tier III).

All have to keep records of compliance, and all are required to do due diligence on their customers, but shipowners, bankers and insurers have an important exemption: they are allowed to rely on their customers for price data. If that data is fraudulent, they are not liable for accidentally participating in a sanctions violation.

“This recordkeeping and attestation process is designed to create a ‘safe harbor’ for service providers from liability for breach of sanctions in cases where service providers inadvertently deal in the purchase of seaborne Russian oil above the price cap due to falsified records,” advised Treasury’s Office of Foreign Asset Conrol.

OFAC does expect to see attempts at sanctions evasion, and it cautioned involved parties to watch for signs of deceptive practices, such as AIS manipulation or reluctance to provide pricing data.

The office said that it intends to harmonize its regulatory approach with the other members of the G7, indicating that the same guidance will be applied broadly.

So the short version of this is the G7 will require buyers to keep price records, as in price per unit volume, of oil and oil products, and presumably also indicate country of origin. The ones who are not financial institutions (as in subject to having regulators go full proctology on them and having their banking licenses revoked) would be subject to fines or even having their access to dollar payment systems suspended or revoked if they were found to be cheating. This would apply to traders in non G7 countries too.

As you can see, the Treasury version of the plan gave insurers and shipowners a green light as long as they got representations about pricing from the buyers. But consider this excerpt from a story yesterday at Reuters:

Oil-laden tankers risk being left languishing at sea if insurers do not urgently get clarity on an unfinished G7 and European Union plan to cap the price of Russian crude, two senior industry executives told Reuters….

And with just three weeks to go, time is running out to fully convince the shipping services industry it will work.

Concerns are centred around a scenario in which insurers discover that oil in transit at sea, which was believed to have been sold below the price cap, was in fact sold above it.

This would trigger the withdrawal of insurance cover as well as a refusal by buyers to accept delivery, leading to financial and logistical headaches and risking environmental dangers.

This is simply crazy. The original language provided for no liability in the event a Tier II or III party found out that they’d been lied to about the price of Russian oil they were carrying. But it appears the UK getting cute with its maritime services ban, including insurance, has gone further than the Treasury’s intent. The Bloomberg subhead from its November 3 article, UK Seeks to Cap the Price of Russian Oil With Insurance Move, incorrectly states “UK aligns its position with EU ahead of planned price cap” when the UK has superceded the Treasury plan:

The UK government is to cap the price of Russian oil for any company in the world using the country’s insurance, brokerage and shipping services.

The UK Treasury said in a statement on Thursday that the country will prohibit the provision of the services from Dec. 5, part of a broader international effort to undermine Russia’s war effort in Ukraine.

The ban won’t apply to oil purchased at or below a price cap set by a coalition of the G-7 nations and Australia, the UK Treasury said. The decision aligns the UK more closely with the European Union, which has also said it will ban insurance and services for the shipment of oil not sold below the cap.

While the Bloomberg article does not spell it out, first the UK prohibition sure sounds like it makes insurers compliance police, something the US Treasury avoided since the insures in the normal course of business don’t have access to the needed info. Second, “prohibit” sure sounds like the insurer will be punished if found to have misbehaved.

Finally, I doubt insurers are solely or even mainly worried about getting surprise news about a tanker at sea. Raising this scenario seems to be designed to force the UK to limit its prohibition to the issuance of insurance before the tankers set sail. If the insurer checked all the required due diligence boxes, it (and the tanker owner, assuming he was not misleading the insurer) should not be subject to punishment if the shipper (the buyer of the Russian oil) made misrepresentation to them when they have no or little ability to verify what they have been told.

Of course, the other remedy is not to buy insurance from UK insurers. Russia signaled it was looking into stepping into that role, and I would imagine that there are players in the Middle East who might be game too. But it does not seem as easy to get around the bans on servicing tankers….

Any shipping or oil trading knowledgeable readers are very much encouraged to pipe up

By Julianne Geiger, a veteran editor, writer and researcher for Oilprice.com. Originally published at OilPrice.com

Oil cargo could soon be stranded at sea if G7 leadership fails to get insurers details regarding the upcoming—but undefined—price cap mechanism on Russian crude oil, senior industry executives told Reuters this week.

The price cap plan—although it can hardly be called a plan at this point—is set to take effect as of December 5, after Canada, France, Germany, Italy, Japan, the UK, and the United States agreed to hold buyers within the group to purchase crude oil from Russia only if it could be purchased below a set minimum.

The plan, if the G7 nail down the details—would seek to limit the revenue Russia receives from the sale of crude oil, while allowing those in need to still purchase oil from the sanctioned country.

With just three-and-a-half weeks to go before the measure would go into effect, the industry is clamoring for clarity.

One lingering question, according to Reuters’ sources, is that insurers could discover that an oil cargo en route was actually sold at a level that exceeded the agreed-upon price cap. As it stands, insurers would need to pull coverage for the cargo, and the buyer would not accept the delivery—what happens after that has not yet been ironed out, and has the potential to leave cargo stranded at sea, at great environmental risk.

“If the time is too short, I think everyone will have a Plan B to de-risk, terminate, stay away, not maybe conclude any new contracts until there is some clarity,” George Voloshin, Global Anti-Financial Crime Expert at ACAMS, the Association of Certified Anti-Money Laundering Specialists told Reuters. “It will probably be quite messy.”

One European Commission told Reuters that the EU was aware that the industry is looking for more detail, but that the matter needed to be addressed by the G7 specifically.

U.S. State Department Ambassador James O’Brien has said that the G7 will have the details ready.

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11 comments

  1. The Rev Kev

    There may be a time factor at work here. The G-20 summit in Bali starts and finishes in the next several days and I think that all the members of the G-7 are also members of the G-20. So this would be a hot topic there and there would be moves to trying to have this oil price cap negotiated into a workable form. Will it work? No. There are too many powerful countries that want to deep-six this idiotic idea and as this was Yellen’s idea, perhaps she should fall on her sword. I have heard also that there are so many holes in the present plan that it amounts to a smuggler’s charter. The UK may be gung-ho about this idea but when I checked, found that the bulk majority of their oil deliveries come from the US and Norway so they would not be really effected and so no skin in the game. Other countries may have other priorities however-

    https://www.statista.com/statistics/381963/crude-oil-and-natural-gas-import-origin-countries-to-united-kingdom-uk/

    Reply
  2. Stephen

    The U.K. ought to look up its own history of circumventing Napoleon’s Continental System that was an attempt to strangle our trade. It failed. Totally. It also hurt France as much as or more than it hurt the U.K. Sounds like this will not be so different, despite the elaborate mechanisms. It boils down to power: plenty of quite powerful states seem to want this to fail. The G7 does not quite rule the world.

    Not so sure either why the U.K. is seemingly so keen to destroy its own role as the centre of the maritime insurance market. But that seems a possible outcome. After all, we do not build, run and own the ships anymore so it is a legacy and expertise based dominance. As with dollar hegemony these drivers create real barriers to change but it can happen. Things do change. May be more fragile than we might hope. Weaponising the provision of insurance services on a global scale can hardly be helpful for maintaining that dominance. Unless I am missing something.

    Reply
  3. John k

    As has been said elsewhere, opec is not amused by the comedy. Any success here would encourage a buyers cartel vs opec. They already cut output as a warning shot, many opec countries can’t produce more and are under their quota, so would be quite happy with others cutting and the resultant higher price. And Exxon wouldn’t at all mind less opec output.
    Imo Russia won’t sell under the cap and opec again cuts output. This will bring back energy inflation but like;y won’t reduce co2 because man will immediately substitute coal etc, to make up gas/oil shortage, as is already happening in eu and us.

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    1. Kouros

      As OPEC I might think seriously and publicly that I consider not selling to any of the G7 countries, on the argument that this action is political and not market driven and that G7 might decide tomorrow to cap the price of oil sold by OPEC because it is not enough left and it is too expensive, undermining the developed world standard of living.

      Reply
  4. lyman alpha blob

    Perhaps this half baked scheme is not necessarily meant to actually cap Russian oil prices, but as a thin justification for some upcoming Western piracy, given the recent penchant for the West to seize other countries’ assets and all those Western navies that aren’t much use in Ukraine and currently just sitting around not generating a positive ROI.

    Uncle Sam to reluctant compliers: “It would be a real shame if something were to happen to that uninsured tanker of fully priced Russian oil scheduled to show up in your harbor a couple days from now.”

    Reply
  5. Adam Eran

    Reminds me of (alcohol) prohibition in the U.S. Wine for “sacred purposes” was exempt, and anyone can become a rabbi and get such sacred wine. Some distilled spirits still bear the mark of another exemption: “For medicinal purposes only” inscribed on their bottles’ labels.

    Oh yes, and prohibition is apparently the origin of organized crime, so we have that to look forward to… Oh boy!

    Reply
  6. elkern

    IMO, one of the most shocking things about this is the (UK) Tory Party’s enthusiasm for destroying one of the few sources of income that still support the UK (and the Tory Party): the global dominance of The City of London in Maritime Insurance. I’m guessing that the main barrier to entry in this sector is just having a (big) pile of “money”, because if/when a ship goes down, you’ll need to pay out. US & UK economies have been leaking money for decades now so there are plenty of people, organizations, and/or countries which would love to move into this lucrative business. I’d expect new Maritime Insurance companies to pop up soon in China, India, and the Middle East. Within a decade, they will ring the Lutine Bell one last time, when Lloyd’s of London goes beneath the waves.

    Even scarier, the only way this makes sense is if there is an agreement between UK and USA to sink or capture ships which defy the sanctions and use non-approved insurance. That would be piracy and/or an act of war, but US/UK media would present it as legal, rational, and moral.

    Reply
    1. Stephen

      I agree.

      A core capability in the insurance market is the ability to price risk effectively. History and experience help here. As you say, one then needs to be able to make pay outs when required, which is also based to a large extent on the ability to price risk effectively in the first place with enough volume for statistical analysis to be valid.

      To my mind, the situation has some similarities to dollar hegemony where the US has been consciously taking actions to undermine it. But the insurance market is much easier to compete in. The capability that London offers in maritime insurance is unlikely to be replicated overnight. But it certainly can be replaced and people with expertise are mobile too. Weaponizing a source of one’s own income for non economic reasons without thinking through the long term implications will not end well.

      As you indicate, this also demonstrates how disconnected the modern day Tory party is with the concerns of traditional UK businesses and the true non purely financial economy. Really shocking.

      Reply
  7. Felix_47

    All this so NATO can expand into Ukraine and so we have a platform to destabilize Russia? Maybe the powers that be know something about Putin and Trump that we muppets don’t.

    Reply

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