In February, there was quite a surprising twist in the maritime world. Imagine a little-known company named DILRO, tucked away in Dubai, suddenly making a big move. They decided to purchase an aging tanker known as the Ocean Kapal, which had seen 18 years of sea adventures. This acquisition marked the beginning of an intriguing transformation for the vessel. Not only did it get a fresh new name, becoming the Abundance III, but it also embraced an entirely new purpose. Fast forward to April, and the Abundance III proudly accomplished its very first mission – delivering a valuable cargo of Iranian oil to the bustling port of Dongjiakou in northern China. The ship didn't stop there; it repeated this successful journey in September. Now, it's quietly waiting off the coast of Malaysia, ready for a potential new adventure, possibly another voyage to transport Iranian oil. The Abundance III is just one player in a growing team of vessels joining the covert "dark fleet," all dedicated to the discreet task of ferrying Iranian oil. These exports have soared from a mere 380,000 barrels per day (b/d) in 2020 to a remarkable 1.4 million barrels per day today.
Amidst
this maritime drama, it is interesting to observe the United States taking a
somewhat unexpected approach. Despite maintaining a strict set of sanctions
aimed at those involved in the production, shipment, or sale of Iranian
petroleum, American officials decided to ease up on enforcement efforts in the
past year. This decision appears to be rooted in a complex mix of motives. On
one hand, they were likely hoping to secure an agreement related to Iran's
nuclear program. On the other hand, they might have been eyeing the upcoming
American presidential election and wanting to keep fuel prices in check. As a
result, there has been a noticeable decrease in the number of individuals and
businesses facing sanctions through the Office of Foreign Assets Control
(OFAC), which serves as America's key enforcement agency responsible for
Iran-related sanctions.
Against
the backdrop of these global dynamics, picture the Abundance III and its fellow
ships not only navigating the vast seas but also navigating the intricate world
of international politics. As they play their part in the movement of Iranian
oil, these vessels operate in a space where global interests, economic
pressures, and diplomatic negotiations intersect—a reminder of how complex and
multifaceted contemporary maritime activities can be.
After
Hamas launched an attack on Israel on October 7th, the Biden administration
found itself facing increasing pressure to address the situation. This pressure
stemmed from the fact that Iran supports Hamas, and the revenue generated from
oil sales contributes significantly to Iran's financial resources.
Interestingly, despite these geopolitical tensions, oil traders have remained
relatively calm, with oil prices currently hovering at $82.85 per barrel, down
from $97 in September. However, there is a growing concern about the potential
market volatility that could arise if sanctions against Iran were abruptly
reinstated.
Since
President Donald Trump introduced fresh sanctions in late 2018, Iran's
smuggling network has undergone a remarkable transformation, becoming more
sophisticated and efficient. The National Iran Oil Company (NIOC), a state-run
monopoly, manages Iran's petroleum industry. China serves as its largest
customer, but it is not the major state-owned Chinese corporations that deal
with Iranian oil. Instead, it is the "teapot refineries" (that is, small
and independent oil refineries in China) that play a crucial role by absorbing
a staggering 95% of Iranian oil supplies. These refineries, driven by an excess
in refining capacity, actively seek the most cost-effective sources of crude
oil. Iran's oil typically trades at a discount of $10-12 compared to the global
benchmark, a notable contrast to Russia's $5 discount for oil delivered to
Chinese ports. Importantly, these teapot refineries conduct their transactions
in Chinese currency rather than American dollars, effectively shielding
themselves from potential sanctions.
Generally
speaking, the heart of Iran's covert oil trade relies on the use of older
tankers, often acquired by lesser-known intermediaries, to connect various
points in the supply chain. Many of these tankers would have been destined for
the scrapyard due to a lack of interest from prominent charterers.
Intriguingly, of the 102 extra-large tankers involved in transporting Iranian
oil in 2023, 42 had not been part of these operations the previous year, and 27
had no prior record of carrying questionable oil, as reported by Kpler, a
ship-tracking firm. These vessels often undertake only a handful of voyages
each year, spanning just a few years. However, those who invest in them see a
swift return on their investment due to the premium rates commanded by
clandestine shipping operations in this complex and ever-evolving web of global
commerce.
Behind
the scenes of these covert operations, a clever game of concealment unfolds,
with ownership cleverly masked through the use of shell companies registered in
far-flung offshore locations like China, Vietnam, and the UAE. Interestingly,
many of those entities flagged by America's Treasury department bear Chinese
names, hinting at potential connections to mainland China. However, it is
important to note that some Chinese financial institutions that appear on these
lists may not play the central role they seem to; they often function as what
one might call "sacrificial lambs" within this intricate web of
transactions. Their primary purpose is to facilitate the import of Iranian oil,
a fact discerned from the available published evidence. Adding a layer of
complexity, Iran's government extends its support to these clandestine
activities, offering insurance to further blur the trail.
As
is reported in The Economist, a respected news magazine, the journey of
Iranian oil typically sets sail from Kharg Island, situated to the north of the
strategically vital Strait of Hormuz. However, a noticeable shift in this
clandestine trade is emerging, as an increasing number of oil shipments now
commence from Jask, a relatively new port located to the south of the strait.
This shift suggests that Jask might be on its way to becoming the favored
route, avoiding the congested choke point of the Hormuz Strait. To maintain a
low profile and avoid detection, ships usually activate their transponders only
when navigating through narrow passages, and tankers rarely complete the entire
journey without interruption. Some ships even rendezvous with others off the
coast of Fujairah, a massive terminal in the UAE known for handling various
petroleum products, including those with questionable origins, such as Russian
oil. Subsequently, many of these tankers offload their cargo off the shores of
Malaysia or Singapore, where smaller vessels take over the task of ferrying the
oil to northern China. This process often involves blending the Iranian oil
with other crude varieties, such as those from Venezuela, or disguising it as a
different type of petrochemical product. Upon arrival in northern China, the
oil finds temporary refuge in storage facilities before embarking on the final
leg of its journey, most frequently heading to the coastal province of
Shandong. This intricate, covert voyage reveals the remarkable complexity and
ingenuity at play in these secretive oil operations, where a carefully crafted
dance of logistics and misdirection keeps the true beneficiaries hidden from
view.
Dark
Fleet Diplomacy
Many
American lawmakers are eager to disrupt trade with the dark fleet, but their
options are limited. While the idea of imposing new sanctions is on the table,
it appears unlikely since existing sanctions are already comprehensive.
However, officials may explore alternative avenues to achieve their objectives,
with one such approach being the strengthening of enforcement mechanisms. The
question remains: could these efforts effectively sink the dark fleet and its
enablers?
Several
significant challenges complicate this endeavor. The National Iranian Oil
Company (NIOC), a key player in the trade, has no direct dealings with the
United States or transactions in dollars, making it resistant to American
pressure. Furthermore, the ability to influence the teapots, the middlemen in
China's government-controlled oil trade, lies primarily with China itself.
Convincing China to take action against these middlemen may prove difficult, as
it may not perceive a compelling reason to do so. The United States would then
need to target the middlemen more directly, but with numerous ongoing sanction
programs, including those against Russia and Venezuela, its capacity to do so
is stretched thin.
In
addition, targeting facilitators and middlemen has become increasingly
challenging compared to the previous administration under President Trump. In
the past, countries like India and South Korea, which were sensitive to
American pressure, participated in the trade. However, many of these countries
have since distanced themselves from such activities due to the risk of facing
American sanctions.
Looking
at recent history, when American companies were penalized for flouting
sanctions, they often ceased their business activities promptly. However, new
players tend to emerge to fill the void left by these departing companies.
These emerging operators may be less deterred, especially since Iran is
blacklisted only by the United States. In contrast, Russia's oil is embargoed
by all G7 member countries, which adds another layer of complexity to the
situation. The Biden administration could consider escalating its efforts by
seizing Iranian ships en masse at sea. However, such a move would require
significant resources, potentially cause legal challenges, and invite
retaliation, making it a high-stakes option.
Any
attempt to disrupt Iranian oil exports would likely result in a temporary
setback, lasting for approximately three months. According to simulations
conducted by Rystad Energy, a respected consultancy in the energy sector, the
initial impact could be a reduction of 300,000 barrels per day (b/d) in Iranian
exports. This loss, equivalent to just 0.3% of the global demand for oil, could
lead to a noticeable increase in global oil prices, potentially in the range of
$4 to $5 per barrel. This price surge, however, would likely be relatively
short-lived.
In
a more extreme scenario, where tensions escalate further, causing disruptions
in shipping routes around key areas like the Strait of Hormuz, and Gulf states
take action against Iranian assistance, an additional 400,000 b/d of Iranian
crude oil could vanish from the market. Such a development would indeed result
in a more significant spike in oil prices, potentially as high as 10%. However,
this spike too would likely be a momentary phenomenon.
The
reason for this short-lived impact lies in the capacity of Iran's neighboring
countries, particularly the major members of OPEC (the oil-producing cartel).
These nations collectively possess a substantial spare production capacity of
approximately 5.5 million b/d. In theory, countries like Saudi Arabia could
step in to offset the Iranian deficit without requiring additional assistance.
Furthermore, OPEC would have a strong incentive to intervene in such a
situation, as excessively high oil prices could lead to a rapid decline in
global oil demand, posing economic risks for both producers and consumers
alike.
Given
the intricate dynamics of the global oil market and the extensive reserves held
by major oil-producing nations, it would require an exceptional sequence of
events for oil prices to sustainably reach triple-digit figures. The United
States has been keen on demonstrating its resolve in dealing with entities that
violate sanctions. In a notable move last October, the U.S. took the
unprecedented step of singling out two tanker owners for their involvement in
violating restrictions related to Russia. Additionally, the U.S. has been in
the process of relaxing sanctions on Venezuela, possibly as a strategic move in
anticipation of a potential decrease in Iranian oil exports. However, beneath
this outward display of assertiveness lies a fundamental reality: Iran's supply
chains possess a level of flexibility that renders them largely resilient to
American efforts to curb their activities.
Iran
has demonstrated a remarkable ability to adapt to changing circumstances and
navigate through sanctions over the years. Despite concerted efforts by the
U.S. to restrict its oil exports and disrupt its supply chains, Iran has found
ways to continue trading and accessing international markets, albeit with
varying degrees of difficulty. This resilience is due to a combination of
factors, including diplomatic negotiations, the cooperation of some trading
partners, and innovative approaches to bypassing sanctions. As a result, while
the U.S. may seek to demonstrate toughness in its sanctions enforcement, the
intricate nature of global supply chains and the strategic interests of various
actors make it challenging to entirely curtail Iran's oil-related activities,
highlighting the ongoing complexities of international diplomacy and energy
geopolitics.
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