THE dark fleet* is the new scrapping for tanker shipping. Tankers over 20 years old that used to go to the breakers carry cargoes for Iran, Venezuela and Russia instead. But there’s a limit to how large the dark fleet can grow, because it faces the same supply-demand fundamentals as the compliant fleet.

That upper limit will be reached “soon”, predicted Frontline chief executive Lars Barstad during a conference call on Friday.

“What we have ended up seeing is a two-tier market that is developing in front of our eyes,” he said.

“The divide between what we would refer to as the compliant and non-compliant markets has grown over the last 12 to 18 months. Currently — and this is quite surprising to some — 23% of the global tanker fleet is suspected to be or is involved in sanctioned trades.”

Frontline has its own definition of non-compliant tankers. It includes two categories: what it calls the “dark fleet”, which it defines as vessels listed by the US Office of Foreign Assets Control or United Against Nuclear Iran (UANI), and the “grey fleet”, which it defines as vessels suspected of carrying sanctioned cargo based on Automatic Identification System tracking.

By this definition, Frontline calculates that 150 very large crude carriers (17% of the fleet), 131 suezmaxes (21% of the fleet), and 317 aframaxes/long range two tankers (28% of the fleet) are now non-compliant.

The scale of the non-compliant fleet has recently risen for two reasons, said Barstad: increased enforcement of Russian sanctions by Western authorities and higher crude export volumes from Iran.

“Over the last months there has been increased scrutiny of the Russian trade, exposing more and more vessels to being sanctioned by either the G-7 or the EU. We’ve also seen steep growth in Iranian exports, which has increased the need for tonnage for transportation.”

The limit of dark fleet growth

“I believe the [non-compliant] fleet will continue to grow because for a ship turning 20 years old, it makes a lot of sense to go into that market,” he continued.

“The interesting part here is you’re not building ships to enter the dark or grey fleet. They get their fleet supply from the compliant fleet — they’re supplied by the ageing of the overall tanker fleet. Vessels move from the compliant fleet due to age because we have zero scrapping. This ageing is accelerating as we move forward.”

An upper limit for the non-compliant fleet will be hit when it faces the same downward pressure on margins from excess supply versus demand that’s commonly experienced in the compliant fleet.

“Unless non-conventional trades continue to grow, the illicit market will soon be oversupplied as the fleet ageing accelerates… unless you see Iran able to produce significantly more oil, or the same goes for Russia or Venezuela — and all three of these are unlikely.”

There are also limits to demand for sanctioned oil, particularly given recent weakness in Chinese demand.

“China has close to 20% of its supply coming from either Iran, Venezuela or Russia, and we know it’s taking more from Russia in the north,” Barstad said, noting that Chinese demand “doesn’t look too good right now, to be fair”.

“So, what we will start to see is an overcrowded and oversupplied sanctioned market. And once the margins in that market are destroyed, we will actually start to see recycling. One should expect scrapping to start to happen in the end.” 

'I have lost all faith'

What Barstad does not expect is for sanctions from Western governments or environmental and safety regulations from the International Maritime Organization to force non-compliant ships to the breakers.

“I have lost all faith in enforcing sanctions. I have lost all faith in [the ability] to regulate out of this.

“With the IMO, in respect to reducing emissions, I can assure you this fleet is not spending too much capex on reducing its carbon footprint.” Regarding IMO safety regulations, he added, “We had a tanker [Ceres I (IMO: 9229439)] that blew up off Singapore recently and nobody really put too much attention on that.

“We did a study to see how many of these vessels are actually not insured by any recongisable P&I club… and it paints a horrendous picture if something happens. It paints a very, very bleak picture if we get more events like this.”

* Lloyd’s List defines a tanker as part of the dark fleet if it is aged 15 years or over, anonymously owned and/or has a corporate structure designed to obfuscate beneficial ownership discovery, solely deployed in sanctioned oil trades, and engaged in one or more of the deceptive shipping practices outlined in US State Department guidance issued in May 2020. The figures exclude tankers tracked to government-controlled shipping entities such as Russia’s Sovcomflot, or Iran’s National Iranian Tanker Co, and those already sanctioned.

Download our explainer on the different risk profiles of the dark fleet here