Shadow fleet, tankers insurance and Realpolitik
Recently there have been many discussions on the adequacy or inadequacy of tanker insurance. The inference line looks as follows – an oil spill from a tanker can cause billions of dollars of damages. Proper insurance would be able to cover that cost, while in the case of a tanker insured outside of the IGP&I, there would not be enough funds. There is an implicit belief, that the full cost of the clean-up would be covered by insurance obtained by the shipowners, and therefore it is important for the insurer to be well-capitalized to make good on a multi-billion claim.
But this is not how the system works. There is a good primer on the subject if you want to know the details. Let me explain it briefly.
There is a 1992 international convention that limits the liability of the shipowners and their insurers to an amount linked to the ship size. The cap is ~$130 mln for vessels of GWT higher than 140 kt. Two more entities, established by the international conventions, act as the second- and third-tier cover. These entities are funded by signatory states and oil-receiving entities and their cover is independent of the insurance carried by the vessel.
IGP&I insurers do not provide more than $130 mln of coverage per vessel. They do play a role in increasing the safety of international marine oil transport by vetting the ships and demanding certain maintenance and operations standards thus lowering the risk of a spill. However, if a catastrophic spill with an IGP&I-insured vessel does happen, their financial participation in the cleanup would be limited by the convention-established cap. (This risk is most likely re-insured by other providers, but this is not important here).
Thinking about it, this is not surprising – the safety regime, established by the UNCLOS and the conventions that developed it further, was designed under the UN auspices as an inclusive mechanism, and the negotiators probably were not inclined to enshrine the oligopoly of a small group of insurers from the developed countries, so they designed the system in a way that made it possible for non-IGP&I insurers to offer meaningful coverage and lowered barriers to entry around this service.
This also means that the insurers (or re-insurers) that provide coverage for the “shadow fleet” do not necessarily have to have a massive balance sheet. Even a modest-sized and lightly capitalized insurance company could withstand a few claims to the maximum amount of $130 mln, and if the past 15 years are of any guidance, this is all that’s needed. The largest spill of the last 20 years, Sanchi in 2018, resulted in a P&I claim of ~$100 mln.
A Greenpeace report shows that in 2021, 35% of the tankers carrying Russian oil cargo did not have IGP&I insurance—and nobody was concerned about that; it was not an issue. Older tankers have always been around; they did not just emerge out of nowhere in the last two years. They were abundant in European waters just as well as elsewhere, carrying Russian crude and oil and oil products from different origins.
It would be understandable if this surge of interest emerged after a major incident or a spill, but this is not the case. It starts to look like there is a concerted effort to make IGP&I insurance a requirement for oil shipping. When the price cap was introduced, apparently there was a belief, that it would be impossible to do without IGP&I services – this was proven wrong over the last 2 years. It feels like, there is an ongoing campaign to force the oligopoly under the banner of environmental concerns. I believe, this is scaremongering, which is not based on solid evidence, but rather on anecdotal evidence, data-picking, and story-telling.
If environmental concerns are valid, if potential risks are high enough, there may be a case for stricter requirements for oil-carrying sea vessels. If so, these stricter requirements should be universal, not applicable only to the vessels that carry Russian oil, and these requirements should not establish a monopoly of service providers from certain countries.
I can understand why many would like to see Russian oil income dwindle. I know that many believe that the price cap mechanism is a proper tool to achieve that (I always had my doubts), were disappointed to see it fail, and are hoping that there would be a fix that would make it work.
If the real goal is the blockade of the Russian oil trade, maybe a conditional one, then it should be enacted as a blockade and not hide behind innocent and peaceful concerns. It is not going to fool either Russians or the observers, but it destroys the credibility. It is naïve to think that it would be possible to attain the results of the blockade while not incurring the cost or avoiding an escalation by hiding behind an artful interpretation of the conventions or sudden public concerns over possible damage to the environment. Putting the tankers, the companies that own them, the individuals controlling the companies, oil buyers and sellers on the sanctions list is a valid way of conducting economic warfare. Violating the spirit of international law, while pretending to adhere to it, is not – even when this approach is applied against bad actors, blatantly violating international law elsewhere.
The legal and regulatory infrastructure of international maritime transport was designed and fine-tuned over time to facilitate peaceful trade, balance the interests of all the parties and countries involved, alleviate concerns of possible blockades and hindrances to passage, and create mechanisms that would make it difficult to introduce such hindrances. There have been lots of conflicts over fishing grounds, right of passage, and other similar issues over the history of mankind since antiquity, and this legal architecture was designed to make them history. In my opinion, weaponizing these regulations, while pretending to adhere to them to solve a momentary problem is extremely short-sighted and will create plenty of long-term problems. Doing so with the help of scaremongering in the absence of solid foundations adds insult to injury, destroys trust in the rules-based world order, and legitimizes cynicism. Even if it succeeds, it would be a skirmish won, but a struggle lost.