RUSSIAN OIL DISASTER

The ships that sank in the Black Sea were not only hampered by Russia’s own GPS jamming, but were caught in a storm that overwhelmed them. All three ships, two on Sunday and one late Monday, were over fifty years old. A fourth ship, a floating crane also sank – again running aground by being in the wrong position, in weather it should never have been in.

These tanker disasters were caused by Russia using tankers 20 years past their scrap date. 90,000 barrels of oil was lost and Russia is unlikely to try and clear it up. Some it is already coming ashore, much more will do so as the ships break up in the coming months and years.

These three tankers sank because of the war in Ukraine. Russia is so paranoid about the Kerch bridge, they no longer allow larger vessels through the straits, because of complex net guards and traps on the southern side designed to prevent sea drones from getting near the bridge pillars.

These three tankers, not one of which should have been in the Black Sea, let alone in a storm of that scale are for use on internal waterways like the River Don, maybe the Caspian Sea. They were being used because they had no choice, and they were using them to transship oil further down the coast – not that they ever got there.

The incorrect and unsafe use of ships that were never designed for what amounts to seagoing operations, let alone their advanced years, lack of maintenance and poor condition, explains so much about the state of modern Russia and the way this war has sucked the life out of its economy; to the point of endangering the sailors on the ships, and the callous disregard for any environmental considerations if things went wrong, and the went spectacularly wrong.

The loss of these tankers is why so many western countries are so concerned about the dark and gray fleets of ancient Russian seagoing tankers, most only single hulled and older than 20 years, that are crossing into the Atlantic in stormy winter weather. If one of these things with 250,000 barrels of crude or even as much as 1 million, breaks up off the north coast of Norway or Scotland, off the coast of Ireland or Iceland, the damage could be catastrophic. And who would pay for it? Most of these tankers aren’t properly insured.

Russia is using ‘dark’ and ‘grey’ fleets of oil tankers to ship its oil around the globe.

Around 2.1 million bpd is being moved on what amounts to unsafe and dangerous tankers. Another 700,000bpd of refined products.

Most of it is shipped to China, India and Brazil, as well as S.Korea, Malaysia and Singapore.

The price caps have forced Russia to use these older fleets of ships and have been bought up by Russian companies and others working on their behalf.

Western companies won’t insure these and Russia is doing so itself. However this is more a statement than a reality – nobody has claimed anything from them yet. And when they do I doubt they’ll be seeing any money.

In the past two weeks Norway, Holland, Denmark, Iceland and the UK have agreed to stop and if need be seize these vessels in their waters, which forces them out into the North Atlantic rather than busy shipping lanes in the North Sea and English Channel.

The problem is there’s almost nothing that can be done about these tankers in international waters and only governments willing to take action if they enter sovereign waters can do anything.

The situation in the Black Sea is a warning to everyone, sooner or later one of these ancient and poorly maintained ships, carrying a substantial crude oil cargo, is going down. Russia doesn’t care, it isn’t going to pay and the destruction they’ll bring to some unsuspecting coastline is going to be devastating and take years to resolve.

The trade in oil is a very flexible one. Tankers often set ail having no buyer for the crude they carry. This especially true of the Russians at present. They wait until they reach a region and make themselves known. Interested buyers will then either compete for the tanker or simply buy the cargo at the lowest price they can get. The buyers know its best to have the fully loaded tanker sit off shore for lengthy periods because the longer it sits without being bought, the less they’ll have to pay for it – a scenario Russian tankers face all the time these days.

If a tanker looks like it might not sell sat off India, it will be ordered off to Malaysia or Singapore where it might get purchased more quickly. At a certain point the oil value may have dropped to the point where it’s rapidly becoming unprofitable given crew and shipping costs, and it could easily be sold below cost, but rather that than nothing. Once empty the tanker can come back for more.

Russia has to keep the tanker fleet moving and selling, almost regardless of costs. It has to ship the oil because it has nowhere to store it on land. The buyers know they’re ripping the Russians off quite often, especially when the price is lower than ideal, but what do they care? They know the bind Russia is in and are prepared to use the situation to their advantage.

The only way this starts to work really badly against Russia is when the oil price drops below $60pb. Once that happens the drilling and shipment costs can’t be covered and its down to cash flow, not profitability. The Russian oil companies will be losing money, but the revenue they generate for the State matters more, so the government will still insist on pushing the oil out no matter how much it goes for. It’s stuck in a loop where it has to sell the oil, or its income collapses completely and the game is up.

The oil trade is insidious. Both Saudi Arabia and the UAE have actually purchased huge quantities of Russian crude, using their vast storage facilities to keep it in, waited for the price to rise and then re-sold it as their own. This goes on all the time, and makes policing the oil trade even more difficult.

Russia’s crude oil exports haven’t just been a problem for Russia. They’ve almost destroyed the Cuban economy. Because in the days of the Soviets the Cubans were given what amounted to nearly free oil by the Russians in exchange for sugar, Cuban power stations were all oil fired.

Now with Russia unable and unwilling to send free oil, Venezuela having cut back on its freebie donations, Cuba is on its knees. There’s been no power generation investment at all worth speaking of, power generation is at a record low with long blackouts lasting days and the Cuban economy is near collapse with minimal electrical generation. Its never repaid a debt in its history and the Chinese won’t even help it with loans to build new capacity. The sugar industry is near collapse due to lack of investment and power, the over dependence on Russian largess has finally come home to roost.

Russia uses and abuses its friends as and when it needs them. Russia’s oil industry is failing not just Russia, but those it once called brothers in arms. But what does Putin care?

The Analyst

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