The new world created by Vladimir Putin’s invasion of Ukraine has spawned a new oil trading hub: the town of Ceuta – a tiny Spanish enclave that sticks out of Morocco into the Mediterranean Sea like a thumb.There, in calm seas away from prying eyes, Russia is swapping oil tankers, a technique that allows it to reduce shipping costs, get around restrictions and smooth logistics for its remaining customers. The result? Russian oil is still flowing into the global market in great quantities, barely down from prewar levels despite US and European Union sanctions. Yes, the Kremlin is having to sell its oil at a discount, but it’s still shipping lots of it.
Until it invaded Ukraine, Russia seldom used the waters near Ceuta as a stopover for its oil. Back then, Moscow shipped crude directly to European refineries with small tankers. But the Kremlin started to use the sea near the Spanish town as a base for ship-to-ship transfers, first sporadically, and now routinely.The route goes as follows: Russia loads crude into small-sized tankers called Aframaxes at its Baltic Sea export terminals, such as Primorsk and Ust-Luga. The vessels, reinforced to break through Arctic ice during the winter, ferry the crude toward Ceuta. Near the town, the Aframaxes, which carry about 700,000 barrels, wait until a giant so-called very large crude carrier, or VLCC, arrives. The Aframaxes approach the VLCC and transfer the cargo ship-to-ship. Normally, up to three of those operations are needed to load up one VLCC, which can transport at least 2 million barrels. After that, the VLCC begins its journey toward Asia, going around Africa.
Since December, six VLCCs have done exactly that, taking crude from more than 15 Aframaxes. Some of them are veterans of the black market in oil, having in the past shipped Iranian and Venezuelan crude, according to Vortexa Ltd., a consultancy that tracks tankers. And Russia and China appear to be lining up more swapping stops in Ceuta. Currently, two VLCC are there waiting for shuttle tankers to arrive. Moscow doesn’t appear to be violating international law: The tankers largely stay 12 nautical miles offshore, the limit of territorial waters — although at times they appear to have drifted closer to Ceuta, into what Spain considers its territorial waters, according to Bloomberg tracking data. The Russians also abide by international norms by keeping the ships’ beacons on. But it’s a risky business; most of the tankers calling on Ceuta since December have seen better days. The oldest was 26 years, which, in human terms, equals someone in their 70s. The ownership is largely Russian and Chinese, and their insurance coverage is murky at best. The risk of a spill is high. Spain would do well to keep its navy patrolling nearby, making sure that nothing goes wrong. There’s a reason why Russia isn’t using other typical ship-to-ship areas, including Skaw, in Denmark, and Southwold, in England. All suggest that local authorities there had made clear they wouldn’t welcome the ship-to-ship maneuvers. The waters around Ceuta come in handy for three reasons.First, despite spending hundreds of millions of dollars building a ghost fleet of Aframaxes — whose ownership is opaque — Russia doesn’t have access to many ice-class boats, which are one of the hottest commodities of the shipping industry. If it had to move the cargo all the way from the Baltic Sea to China or India with the Aframaxes, it would quickly tie up all its tankers due to the length of the voyage. The Baltic-to-Ceuta route takes 10 days; continuing to China would add 40 days.Second, it reduces the cost significantly: economies of scale mean it’s much cheaper to ferry crude in a VLCC than in an Aframax. Because there are more VLCCs available, they also are cheaper right now. Hiring a VLCC costs less than $20,000 per day, while an Aframax goes for $55,000 per day. Third, Ceuta is just in the right place: inside the Mediterranean Sea, it’s sheltered from the stormy winds and winter swell of the North Atlantic. But it’s so close to Gibraltar that the VLCCs that pick up the cargoes can quickly return to the open waters to sail around Africa and toward Asia without losing much time. The other location that Russia is using, offshore Kalamata (Greece), forces the tankers to go much further into the Mediterranean Sea, and it’s only convenient for half-laden VLCCs that could cross the Suez Canal (The waterway is too shallow for a fully loaded VLCC).
So the waters around Ceuta remain busy with Russian traffic. Discounted or not, every oil dollar counts for the Kremlin. Europe needs to pay attention to what’s happening at its front door.
More From Bloomberg Opinion:
• Putin’s Few Oil Buyers Demand Deep Discounts: Julian Lee
• Can Europe’s Energy Bridge to Russia Be Rebuilt?: Javier Blas
• Mind the Gap Between the West and the Rest: Clara F. Marques
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former reporter for Bloomberg News and commodities editor at the Financial Times, he is coauthor of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”
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