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Written evidence submitted by State Capture: Research and Action and the Kyiv School of Economics Institute

Mitigating an increased risk of oil spills in the English Channel as an unintended consequences of the oil price cap

1. Introduction and summary

1. The following evidence is submitted jointly by State Capture: Research and Action and the Kyiv School of Economics Institute (the “submitting organisations”) in response to the Treasury Committee’s Call for Evidence: Are the UK’s Russia Financial Sanctions Working?.
2. State Capture: Research and Action (“SC:RA”) is a non-profit foundation registered in the Netherlands (Stichting). Its focus is on investigating and countering state capture and associated activities across the globe. We envision a global society where states exist to serve their people, and where elites are unable to bend laws and institutions to serve their own interests. We convene and support investigators, civil society, data analysts, policy experts, academics and legal professionals to conduct research, undertake policy advocacy and initiate legal proceedings to promote a deeper understanding of and counter state capture. Since the outbreak of Russia’s full-scale invasion of Ukraine in February 2022, SC:RA has supported and coordinated a network of investigators, data analysts and lawyers to collect and analyse evidence on schemes, institutions, entities and individuals that enable and/or profit from Russia’s aggression – using this data to pursue legal action and policy advocacy.
3. Kyiv School of Economics Institute (“KSE Institute”) is a leading Ukrainian think tank that has been actively contributing to sanctions policy design and analysis since the outbreak of the Russia’s full-scale invasion. KSE Institute is the principal contributor to the International Working Group on Russian Sanctions, launched by the President of Ukraine in April 2022.[1] During the past two years, KSE Institute has developed unique and comprehensive expertise on international sanctions, including restrictions on Russian hydrocarbons, export controls of military and dual-use goods, as well as financial sector measures. From July 2023, KSE Institute has been issuing a monthly Russian Oil Tracker – an analytical product reporting dynamics in Russian exports of hydrocarbons and oil price cap compliance.[2]
4. This submission focuses on the issue of uninsured (or inadequately insured) “shadow fleet” oil tankers carrying Russian crude oil in violation of the oil price cap through the Strait of Dover – posing a serious risk of severe environmental damage in the English Channel, and a multi-million-pound clean-up operation borne by UK taxpayers. The submission seeks to respond to point (7) from areas of interest identified in the call for evidence: mitigation of any unintended consequences of financial sanctions.
5. In summary, the G7 oil price cap was introduced to prevent Russian oil exporters from legally selling crude oil at over $60 USD/barrel, aimed at reducing Russia’s oil revenue and depleting the Kremlin’s war chest. A key feature of the price cap is a ban on G7 P&I insurance clubs from insuring Russian oil cargo sold above the price cap. In response, Russia has created a “shadow fleet” of hundreds of oil tankers, charged with carrying crude oil above the price cap without any or any adequate P&I insurance. This has allowed Russia to effectively circumvent the oil price cap, and to add billions of USD to its war chest.[3] Around 80% of these oil tankers are older than 15 years,[4] are therefore unreliable and represent a serious risk of malfunction, collision and spillage. Experts opine that it is only a matter of time before a major incident involving Russian shadow tankers will occur.[5] Several close calls have already taken place involving the shadow fleet in 2023 and 2024, including one major malfunction off the coast of Denmark in March 2024.[6]
6. According to estimates[7], in 2023, about 399 voyages were made through the Strait of Dover by shadow fleet tankers carrying Russian crude oil, which were loaded in Russian ports (Ust-Luga and Primorsk) in the Baltic.
7. An oil spill from one of these tankers in the English Channel would cause severe damage to the marine environment and coastal ecosystem. The cost of clean-up operations for an oil spill from a shipwrecked Suezmax “shadow fleet” tanker could be anywhere between £99 million and £1.05 bn GBP.[8] In the absence of adequate P&I insurance, this cost is likely to be borne by UK taxpayers.
8. In response to this unintended consequence of Russia’s circumvention of the oil price cap, the submitting organisations call on the UK Government to tighten UK laws on environmental protection to require all oil tankers to carry adequate P&I insurance or other financial security capable of remediating the cost of an oil spill – including in the Strait of Dover.[9] Such insurance is already obligatory for entry into UK ports.[10] Furthermore, the submitting organisations call on the UK Government to spearhead an international effort to require all oil tankers to carry adequate P&I insurance in international waters – by expanding the application of the International Convention on Civil Liability for Oil Pollution Damage (1992).[11]
9. The submitting organisations aver that the risk of environmental damage from the “shadow fleet”[12] and the huge cost of a potential clean-up should incentivise the UK Government to adopt innovative solutions to protecting its coastal environment. Requiring all oil tankers to carry proof of adequate P&I insurance in UK territorial waters, the Dover Strait and more broadly in all international waters would not only protect the UK from an environmental catastrophe, it would also disincentivise further circumvention of the oil price cap with uninsured tankers and give G7 sanctions their intended effect.

2. The issue: inadequately insured ‘shadow fleet’ oil tankers in the English Channel

10. The G7 oil price cap was introduced to prevent Russian oil exporters from legally selling crude oil at over $60 USD/barrel, aimed at reducing Russia’s oil revenue and depleting the Kremlin’s war chest while, at the same, preventing major destabilisation of the global oil market.[13] A key feature of the price cap is a ban on G7 P&I insurance clubs from insuring Russian oil cargo sold above the price cap[14].
11. In response, Russia has created a “shadow fleet” of hundreds of oil tankers.[15] We apply the term “shadow fleet” to oil tankers with no maritime service links to G7/EU countries, including ownership, vessel management, flagging, and P&I insurance. The shadow fleet’s objective is to trade Russian crude above the price cap- allowing Russia to generate additional revenue and fund its war in Ukraine.
12. The International Maritime Organization estimates the global shadow fleet to be made of 300 to 600 tankers primarily comprised of older ships, many of which have not been subject to recent inspections and undergo inadequate maintenance.[16]According to analysis by KSE Institute based on open and commercially available data[17] in January 2024, the Russian shadow fleet consisted of at least 101 tankers carrying crude oil from Russian ports.[18] Russia has continuously sought to expand     its shadow fleet over the past two years.
13. In January 2024, 78% of total Russian seaborne crude oil exports in volume terms were transported by shadow fleet vessels[19]. The share has been rising consistently since the start of the full-scale invasion and the build-up of the shadow fleet accelerated noticeably after the taking effect of the oil price cap regime.[20]
14. Russia continues to rely on Baltic Sea ports for more than 40% of its seaborne crude oil exports.[21] In January 2024, almost 45 million barrels of crude oil were transported through the Baltic Sea—with the bulk transiting through the English Channel.[22] An estimated 75% of all Russian crude exports through the Baltic Sea in January 2024 was done using shadow fleet tankers.[23] Russian shadow fleet vessels carrying crude oil made 399 individual voyages through the Strait of Dover in 2023.[24] In February 2024, the most active managers of the shadow fleet that transported Russian crude oil through the Strait of Dover were companies registered in the Marshall Islands and the United Arab Emirates: 14 out of 17 of their voyages were made with tankers that were over 15 years old.[25] By industry standards – oil tankers are usually decommissioned after 15 years of service.[26]
15. Shadow fleet tankers carrying oil over $60 USD/barrel do not (or should not) carry International Group P&I insurance – because of the oil price cap and its implementing legislation. As such, shadow fleet tankers are either completely uninsured, or carry inadequate insurance from paper companies that lack sufficient capitalisation to cover the cost of an oil spill or adequate re-insurance.[27] Alternatively, according to a recent investigation by the Financial Times revealed that tankers insured by Moscow-based Ingosstrakh are subject to a “sanctions exclusion clause” which would invalidate claims involving tankers moving Russian oil above the oil price cap.[28]
16. Reportedly, nearly 30 accidents involving various shadow vessels have occurred in 2022-2023:[29]
1. The Pablo, a 27-year-old Gabon-registered tanker that suffered a large explosion by the coast of Indonesia in May 2023. The ship was built in 1997 and was set to be sold as scarp back in 2018, however it was repurposed to join a shadow fleet carrying Iranian oil.[30] With no identified insurer, local authorities had to manage the consequences of the incident. Much greater harm was avoided only because the ship was returning after offloading the cargo. Had the vessel been carrying its maximum capacity of 700,000 barrels of oil during the incident, environmental and economic damage would have been disastrous.[31]
2. In December 2023, the 23-year-old, Cameroon-flagged ship Liberty, carrying sanctioned Venezuelan oil, experienced technical failure and ran aground in the Singapore Strait. A major ecological catastrophe was avoided because Indonesian salvage teams managed to free the vessel.[32]
3. In October 2023, a Russian shadow fleet tanker called the Turba lost engine power some 200 miles off the coast of Indonesia and for about 48 hours the ship’s navigation status was “not under command” - meaning that the ship was unable to manoeuvre on its own and therefore to keep out of the way of other traffic.[33] The Turba is a 26-year-old vessel that has not had a full inspection since 2017.[34] According to the open database,[35] the Turba lacks P&I insurance and sails under the flag of Cameroon, a country with a poor standing for the oversight of maritime safety.
4. On 2 March 2024, a collision involving a Russian shadow fleet tanker occurred in the Danish Strait.[36] The incident was caused by the 15-year-old Andromeda Star oil, with opaque ownership and a Goa-based ship manager called Margao Marine Solutions OPC, which does not respond to emailed requests and has no listed phone number.[37] The vessel’s insurers are unknown, and it is not listed as being covered on the International Group of P&I Clubs’ website. Fortunately, the ship was returning to Russia empty and as such did not cause an environmental catastrophe in the Danish Strain.
17. According to one industry expert, “[t]ankers that should have been scrapped by now are doing loads of ship-to-ship transfers of millions of barrels of oil without proper insurance” is “an environmental disaster waiting to happen.””[38] The potential impact of a large oil spill from an ageing tanker can be illustrated by the Prestige disaster in 2002 off the costs of Spain and Portugal. The 26-year old Prestige broke apart and leaked 50,000 metric tons of oil. After the sinking, the wreck continued to leak approximately 125 tons of oil a day, polluting the seabed and contaminating the coastline, especially along the territory of Galicia.[39] The Prestige accident is one of the greatest ecological disasters in Europe and total damage caused by the incident has been estimated at over 4 billion euros.[40]
18. According to a preliminary estimate prepared by a group of economics experts for this submission,[41] the cost of clean-up operations for an oil spill from a shipwrecked Suezmax “shadow fleet” tanker in the English Channel could be anywhere between £99 million and £1.05 bn GBP.[42] In the absence of adequate P&I insurance, this cost is likely to be borne by UK taxpayers.
19. In addition to clean-up costs, an oil spill in the English Channel would harm both economic activity and the ecosystem. Several industries would be affected, including fishing, tourism, and boating. The ecological impacts of a large spill would also be non-trivial. Seabirds, which dive for fish, are highly susceptible to oil spills, as the oil coats their feathers and leads to fatalities. Fish eggs and larvae are also particularly vulnerable to oil spills. Oil spills pose threats to marine mammals and sea turtles, including leatherback sea turtles and fin whales. Finally, oil spills can contaminate coastal habitats, resulting in organism fatalities and hypoxia. Along the Channel coast, UK-designated Environmentally Sensitive Areas like Avon Valley, Test Valley, and South Downs are bordered by South Wessex Downs, Dartmoor, Blackdown Hills, and West Penwith. The region hosts numerous sensitive estuary and salt marsh ecosystems, facing habitat loss and disturbance. An oil spill could cause substantial harm to these ecologically-sensitive areas.

3. Proposed solution: require proof of adequate P&I insurance

20. In response to this unintended consequence of Russia’s circumvention of the oil price cap, the submitting organisations call on the UK Government to tighten UK laws on environmental protection to require all oil tankers to carry adequate P&I insurance or other financial security capable of remediating the cost of an oil spill in waters under UK control. Such insurance is already obligatory for entry into UK ports.[43] The submitting organisations recommend for this obligation to be extended to UK territorial waters and its Exclusive Economic Zone, as per the terms of the International Convention on Civil Liability for Oil Pollution Damage (1992).[44]
21. The submitting organisations further recommend that the obligation to carry adequate P&I insurance should be extended to the Strait of Dover. Article 42(1)(b) of the UN Convention on the Law of the Sea allows the UK to adopt laws and regulations relating to the transit passage in the Strait of Dover in respect of “the prevention, reduction and control of pollution, by giving effect to applicable international regulations regarding the discharge of oil, oily wastes and other noxious substances in the strait”. According to Article 42(4), “foreign ships exercising the right of transit passage shall comply with such laws and regulations”. Nevertheless, it is unsettled whether such an obligation in relation to the Strait of Dover would be enforceable under the current terms of Article 42(2).[45] Further legal advice is necessary on this point from relevant experts.
22. Furthermore, the submitting organisations call on the UK Government to spearhead an international effort to require all oil tankers to carry adequate P&I insurance in international waters – by expanding the application of the International Convention on Civil Liability for Oil Pollution Damage (1992)[46] and/or altering the UN Convention on the Law of the Sea.
23. The submitting organisations aver that the risk of environmental damage from the “shadow fleet” and the huge cost of a potential clean-up should incentivise the UK Government to adopt innovative solutions to protecting its coastal environment. Requiring all oil tankers to carry proof of adequate P&I insurance in UK territorial waters, the Dover Strait and more broadly in all international waters would not only protect the UK from an environmental catastrophe, but it would also significantly raise the cost of circumventing the oil price cap.
    

List of Annexes:

Annex 1: Role of Shadow Fleet in Russian Export of Crude Oil, 2022-2024

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Annex 2: Shadow Fleet Voyages Through the Strait of Dover, 2023

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Annex 3: Excerpt from the KSE Institute Russian Oil Tracker, February 2024

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Annex 4: Quantification of the Potential Damage of An Oil Spill in The English Channel From a Ship Carrying Russian Oil

Preliminary opinion prepared by Tatyana Deryugina (Associate Professor of Finance at the University of Illinois), Andrés de Loera (PhD Student in economics at Harvard University), Dr Richard S.J. Tol MAE (Professor of Economics at the University of Sussex and Professor of Economics and Climate Change at Vrije Universiteit in Amsterdam) and Javier López Prol (Assistant Professor of Economics, Yonsei University, South Korea).

To quantify the potential damage of an oil spill in the English Channel from a ship carrying Russian oil, we first consider historic oil spills using data from Allo and Loureiro (2013). The data include information on tons of oil spilled and the total damage caused. Damage is defined as the sum of the total claims filed for compensation following the accident. Using the relationship between total damage and tons of oil spilled and assuming that it is linear in logs, we project that a spill from the Aframax or the Suezmax could cause, respectively, up to £84 and £99 million in damage (2023 pounds). This is, however, the most optimistic scenario. Alternatively assuming that damages are linear in log of oil spilled yields £431 million in damage for the Aframax and £449 million for the Suezmax. Finally, the simplest model—assuming a linear relationship between damage and tons of oil spilled without any transformation—yields maximum damages of £797 million for the Aframax and £1.05 billion for the Suezmax. The methodological appendix provides additional detail on these calculations.

As the scenarios above illustrate, the damage caused by oil spills can vary tremendously. The raw damage data support this. In particular, there is a long right tail of damage: the median damage per thousand tons spilled is £9.7 million, but the 75th percentile is almost £39 million, and the 90th percentile is almost £118 million. Several factors will influence the actual amount of damage, including the difficulty and speed of cleanup; what economic activity and ecological assets are exposed to the spill; and the legal environment in which the spill occurs.

Considering the case of Russia and the English Channel specifically, an oil spill would first and foremost create cleanup costs. In principle, the party responsible for the spill is also responsible for cleaning it up, but there is no guarantee that Russia would cooperate in case of a spill. Additionally, if Russia does not report and try to contain the spill in a timely manner, both the cleanup costs and damage could be substantially larger than in cases where the responsible party acts promptly to clean up the spill.

In addition to cleanup costs, an oil spill in the English Channel would harm both economic activity and the ecosystem. The extent of harm would again depend on the amount of oil spilled, exactly where it is spilled, and how quickly the oil is contained and cleaned up. Several industries would be affected, including fishing, tourism, and boating. Each of these industries is economically valuable: catch value in the English Channel exceeded £110 million in 2021. Visitor expenditures on the channel island of Jersey in 2019 were £280 million, and the channel island of Guernsey estimated their direct and indirect tourism revenue to be £108.8 million in 2015. The English Channel boasts one of the world's largest leisure sailing regions, featuring over ten major sailing races and 57 marinas in England alone. In 2018, more than 3.9 million UK adults (7.3% of the adult population) engaged in boating or watersports, with UK households owning over 1 million boats/craft. The UK leisure marine industry generates £3.97 billion in direct revenues and contributes over £1.5 billion in gross value added. Each of these industries would suffer a decline in revenue if there were a large and difficult-to-clean-up oil spill in the English Channel.

The ecological impacts of a large spill would also be non-trivial. Seabirds, which dive for fish, are highly susceptible to oil spills, as the oil coats their feathers and leads to fatalities. Half of British or Channel Islands seabird species have declined in the past two decades, with six of 25 breeding species listed on the UK Birds of Conservation Concern Red List and eighteen on the Amber List.

Fish eggs and larvae are also particularly vulnerable to oil spills. The English Channel is renowned for shellfish like scallops, alongside species such as cod, sole, haddock, whiting, pollock, mackerel, and herring. But 30% of Channel fish are already overfished, with declines noted in whiting, common sole, and European seabass. A large oil spill would cause further damage to these populations.

Oil spills pose threats to marine mammals and sea turtles in the Channel, including leatherback sea turtles and fin whales. The UK hosts 177,000 porpoises and 40% of the global grey seal population. Its only pod of bottlenose dolphins lives in the Channel. However, bottlenose dolphins face extinction risk, fin whales are threatened, and leatherback sea turtles are endangered.

Finally, oil spills can contaminate coastal habitats, resulting in organism fatalities and hypoxia. Along the Channel coast, UK-designated Environmentally Sensitive Areas like Avon Valley, Test Valley, and South Downs are bordered by South Wessex Downs, Dartmoor, Blackdown Hills, and West Penwith. The region hosts numerous sensitive estuary and salt marsh ecosystems, facing habitat loss and disturbance. An oil spill could cause substantial harm to these ecologically-sensitive areas.

Methodological appendix

Russia’s main export oil blend is Urals, which is a medium blend (source). The tanker classes we consider are the Aframax (capacity of 750,000 barrels) and Suezmax (capacity 1 million barrels). This chart provides conversion factors for different oils from barrels to metric tonnes. Urals have an API of 30.6, which is closest to Poseidon. Using the conversion factor of 0.139 tonnes per barrel, a fully loaded Aframax carries 104,250 tonnes of oil and a fully loaded Suezmax carries 139,000 tonnes. The table below summarizes the results of the log-log model (in 2023 dollars). Conversions between dollars and pounds were done using an exchange rate of 0.79 pounds per dollar.

*Based on data from Allo and Loureiro (2013)

Distribution of damage per thousand tons of oil spilled

*Based on data from Allo and Loureiro (2013)

Table: Damages from Major Oil Spills in 2023 Dollars

(based on data from Allo and Loureiro (2013))

Table: Tons Spilled in Major Oil Spills

(based on data from Allo and Loureiro (2013))

Figure from European Environmental Agency

Notable concentration around Western mouth of English Channel

March 2024