With a month to go before the start of a full European embargo on Iranian oil, ship owners seeking to keep hauling the crude by switching insurance provider risk having their tankers seized by lenders.
Most loans to buy vessels require insurance against risks including spills and collisions, and banks will normally only accept cover provided by members of the International Group of P&I Clubs, according to Harry Theochari, a London-based shipping and asset-finance lawyer at Norton Rose LLP. The group’s members insure about 95 percent of the tanker fleet and follow European Union law, which will prohibit all such cargoes from July 1 as part of international efforts to curb Iran’s nuclear program.
Oil shipments from Iran, the Organization of Petroleum Exporting Countries’ second-largest producer, already declined 23 percent this year, Barclays Plc estimates. While ship owners in China, Japan and India, the biggest buyers of the crude, have said they will seek alternative insurance, switching cover would require the assent of lenders. European banks finance about 80 percent of the world’s fleet, according to Petrofin Research, an Athens-based industry consultant.
“If the insurances are not in a form that’s acceptable to the bank, that’s an immediate event of default and the bank would have the right to foreclose,” Theochari said by phone. “It’s sort of the atomic-device option. The insurances are just so fundamental there’s never any grace period.”
Tankers taking Iranian cargoes will face legal proceedings from banks, said Iris Schrecker, the head of compliance at DVB Bank SE in Frankfurt, which finances 1,500 vessels through 450 loan accords. A ship losing its insurance would be an event of default, said Thomas Midteide, an Oslo-based spokesman for DNB ASA, the second-biggest shipping lender.
Nordea Bank AB, which has about 13.6 billion euros ($17.7 billion) of shipping, offshore and oil loans, follows regulations and takes “appropriate” measures in the event of breached loan accords, said Stephan Ghisler-Solvang, a spokesman for the bank. Rune Hoffmann, a spokesman for HSH Nordbank AG, the largest shipping lender, declined to comment. Commerzbank AG accounts for sanctions and embargoes, the industry’s third-biggest financier said in an e-mailed statement.
At least 62 non-Iranian tankers have loaded at Kharg Island, the nation’s largest oil terminal, since EU ministers agreed to the embargo on Jan. 23, according to ship-tracking data compiled by Bloomberg. The EU ban covers the purchase, transportation, financing and insuring of Iranian oil, with pre-existing contracts and third-party liability insurance exempt until July 1.
“The banking is a separate issue that we don’t think was at all foreseen and is potentially more far-reaching,” said Andrew Bardot, London-based secretary and executive officer of the International Group of P&I Clubs.
With four weeks to go, ship charters are already being curbed because of the time it takes the vessels to deploy, load and deliver cargoes. A journey to China, the biggest buyer of Iranian crude, takes about 20 days and tankers are normally hired about three weeks in advance.
Iran and Western negotiators agreed to hold another round of talks about the country’s nuclear program next month after failing to reach a deal at a summit in Baghdad last week. The government in Tehran faces four set of United Nations sanctions urging the country to stop enriching uranium.
UN inspectors found Iran almost doubled its stockpile of 20 percent medium-enriched uranium since February and some particles at the nation’s Fordo facility were enriched to 27 percent, the International Atomic Energy Agency said May 25. That’s closer to the 90 percent level needed for atomic weapons. Iran says it’s only enriching uranium to that grade to fuel a research reactor producing medical isotopes for cancer treatment.
Iran’s oil exports of 1.7 million barrels a day may fall by another 300,000 to 500,000 barrels from July, Barclays analysts led by Helima Croft in New York said in a May 15 report. Crude traded in London rose as much as 25 percent from mid-December to early March on concern about declining supply. It has since retreated 17 percent to $106.32 a barrel on speculation that slowing global growth will curb demand for energy.
Japan is considering sovereign guarantees for tankers carrying Iranian crude, two government officials familiar with proposed legislation said this month. Indian vessel owners have also asked the state to provide cover. The government in China has already underwritten some Iranian cargoes, the Paris-based International Energy Agency said in March.
Banks that allow ships to change to an insurer who’ll cover Iranian shipments would potentially violate U.S. sanctions because it might be interpreted as facilitating trade with the Persian Gulf nation, according to Clare Hatcher, a London-based consultant at Clyde & Co., an international trade law firm. The U.S. has restricted dealings with Iran since 1979, when militants took 52 hostages at the American embassy in Tehran.
An executive order signed May 1 penalizes people outside the U.S. who facilitate sanctions violations, for instance by using the U.S. financial system to access dollars. About 90 percent of the fleet is financed in the currency, Petrofin estimates.
Under a U.S. law signed Dec. 31, countries that fail to show they are reducing their oil imports from Iran by June 28 will have their banks’ access to the U.S. financial system blocked. Japan and 10 European nations received exemptions in March for a renewable period of 180 days.