Russian Oil Companies Switch to New Shipping Routes in Wake of European Sanctions

Russia is transferring record amounts of its flagship Urals crude at sea in an effort to overcome the high freight costs that have resulted from European sanctions.

By shipping the crude via sea, Russia hopes to avoid the costly fees associated with land transport. This move will help to ensure that Russia can continue to meet its energy needs despite the sanctions.

According to tanker tracking data compiled by Bloomberg, a total of 19 million barrels of crude are expected to be transferred at sea this month and last. This is likely to set a record for January alone, with 14 million barrels expected to be transferred.

Last month, the European Union banned almost all crude imports from Russia and joined a Group of Seven program capping the price at which Moscow can sell its barrels. This caused freight costs to soar as ships became harder to find.

The transfer of crude oil at sea, which was all but dried up before the ban and cap, represents a more efficient way of getting Russian crude to buyers. This should help to bring down freight bills over time.

After the European Union banned STS volumes in December, they soared. This was likely due to people stocking up on the product before the ban went into effect.

The G-7 program allows ships engaged in ship-to-ship transfers to use industry standard insurance as long as the cargoes on board are sold at or below $60. This makes it easier for companies to comply with the regulations and ensures that cargoes are properly protected.

Ship-to-ship transfers are a routine part of oil trading, and those that are taking place are doing so in full view of satellite tracking systems. Locations such as Ceuta, a Spanish city on the north coast of Africa, and Greece’s southern city Kalamata, are once again becoming hotspots.

The transfers should also keep ice-strengthened tankers from straying too far from Russia’s Baltic Sea. Such vessels are needed in wintry conditions and the further they sail, the longer it takes for them to get back. By keeping them closer to shore, Russia can ensure that these tankers are available when they are needed most.

Since the European boycott of Russian Urals crude, most of it has been transported thousands of miles to Asia on relatively small tankers. This has stretched the fleet and pushed up freight rates for smaller tankers that aren't as well suited to long-distance trading.

A total of five very large crude carriers (VLCCs) are likely to be involved in Urals ship-to-ship (STS) transfers. VLCCs are the largest mainstream vessels in the industry, and can carry up to 2 million barrels of crude oil.

Three VLCCs have completed maneuvers at Ceuta and sailed to Asia. Two more VLCCs are waiting at Ceuta, while at least 6 Aframaxes are expected to arrive at the site by the end of this month. These Aframaxes have roughly a third the transportation capacity of VLCCs and will be loaded with Urals from Baltic ports.