COLUMN | Geopolitical updates, part one: Hot war and Houthi hostages; Russia and Iran dependent on China; Dark Fleet deception [Offshore Accounts]

The oil price has slumped back to just above US$70 despite the ongoing wars (in the plural) in the Middle East and the African Sahel. The leaders of Hamas and Hezbollah have both been killed by the Israelis, but fighting in Gaza continues, and the Israel Defence Forces has crossed the border into southern Lebanon. Iran and the Houthis in Yemen have fired hundreds of missiles against Israel, most of which were intercepted, and the Houthis continue to attack merchant ships in the Red Sea and the Gulf of Aden with rockets and with sea drones.

North Korea enters the Ukraine conflict, Africa Corps in Sahel

The rest of the region continues to see high levels of conflict. Civil war continues in Sudan and in Libya, and the Russian Air Force has been bombing the rebel-held area around Idlib in Syria, whilst the Africa Corps, the successor to the Wagner Group of mercenaries (and not affiliated in any way with the Afrika Korps of World War II), continues to conduct both military and commercial operations in Mali and the Central African Republic.

Iran has been routinely shipping drones to Russia across the Caspian Sea and last week, the EU sanctioned three Iranian airlines (Iran Air, Mahan Air and Saha Airlines) for repeatedly transporting Iranian weapons to Russia. Iran Aseman Airlines was already banned from the EU due to safety concerns. Strange that.

North Korea is apparently sending 10,000 troops to assist in the Russian invasion of Ukraine, as per Bloomberg, and last week, Russian missiles hit a cargo vessel in Odesa, the fourth such attack this month (including one that reportedly killed a Ukrainian national).

None of this seemed even remotely likely three years ago, when the oil price also stood at close to US$70 and the world was a much more peaceful place. Markets seem to be ruling out any Israeli attacks on Iranian oil facilities, or that the Iranians will attempt to close the Straits of Hormuz, however. This may yet prove wishful thinking, as the last four years have shown how, in the words of famed baseball player Yogi Berra, “it's tough to make predictions, especially about the future.”

What lessons can we learn?

China bankrolls Russia

Much has been written on how Russia is increasingly dependent on China economically, and how Russian oil exports are increasingly dependent on transport by the Dark Fleet of often ageing and unsafe tankers. These are vessels registered in low quality registries like Palau, the Cook Islands, Sao Tome and Gabon, owned by shell companies in secretive jurisdictions and use often unknown ship management companies in the UAE or India to circumvent Western sanctions on Russia and the G7 US$60 per barrel price cap on Russian oil exports.

Many do not have adequate insurance in place. The UK recently introduced measures to enforce checks on the insurance of tankers transiting the English Channel, but it is not clear what will be done if tankers lie about their coverage, have coverage from, er, second tier insurers like Maritime Mutual (which we covered last week), or if they ignore the challenge and simply insist on their right of innocent passage. The west had been a big advocate of the right of innocent passage through the South China Sea, but not so much when it is conducted by the Dark Fleet, it seems.

It is true that Russia has emerged as China's single largest supplier of crude oil, surpassing Saudi Arabia and shipping around 2.25 million barrels a day (bpd) to the People’s Republic, meaning that China receives around 30 per cent of total Russian oil exports, which stood at 6.7 million bpd in 2023.

China itself imports over 11 million bpd of crude oil, and is the largest oil importer in the world, despite also being the fourth or fifth largest producer as well (positions for which it vies with Canada). China also burns half the coal consumed in the world, and manufactures half the world’s steel.

Russian oil exports down 25 per cent since 2017

Note that in 2017 Russia exported around nine million bpd of crude oil, so the long-term trajectory of Russian exports is not positive – which is bullish for the medium-term oil price.

Additionally, Finnish researchers note that in 2023, China also imported 39 per cent of all Russian coal exports and was contributing around US$7.5 billion monthly to the Kremlin in total payments for all types of fossil fuels, ahead of India and Turkey, the number two and three customers, both of whom each contributed just over US$3 billion in hydrocarbon purchases to Russia monthly.

China bankrolls Iran

However, Iran is even more dependent on China than Russia is. This has a number of important consequences. Iran is OPEC’s third largest oil producer with production of around 3.3 million barrels a day, as per The Tehran Times.

Up to 95 per cent of Iran’s approximately 1.8 million barrels of oil exports per day is shipped to China, all of it by sea, often via multiple ship-to-ship transfers to disguise the origin, and almost entirely on Iranian state-owned or Dark Fleet tankers.

A recent expose in The Economist showed how Iran uses a network of shell companies, proxies, and offshore bank accounts to launder the estimated US$50 billion of revenue it receives from China for its petroleum products each year.

The report estimated that the Islamic Republic loses around 30 per cent of the funds to commissions, middlemen, and bank charges as its different oil-selling entities and influential friends of the mullahs seek to route and reroute money around the world to evade American sanctions, with Hong Kong and the UAE serving as major hubs for Iranian-linked entities.

Curiously, The Economist claimed that Panama was the largest registry for Iranian Dark Fleet vessels, without backing that assertion.

Chinese customs data is wrong

Hilariously, the EIA found that Chinese customs data indicates that China imported 1.1 million bpd of crude oil from Malaysia in 2023, a remarkable figure that exceeded Malaysia’s total crude oil production. Why the obvious falsehood?

Industry analysts believe that much of the oil shipped from Iran to China was re-labelled through mixing cargoes and faking documents as originating from countries such as Malaysia, the United Arab Emirates, and Oman to avoid US sanctions against countries engaging in oil sales with Iran.

China's reluctance to admit that a sixth of its oil imports come from Iran is admirable – and it helps Chinese state enterprises avoid secondary sanctions from Washington. In the same way, two Dark Fleet LNG tankers on the new western vessels sanctions list have arrived close to China with cargoes from the sanctioned Arctic 2 LNG project in Russia, as reported by Upstream, but have so far not discharged there yet due to concerns that their buyers would be cut off from the US dollar clearing network.

Unlike oil, LNG is carried in far fewer vessels and bought by far fewer buyers, so concealing shipments is much harder. Note that existing Russian LNG projects open prior to 2022 are not subject to EU sanctions, only new ones and that the EU continues to be the biggest customer for Russian LNG. The EU increased its imports of Russian LNG by 11 per cent in the first half of this year compared to the same period in 2023, as per IEEFA data.

Two logical conclusions

If the EU wishes to protect Ukraine from further Russian assaults, restricting LNG imports and the continuing piped gas imports from Russia will become a priority. “There are no excuses, the EU can live without Russian gas,” EU Energy Commissioner Kadri Simson said last week. It doesn’t get clearer than that.

If Israel wishes to protect itself from Hamas, Hezbollah and the Houthis in the long term, cutting off their funding from Iran will likely involve efforts to cut off Iranian oil to China. If Mossad can co-ordinate the simultaneous explosion of hundreds of pagers and radios, accidents to Dark Fleet vessels in ballast (thus minimising pollution) might also be considered by Tel Aviv, but probably covertly and after the US elections, so as not to concern voters there.

With Iran and Israel locked in a deadly battle, the crew of Dark Fleet vessels trading Iranian oil, may find themselves caught up in the conflict, whether they like it or not.

Later in the week, we will look at the consequences of this deadly geo-strategic mayhem.

Don’t forget the crew of Galaxy Leader

We remind readers that the Houthis continue to hold hostage the 25 crewmembers of Japanese-operated car carrier Galaxy Leader, which was seized in November 2023. The hostages consist of seventeen Filipinos, two Bulgarians, three Ukrainians, two Mexicans, and one Romanian seafarer, and they are held in the Yemeni port of Hodeidah, which has been repeatedly bombed by the Israeli military.

Last month, the International Committee of the Red Cross was able to visit the detained crew, for only the second time. Many are reported to have malaria. We urge those across the industry not to forget the plight of these seafarers, and we urge the governments of their respective home countries to assist in their speedy release.

We also urge greedy and selfish shipowners not to put their seafarers at risk by routing vessels through the Bab Al Mandab strait at the entrance to the Red Sea. We recommend that the International Transport Workers' Federation to publish their names in the same way that the owners of substandard vessels are scrutinised.

Seafarers face enough dangers without reckless owners gambling with their lives.

Background reading

The Wikiran website of leaked documents relating to Iran, presumably hacked and obtained by enemies of the Islamic State, has a technically unreliable and often unavailable website (www.wikiran.org) and its reports seem to be the basis of most of the report in The Economist. However, you can follow the organisation on X.com under the handle @wiki_iran and access their research there.