US sanctions on Russian oil shipments a worry for Indian refiners

Enhanced enforcement of sanctions by Western powers may increase procurement costs and reduce the appeal of discounted Russian crude

Fresh US sanctions on Russian shipping companies threaten to hurt supplies of oil this year to Moscow’s second-biggest customer — Indian refiners.

Enhanced sanctions enforcement by western powers will eventually increase procurement costs and reduce the appeal of discounted Russian crude, which accounts for a third of India’s oil imports, industry officials said.
 

For now, Indian oil companies are staring at uncertainty after Washington placed Dubai-based shipping operators Sun Ship Management and Hennesea Holdings under fresh sanctions. These are over violating the $60 a barrel price-cap rule imposed by the G-7 in December 2022, industry officials said.
 

China has escaped unscathed because oil trade between Moscow and Beijing is marked in yuan, whereas Indian refiners are hard pressed to convince Indian banks to process payments in UAE dirhams or US dollars for supplies on sanctioned ships. Russia is not accepting Indian rupees.
 

Both Sun Ship and Hennesea operate a combined 110 ships, which supply to Chinese and Indian crude buyers, and product markets. And, over 50 ships from both shippers have discharged crude cargoes at Indian ports over the last few months, according to research based on shipping records and industry officials.
 

“Definitely an issue,” said Vandana Hari, a Singapore-based energy expert. “Whether this worsens or becomes a constant hurdle will depend entirely on whether the US keeps up with the crackdowns,” added Hari, the founder of Vanda Insights.

India received Russian oil cargoes via 51, 58 and 55 tankers in October, November and December, respectively, according to data from Vortexa. Several cargoes were supplied by ships owned by Sun Ship and Hennesea.

 

The question that New Delhi faces is if Washington’s policing will disrupt the growing oil ties between Russia and India. India has raised its share of Russian crude to around 39 per cent in 2023 from 16 per cent in 2022, disregarding Washington’s pressure. “In the Russian case, it’s a question of price cap, and it’s also a question of some of its shipping entities coming under adverse notice of others,” oil minister Hardeep Singh Puri recently told Bloomberg Television in Davos. 
 

The oil ministry and Sun Ship Management did not reply to a Business Standard mail seeking comments. Hennesea could not be reached. The impact of sanctions is somewhat visible on trade flows. Companies led by Reliance Industries and Rosneft-owned Nayara Energy bought 1.56 million barrels a day of Russian crude this month. This is around 32 per cent of the country’s total imports, data from market intelligence agency Kpler show.
 

That compares to a 37 per cent share in November, prior to the two new sanction notifications by the Office of Foreign Assets Control (OFAC), an arm of the US Treasury Department, and a record 46 per cent in May 2023.
 

State-run refiners like Indian Oil and Bharat Petroleum are facing a dwindling share of Russian crude this month. It is because they have less flexibility with Russian imports compared to private refiners, refining officials said. Hennesea is the latest major shipping company to come under Washington’s radar for sanctions violations on January 18, with 18 vessels carrying crude and products under investigations by the OFAC, the US agency said. Of them, at least eight vessels were used to supply Indian refiners in the last few months, according to calculations based on data from market intelligence agencies Kpler and Vortexa. That number rises if you add the 42 tankers under Sun Ship that were also used to supply oil to India in the past one year.
 

Last month, eight of Sun Ship’s tankers, including Kazan, Ligovsky Prospekt, NS Century, Krymsk and Sakhalin Island, among others, had to turn back from Indian destinations and move towards China and Singapore after OFAC imposed sanctions on December 20. 
 

Dubai-based Sun Ship, owned by UAE and Russian nationals, owns, manages and operates a fleet of 92 oil, crude oil, LNG and chemical vessels, according to the company’s website. 
 

Indian Oil, the ultimate beneficiary of the premium grade, light, sweet Sokol cargoes aboard those tankers, was forced to buy much more expensive crude of a similar grade from Nigeria. It was to substitute Sokol, according to ship tracking data and industry officials.
 

Nigerian oil costs at least $8/bbl over Sokol, according to pricing data. The trading and operations desks of state refiners are increasingly concerned over renewed efforts by Washington to police the trade, two refining sources said.
 

Indian refining officials said that OFAC must give an advance notice of a month or two before enforcing sanctions. Otherwise, it causes inconvenience to buyers as ships are left stranded on high seas because banks refuse payments. An issue over payments is not just related to lighter and sweeter grades like Sokol and ESPO that typically trade over the G-7 mandated $60/barrel price cap. They are also related to cheaper, sour and higher sulphur oil like Urals, which trade below $60/bbl. Indian banks refuse to process payments for any tankers that fall under OFAC, a refining official said.  Moreover, if several tankers go offline, then freight costs increase, placing more pressure on Russian trade and discounts, another official said. He added that shipping costs have firmed up over the week. Clarksons Securities said the Red Sea conflict has already sent rates higher by a third on the week.
 

A refining official in Delhi explained the modus operandi of a typical Russian trade. Once the crude trading department at a state refiner agrees to a trade, the operations department contacts the shipper for documentation on the vessel. Typically, the shipper provides an IQ-88 form, a 5-6 page document where details on ownership, operators and physical details of the ships are mentioned. These details are vetted by the operations department, including details of sanctions imposed by the US, UK and EU, and any sanction violations will be green flagged to the supplier. The tankers are rejected if they are under any form of sanctions, because Indian banks will not honour payments for deliveries on sanctioned ships, the official said.
 

In the past, Indian refiners and Russian traders have found a way out of supply issues and sanctions. For instance, when oil prices surged to $90/bbl and Urals traded over $70/bbl, traders adjusted invoices to show that trades were done below $60/bbl on free-on-board (FOB) terms to receive payments. Similarly, when Mumbai-based Gatik Ship Management, which had over 40 tankers supplying crude to India, came under sanctions, the company dissolved. However, the tankers continued plying under different flags and ownership structures.