September 23, 2019

US unilateral sanctions disrupt tanker market

The latest US sanctions targeting Iran have disrupted the tanker market. On 25 September 2019, OFAC listed COSCO Shipping Tanker (Dalian) Co. and COSCO Shipping Tanker (Dalian) Seaman & Ship Management Co (the Subsidiaries) as Specially Designated Nationals (SDNs).

The designation of the Subsidiaries as SDNs means that all property and interests in property of the Subsidiaries that is:

  • in the US, or
  • within the possession or control of US citizens, permanent residents of the US, entities organised under US law, individual and entities within US territory, and foreign entities that are owned or controlled by the foregoing,

are blocked. For that reason, US persons are generally prohibited from dealing with the Subsidiaries. However, OFAC has, in a frequently asked questions statement, clarified that the sanctions do not apply to the entities' parent COSCO Shipping Corporation Ltd (COSCO) or the Chinese carrier's other non-blocked subsidiaries or affiliates.

The designation was prompted by allegations that COSCO's Subsidiaries had violated United States' unilateral curbs on Iran. Since the United States pulled out of the Joint Comprehensive Plan of Action (JCPOA) on 8 May 2018, all US sanctions that were lifted or waived in connection with the JCPOA were re-imposed. The effect of this decision is that anyone who purchases petroleum products from Iran, or knowingly transacts with SDNs, may be at serious risk of being listed themselves.

COSCO is one of the world's largest tanker owners, operating more than 50 supertankers and transporting a large part of China's oil needs. After the designation was announced on 25 September, shipping sources reported that oil traders began cancelling bookings and trying to find alternative vessels, pushing the spot rates for very large crude carriers up as much as 28%.

This has not been helped by the fact that there is still significant uncertainty surrounding the impact of the designation. It applies not only to the Subsidiaries, but also to "any entities in which they own, individually or in the aggregate, a 50 percent or greater interest". However, as mentioned above, the sanctions do not apply to the ultimate parent, COSCO, its non-blocked subsidiaries or non-blocked affiliates. The key concern for many is that it is difficult for traders to know which subsidiaries of COSCO are 50% owned by the designated Subsidiaries. This may lead to traders completely avoiding vessels connected to COSCO to avoid inadvertently breaching US sanctions, thereby removing 50 supertankers from the market and significantly increasing demand.

Additionally, it is unclear whether cargoes that are already loaded onto the vessels of the Subsidiaries would be allowed to deliver, or whether they will have to be transferred to unsanctioned tankers first.

The designation comes on the heels of the drone and missile strikes in mid-September on Saudi Aramco's oil production facility in Saudi Arabia, which had already pushed up tanker rates in the market.