How the G7 oil price ceiling closed the Bosphorus Strait

The G7’s plan to keep Russian crude flowing while slashing Moscow’s revenues is already facing its first problem.

By Tuesday afternoon, less than 48 hours after European Union sanctions and a Russian oil price cap took effect, at least 22 crude Carriers are blocked from crossing Turkish waters due to fears in Ankara that uninsured ships risked “catastrophic” damage in the Turkish Straits.

Talks are underway to resolve the impasse, but the turmoil is the first sign of potential unintended consequences of G7 intervention in the global oil market.

what’s the problem?

The congestion resulted from new Turkish requirements that all ore vessels traveling through the Bosporus, the Sea of ​​Marmara and the Dardanelles – known collectively as the Turkish Straits – demonstrate that they have insurance in place to cover incidents such as oil spills and collisions.

The requirement, which took effect Dec. 2, is a response to new EU sanctions that prevent ships carrying Russian crude from accessing European marine insurance unless the oil is sold for $60 a barrel or less.

The EU sanctions, which took effect on Monday and include a near-total ban on importing Russian seaborne crude into the bloc, initially provided for a global ban on the provision of freight and insurance services. The price cap was designed by the United States to allow shipments of Russian crude oil to other parts of the world to continue, thus limiting the impact on the global market.

Before invading Ukraine, Russia was the world’s largest oil exporter, shipping about 8 million barrels per day of crude oil and petroleum products, equivalent to 8 percent of global supplies.

But the complexity of imposing a price cap, along with the Russian collectivization of the so-called “Shadow fleetTo circumvent the restrictions, he raised fears in Turkey of a potentially dangerous increase in the number of uninsured ships sailing through the strait.

What does Turkey want?

Unal Baylan, Turkey’s maritime general manager, wrote to shipowners and insurers on November 16 requesting that marine protection and indemnity providers, known as P&I clubs, provide additional letters confirming that the vessels are fully insured.

During the passage of carrier ships through the Turkish Straits. . . Like goods such as crude oil products that could cause serious consequences to our country, our assets and our employees in the event of a possible accident, it is absolutely necessary for us to ensure in some way that their P&I insurance cover remains valid and comprehensive, he said in a letter seen by the Financial Times.

The Turkish strait is one of the world’s busiest shipping lanes and one of four export routes for Russian seaborne crude. The others are the Baltic Sea, the Barents Sea, and the Sea of ​​Japan.

Crossing the Bosphorus, which is 32 kilometers long and 550 meters wide at its narrowest point, can be challenging, with at least one tanker colliding as recently as 2018. Every year, an estimated 48,000 tankers cross the waterway, carrying about 3 million barrels. daily of oil.

What does the shipping industry say?

The Protection and compensation clubs argue The Turkish demand “far exceeds” the guarantees that insurance companies usually provide. It has been the longstanding policy of P&I clubs to evaluate the merits of a claim only once it has been realized.

The London Protection and Indemnity Club said on Monday that Turkey’s request would require the P&I clubs to guarantee coverage, even if a ship was found to have breached sanctions. She added that doing so would put the clubs themselves in violation of the sanctions, adding that their role is not to pre-assess whether the ship is abiding by the sanctions.

Western shipbrokers said the industry consensus was that no P&I club would agree to the wording requested by Turkey.

However, the shipowner of the Kazakh crude oil tanker heading south at the mouth of the Bosphorus accused the P&I clubs of being “unreasonable”, especially since the movement of Kazakh crude oil was not restricted.

He said it should be possible for clubs to provide assurances to Turkey without exposing themselves to sanctions responsibilities. He added that shippers carrying Kazakh crude, for example, had already provided detailed information about the origin of their cargo to obtain insurance.

The British Treasury said Britain, the United States and the European Union were “working closely” with the Turkish government, shipping and insurance industries “to find a solution”. A spokesman for the British Treasury said: “There is no reason to prevent ships from accessing the Bosphorus for reasons of environment or health and safety.”

Who is affected?

The impact of Turkey’s actions on ships carrying Kazakh crude provides an early example of how Russian sanctions and the price cap mechanism can disrupt legal crude oil shipments.

Kazakh crude is exported from Russia’s Black Sea ports, but its movement is not restricted under Western Russia’s sanctions.

Of the 22 tankers that were waiting on Tuesday, 11 were in the Black Sea at the entrance to the Bosphorus Strait, while 11 tankers crossed the Bosphorus and were in the Sea of ​​Marmara, according to a ship broker who asked not to be named. The first arrived on November 29 and had been waiting for six days. According to ship brokers and tanker tracking services, most ships carry Kazakh, not Russian, crude.

Chevron, which operates Kazakhstan’s 500,000 bpd Tengiz field in partnership with ExxonMobil and exports through the Black Sea, said it was monitoring the situation closely.

Meanwhile, the only crude vessels passing through the strait may be those carrying Russian oil. An oil industry participant with knowledge of the situation said that Russian insurance companies have submitted the required letters of confirmation to the Turkish authorities.

The shipowner said other ships carrying Russian oil were sending messages from newly established P&I clubs outside the main international group, which represent 90 percent of the industry and have so far rejected Turkey’s request.

He said the presence of such ships in the Turkish Straits, with guarantees from less well-known insurance companies, represented a potential danger, adding: “The main fleet is obscured . . . while in theory the shadow fleet can cross.”

Additional reporting by David Sheppard