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Opinion on Offshore Oil Industry and Related Sectors
Best Practices in Response to Recent Developments in Offshore Oil Trade

October 12, 2023

The Price Cap Coalition is publishing this opinion to offer recommendations on certain best practices in the offshore oil industry. This opinion reflects our efforts to prevent and stop sanctioned trade and to promote practices in the sector that require responsibility, as well as to enhance compliance with the price caps on Russian Federation-origin crude oil and petroleum products imposed by the G7, the European Union, and Australia (“Price Cap Coalition” or “Coalition”).1 This opinion is directed to both government and private sector parties involved in offshore trade of crude oil and refined petroleum products (“sector stakeholders”).2
The Coalition is committed to promoting the responsible conduct of offshore oil and petroleum product trade in a reputable, secure, and protected market. The recent developments in offshore oil trade outlined below expose industry stakeholders to increasing security, environmental, economic, reputational, financial, logistical, and legal risks. This opinion summarizes the best practices that sector stakeholders can adopt to mitigate these risks while promoting secure oil flows in the market. These recommendations are based on previous guidance, including the Coalition’s May 2020 “Views on Sanctions and the Maritime Sector”3, the December 2020 “Financial Sanctions Guidance by the Office of Financial Sanctions Implementation (OFSI)”,4 the February 2023 “Guidance on the Implementation of the Russian Oil Price Cap Policy by the Office of Foreign Assets Control (OFAC)”,5 the April 2023 OFAC warning on potential avoidance of the Russian Oil Price Cap6, the OFSI’s United Kingdom Maritime Services Ban and Oil Price Cap Sector Guidance7, and the European Commission’s Oil Price Cap8. Sector stakeholders can mitigate the risks associated with the recent developments in offshore oil trade by adopting the recommendations from this opinion and the previous guidance documents.

Increasing Risks from Recent Developments in Offshore Oil Trade

Geopolitical changes continue to affect and shape global offshore oil trade by altering trade routes, expanding the scope of transportation service providers, and sometimes leading to a loss of transparency. “Shadow” trade, involving parties and cargoes associated with countries or individuals subject to sanctions or other illicit activities, has become more pronounced. This shadow trade is characterized by irregular and often high-risk shipping practices that present significant concerns for both the public and private sectors. These high risks include, but are not limited to:

Maritime Safety and Marine Environment: Ships involved in this shadow trade, sometimes referred to as a “shadow fleet,” are often aged and operating beyond their intended lifespan. These ships are typically registered to flag states that do not meet international obligations. The risk of false registration is also high. Ships involved in shadow trade may have obtained fraudulent surveys or audits, or neglected to undergo them, and may lack the regulatory certificates required under international conventions. Additionally, crew members working on shadow fleet vessels may face pressure to disregard prudent practices, including those provided by the International Convention on Standards of Training, Certification, and Watchkeeping for Seafarers (“STCW”). These factors (e.g., the ship’s age, substandard certificates, substandard flags or inadequate safety and maintenance standards applied by unrecognized organizations, the crew’s negligence) can increase the likelihood of maritime accidents.

Insurance and Economics: Oil spills can cause significant environmental damage and impose heavy economic costs on coastal states. Ships involved in shadow trade may rely on unregulated Protection and Indemnity (P&I) insurance providers with limited or non-transparent regulations, and inadequate capital, reinsurance arrangements, and/or technical expertise to cover the cost of a major claim in the event of a maritime accident. Therefore, it becomes harder to hold such ships accountable for the severe economic burden of environmental damage.

Reputational, Logistical, and Financial Risks: Parties involved in shadow trade often conceal ownership structures and the origin of their cargo. The ownership of shadow fleet tankers can be hidden through complex corporate arrangements, especially with the rise of single-ship fleets. These ships may deactivate or reroute Automatic Identification Systems (AIS) to conceal illicit activities or voyages. Such misleading practices can lead sector stakeholders to unknowingly engage in actions inconsistent with their compliance policies, impacting their reputation and prompting counter-parties to adopt risk-reducing measures, which may result in the loss of access to reputable service providers, finance, customers, and ports.

Legal and Sanctions Risks: A coalition of more than thirty countries has adopted various economic measures in response to Russia’s war against Ukraine, including the oil price cap policy imposed by the Price Cap Coalition. Malicious actors may use deceptive practices to access or maintain access to the services of the Price Cap Coalition in order to transport Russian oil or oil products sold above the price cap, or to violate the Coalition’s sanctions, laws, or regulations.

Recommended Actions

The following recommendations are best practices encouraged by the Coalition for sector stakeholders, based on their roles; (ii) the information available to them; and (iii) the types of transactions they undertake, in compliance with applicable laws and regulations and in accordance with their respective risks:

Recommendation 1: Adequately Capitalized Protection and Indemnity Insurance is Required. Shadow trade involves ships relying on unknown, untested, irregular, or fraudulent insurers. Without legal, continuous insurance coverage, these ships may not be able to cover the costs of accidents that result in significant environmental damage, security risks, and associated costs, including oil spills. The Coalition encourages sector stakeholders to ensure that vessels are continuously covered by appropriate marine insurance throughout their voyages. The Coalition also recommends that sector stakeholders require ships to be insured by legal insurance providers with adequate guarantees for their CLC9 liabilities. If a sector participant engages with a ship not insured by such a provider, they must conduct sufficient due diligence to ensure the insurance company can cover all associated risks. This due diligence may include, where appropriate, reviewing the financial stability, past performance, regulatory records, and/or ownership structure of the insurance provider.

Suggestion 2: Obtaining Class from the International Association of Classification Societies (IACS) Member Community. The information collected by classification societies is useful in enabling insurance companies, port states, and other industry stakeholders to make informed decisions about ships’ seaworthiness. Some ships involved in shadow trade have deviated from industry-standard classification societies and instead use organizations that are either not part of the International Association of Classification Societies (IACS) or have been expelled from this association. The coalition encourages industry stakeholders to ensure that counterparties obtain class from IACS member classification societies to ensure that ships are suitable for their intended service.

Suggestion 3: Best Practice Use of Automatic Identification Systems (“AIS”). In accordance with the International Convention for the Safety of Life at Sea (“SOLAS”), industry stakeholders should encourage the continuous operation of the Automatic Identification System (AIS) throughout the voyage. If a ship must disable the AIS for a legitimate security concern, the ship should document the conditions that require the disabling. Industry stakeholders should also carefully monitor irregular data or data that is inconsistent with actual ship locations that appear in the AIS. Stakeholders should ensure that the ships they do business with are using the Automatic Identification System in accordance with the SOLAS convention to improve their understanding of the vessels’ operations and reduce their exposure to criminals and related risks.

• If access is available, complete the Automatic Identification System tracking with the Long-Range Identification and Tracking (“LRIT”) system. In the event of a malfunction in the AIS or if the system is suspiciously redirected, stakeholders with access to the LRIT system, such as flag registration authorities, should use this system to determine the actual location of the ships, including those chartered by third parties if possible. For stakeholders with access to the LRIT system, combining the AIS and LRIT system is considered best practice to reduce risk.

Suggestion 4: Monitor High-Risk Ship-to-Ship Transfers. Ship-to-ship (STS) transfers (cargo transfers between ships at sea) are often carried out for legitimate purposes, but such transfers can also be used to conceal the origin or destination of the cargo in order to circumvent sanctions or other regulations. Moreover, transferring crude oil or petroleum products from ships outside secure and protected waters poses high environmental and security risks. Industry stakeholders must be aware of these increased risks and, according to their roles, should perform advanced due diligence on ship-to-ship transfers, especially in high-risk areas where illegal trade activities or AIS redirection may occur. This includes the notification of oil cargo transfers between ships as required by Annex I of the International Convention for the Prevention of Pollution from Ships (“MARPOL”). Additionally, it is recommended that stakeholders verify oil cargo logs to maintain a record of cargo movements on ships.

Suggestion 5: Request Relevant Shipping and Ancillary Costs. The improper increase or aggregation of shipping and ancillary costs (such as freight, customs, and insurance) could be methods used to conceal the purchase of Russian oil above the price cap. The invoicing of shipping and ancillary costs in an unreasonably commercial or opaque manner should be considered a red flag for evading the price cap. Shipping, freight, customs, and insurance costs are not included in the price cap and should be invoiced separately at commercially reasonable prices. Stakeholders involved in Russian oil trade and using “Cost, Insurance, Freight” contracts, or who are parties to such contracts, should request a detailed breakdown of all costs associated with the price paid for oil or petroleum products. This may require stakeholders to update the terms and conditions of contracts with sellers or other parties or adjust invoice models to separately list the price of the oil to the loading port and the prices for shipping and other services.

Suggestion 6: Conduct Appropriate Due Diligence. Industry stakeholders should conduct appropriate due diligence. More attention may be warranted for ships with numerous administrative changes (such as flag re-registrations). Stakeholders should also be more vigilant when working with intermediary companies (such as management companies, traders, brokers, etc.) that conceal beneficial ownership or engage in unusually opaque practices. These companies may have a higher likelihood of engaging in deceptive practices and exposing other parties to higher risks. Due diligence should be tailored to the characteristics of stakeholders’ businesses and their associated risk exposure. Due diligence is especially important in cases where market assessments show that Russian oil prices exceed the price cap, and where coalition services have been used or sought.

Suggestion 7: Report Concerned Ships. If an industry participant becomes aware of potentially illegal or unsafe maritime oil trade, including suspicions of violating the price cap, they should report it to the relevant authorities. By reporting these concerning behaviors, industry stakeholders can collectively help protect trade from malicious activities while promoting safety and integrity across the market.

If you have any questions related to our newsletter, please feel free to contact us 24/7 using the contact information below.

Best regards,

Esenyel Partners | Price Cap Coalition
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