Russian sanctions increase the risk of oil pollution, the shipping insurer warns

The chief executive of one of the world’s biggest marine insurers has warned of a growing risk of a catastrophic oil spill after the spillover effects of sanctions on Russia put thousands more ships under “well-tested” insurers.

“No one will be there to help clean up the mess [without sufficient liability cover]” said Rolf Thore Roppestad, CEO of Norwegian Gard. “It’s a social and environmental disaster that’s happening, and it’s a cause for great concern for all of us.”

The rare public warning from a leading insurer comes amid concern among major trading houses and some policymakers about the unintended consequences of a Western sanctions regime that has pushed Russia’s oil trade into the shadows.

Unrest in the energy sector is that smaller, less experienced traders are now transporting crude over longer distances on older vessels with unknown levels of insurance.

In an interview with the Financial Times, Roppestad estimated that since Russia attacked Ukraine, “thousands” of ships have been traded around the world without the cover of the international group of 12 Defense and Indemnification Clubs. The group is predominantly made up of European and American insurers, including Gard, which have historically covered around 90 percent of the world’s ocean-going tonnage.

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He expressed concern about the reliability and ability of non-IG insurers to handle a spill or other accident.

Among those ships is the so-called shadow fleet, an aging group of oil tankers that brokers believe were amassed by Russia to circumvent Western sanctions and are often insured locally.

According to Roppestad, there is a much greater risk of a worst-case scenario in which “no one will pay” for the cleanup after the accident. “As the shadow fleet continues to grow, this will only get more serious.”

International Group P&I clubs are mutually owned by ship owners and charterers and offer insurance for liability such as in the event of a ship capsizing. P&I insurance is critical to the shipping trade and is a requirement for entry into global ports.

Western insurers and brokers have expressed private concern that non-IG insurers’ P&I coverage will be less reliable and result in more limited payouts.

“I’m much less convinced of their reliability and their ability to effectively handle an accident if something goes wrong,” Roppestad said.

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According to insurance experts and ship records, many ships that avoid IG coverage rely on other P&I insurers in Russia and the Middle East. Iran and Venezuela have long used their own shadow fleets of hundreds of ships to circumvent sanctions. Iran has its own P&I insurer, Kish, which was established after the withdrawal of Western insurers.

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“We’ve changed the logistics skills for Russian oil in a very short period of time,” said Ben Luckock, co-head of Trafigura’s oil trading division, of the increasing prominence of smaller, less experienced trading firms that rely on older vessels. Trafigura was one of the biggest suppliers of Russian crude oil before it liquidated that business last year.

Of great concern, he said, are the straits between Denmark and Sweden at the mouth of the Baltic Sea, which remain an important trade route for sanctioned Russian oil that now bypasses Europe on the long journey to new buyers in India and China.

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“You have a lot of 17, 18 and 19-year-old boats going through the Danish Straits. [Russian] Oil for Asia,” Luckock said at the FT Commodities Global Summit last week.

Most of the tankers, especially the large oil tankers, are insured with the International Group and tend to be younger.

In December, Turkey caused traffic jams among crude oil tankers outside its waters after it demanded that all crude oil tankers passing through its waters provide enhanced guarantees of P&I cover.

“P&I clubs exist for their membership. They are looking to pay [out on claims]” said a London insurance broker who spoke on condition of anonymity. “You don’t know if the Russians would say that.” . . let’s just leave it.”

Additional reporting by Polina Ivanova in Berlin