Will Venezuela sanctions spark another tanker spike?

Tanker owners have a love-hate relationship with U.S. sanctions. On one hand, sanctions can pull perfectly good fleet capacity from the market, causing spot rates to skyrocket. On the other, your own perfectly good fleet capacity can get pulled from the market.

What’s especially unnerving to tanker owners about U.S. sanctions is their apparent randomness: some ships get hit, others that perform the exact same voyages do not. It calls to mind the famous Shirley Jackson story, “The Lottery,” in which a resident of a town is randomly and ritualistically stoned to death each year for the good of all those who didn’t get picked.

Take recent sanctions by the Office of Foreign Assets Control (OFAC) targeting Greek tankers carrying Venezuelan crude oil. Clarksons Platou Securities estimates that 2% of the world’s crude and product tankers have called in Venezuela during the past six months. Out of all the vessels that did so, four unlucky names got drawn from the lottery box and added to the U.S. Specially Designated Nationals (SDN) list on June 2: the Greek-operated tankers Athens Voyager, Chios I, Seahero and Voyager I.

Two tankers on, two tankers off

Reuters reported that Dynacom, which commercially manages the Chios 1, Thenamaris, which manages the Seahero, and NGM Energy, which manages the Voyager 1, subsequently committed to cease carrying Venezuelan oil. Reuters also reported that NGM diverted a very large crude carrier (VLCC; a tanker that carries 2 million barrels of crude) that had previously been scheduled to load in Venezuela.

On Thursday, the U.S. Office of Foreign Assets Control (OFAC) removed the Chios I and the Athens Voyager from the sanctions list. The Athens Voyager is commercially managed by Chemnav Shipmanagement, according to data from Signal Ocean. OFAC explained, “Following their designations, both companies have … pledged to cease involvement in the oil sector of the Venezuelan economy so long as the Maduro regime remains in power.”

OFAC also added two tankers to the SDN list: the Euroforce, operated by Greece’s Eurotankers; and the Delos Voyager, which is commercially operated by Chemnav Shipmanagement, according to data from Signal Ocean.

The curious thing about the latest announcement — which highlights OFAC’s aura of inscrutability — is that the Voyager I and Seahero were left on the SDN list, despite pledges by NGM Energy and Thenamaris to pull out of the Venezuela market, while the Delos Voyager, which was added to the list, appears to have the same commercial manager as the Athens Voyager, which was simultaneously removed from the list for good behavior.

“Only the people at OFAC will know [why particular ships are on or off the SDN list]. OFAC is a bit of a black box,” said Bruce Paulsen, a partner at law firm Seward & Kissel, in an interview with Freightwaves on Friday.

COSCO sanctions redux?

The intense investor focus on Venezuela sanctions stems from what happened last year.

On Sept. 25, 2019, the U.S. sanctioned Chinese company COSCO (Dalian) in retaliation for its transport of Iranian crude. The consequence, as a result of opaque ownership structures in China, was that the world’s charterers avoided all tankers in the entire COSCO group, not just those of the Dalian subsidiary, effectively removing 6% of global tanker capacity overnight.

The result was a surge in VLCC spot rates to $200,000 per day. “When the COSCO sanctions hit the market, that put everything on fire,” recalled Trygve Munthe, co-CEO of DHT (NYSE: DHT) on a quarterly conference call.

Excessively high tanker rates are not good for either U.S. refiners or U.S. oil producers. This raises the question of whether OFAC was aware of how its COSCO (Dalian) SDN designation would affect the domestic oil industry — and whether it would rather avoid a repeat when pursuing Venezuela sanctions.

There has been market chatter this month that OFAC is considering large-scale sanctions on ships serving Venezuela, but Thursday’s action suggests a different possibility: that small-scale, seemingly random sanctions, together with quick removals for those who “repent,” could strangle Venezuelan crude exports without the need to heavily inflate freight rates for domestic U.S. oil interests.

OFAC has used a small-scale approach in the tanker markets before. In May 2011, it sanctioned a handful of shipping companies — including Israel’s Ofer Brothers, Ofer-owned Tanker Pacific in Singapore, and Monaco-based Associated Shipbroking — for doing business with Iranian interests.

The move caused confusion — why these companies and not others? — but more importantly, it put the entire shipping industry on notice that America was willing to place “non-U.S. persons” (non-U.S. companies and individuals) on the SDN list. Entities on that list cannot do business with U.S. persons and cannot conduct transactions in U.S. currency, a crippling consequence given that most international shipping deals are done in dollars.

Sending a message

Venezuela sanctions are meant to send a message, just like Iran sanctions in 2011, believes Paulsen.

“Clearly, the idea was to send a message that there’s a risk in lifting PDVSA [Petroleos de Venezuela] cargoes,” he said. “PDVSA was put on the SDN list in 2019. The risk to a non-US person that materially assists a company on the SDN list is that it could also be put on the SDN list.

“With OFAC regulations and executive orders and all this stuff, sometimes it makes sense and often it’s ambiguous, but it’s not just about ‘This is what the law says I can or cannot do.’ You have to look at it from a risk-based perspective. It’s about which way the political wind is blowing and seeing where the risks are. Right now, the political winds are blowing very hard against Venezuela, so caution needs to be the watchword.”

Paulsen is not convinced recent sanctions against a handful of tankers mean that OFAC is intentionally trying to avoid a repeat of the COSCO rate spike, or that large-scale sanctions are off the table.

“I’m not so sure about that,” he said. “An SDN designation is designed to wreak havoc. That’s why it’s such a powerful tool. And that havoc includes effects on the market. I think OFAC must be aware that a designation or a set of designations will impact a particular market one way or the other.”
Source: FreightWaves, By Greg Miller, https://www.freightwaves.com/news/will-venezuela-sanctions-spark-another-tanker-spike