Oil Daily | Russia Expands 'Dark Fleet' for LNG Exports Amid Sanctions; U.S. to Replenish Strategic Reserves

【Global Oil Supply and Demand】

Russia’s push to navigate sanctions and maintain its foothold in the global LNG market is gaining momentum with the deployment of a second vessel from its Arctic LNG 2 project. The tanker, Asya Energy, part of what’s being dubbed a “dark fleet,” recently departed from the sanctioned terminal in northern Russia, signaling Moscow’s continued efforts to circumvent Western restrictions. These vessels, reportedly part of a fleet assembled through discreet ownership transfers and minimal transparency, are crucial for Russia’s strategy to sustain LNG exports amid tightening sanctions.

Russia has been expanding its dark fleet of LNG carriers, much like it did with oil tankers following its invasion of Ukraine. The ownership of several ice-class LNG tankers has been transferred to little-known entities, primarily in Dubai’s free trade zones, allowing them to operate under the radar. This strategy enables Russia to continue exporting LNG despite U.S. sanctions and recent EU measures that ban new investments and transshipment operations of Russian LNG.

The sanctions, particularly those delaying the Arctic LNG 2 project and restricting the use of EU territory for transshipments, have driven Russia to employ its shadow fleet more aggressively. With demand for LNG still strong globally, Moscow is betting on these clandestine operations to keep its energy sector afloat.

An analysis earlier this summer conducted by Bloomberg found that little-known shipping firms operating from Dubai’s free trade zone have assumed ownership of at least eight vessels in the earlier part of the year, including four ice-class LNG carriers that had already received Russia’s approval to traverse the Arctic route. Some of the tankers with new ownership do not have listed insurers, according to the analysis—a strong indication of being part of the dark fleet.

Russian exports of petroleum products to Asia via the southern tip of Africa nearly doubled in July from a month earlier to hit an all-time high, according to LSEG shipping data reported by Reuters. Last month, Russia’s shipments of fuels via the Cape of Good Hope en route to Asia jumped to a record-high volume of 1.1 million metric tons. Since the end of 2023, many ship owners have opted to use the longer route via the Cape of Good Hope to avoid passing through the Red Sea, where the Iran-aligned Houthis have targeted Western and Israeli-flagged or owned vessels.

Despite the fact that Russia isn’t being targeted by the Iran-backed Houthis, vessels are not adding another risk by taking the Red Sea route to Asia. Most of Russia’s exports to Asia via Africa consisted of naphtha, while the remainder were fuel oil from the Russian ports on the Baltic Sea and low-sulfur diesel from the port of Primorsk, also on the Baltic, according to market sources and shipping data cited by Reuters. Russia’s markets in Asia were Singapore, Taiwan, India, and China, per the LSEG data.

In recent months, Russia has had higher-than-expected maintenance and repairs at its refineries after Ukraine stepped up early this year its drone attacks on the Russian refining capacity. In addition to unplanned repairs to fix damages from the drones, some refineries underwent planned maintenance, which dragged down Russia’s fuel output and exports earlier this year.

Higher costs and ongoing field developments are set to boost oil and gas investments to a record high offshore Norway, the top hydrocarbon producer in Western Europe, according to new data from Statistics Norway. Total investments in oil and gas activity in 2024, including pipeline transportation, are estimated at an all-time high of $24 billion 257 billion Norwegian crowns, Statistics Norway said on Thursday in its third-quarter survey of oil companies’ investment plans. The latest estimate is 4.1% higher compared to the investment plans from the survey from the second quarter, which was $23.1 billion 247 billion crowns.

【Oil-Producing Countries Dynamics】

OPEC’s second-largest producer, Iraq, seeks to attract more investment in its oil and gas industry by moving to profit-sharing contracts for new bid rounds from the technical service contracts it has awarded so far. The biggest change in Iraq’s petroleum regulatory landscape in decades is being made to attract higher bids and more investments in its huge oil and gas reserves, government officials have told Reuters. Under the profit-sharing contracts, the winners of the licensing rounds are being offered a share of the revenue from the license after deducting royalty and cost recovery expenses.

In contrast, traditional technical service contracts offer a flat rate for every barrel of oil produced after reimbursing costs. They generally pay foreign investors less than what they would have received under production-sharing contracts. Foreign firms operating in Iraq have complained that the technical service contracts, with the flat rate, do not allow them to benefit when international crude oil prices rise. These contracts become even less lucrative for foreign investors when costs increase.

Earlier this week, Iraq signed 13 preliminary exploration deals that would focus on natural gas exploration and development. The agreements, awarded in a bidding round held in May, will be under profit-sharing contracts, an oil ministry official who attended the signing ceremony told Reuters. Last year, a deal between Iraq and TotalEnergies marked the start of a change in contracts. OPEC’s second-biggest producer and the French supermajor signed a massive $27 billion deal after the country offered revenue-sharing terms and an accommodation to capture more of the gas that is flared.

Ultimately, Iraq had to go back to the drawing board several times to reach into its own pockets and dish out even more favorable terms. Iraq eventually settled on hanging onto just 30% of the project, with TotalEnergies grabbing 45% and QatarEnergy getting a 25% stake. The deal will allow TotalEnergies to take part of the revenues from the Ratawi oilfield and use them to help finance three more projects. The revenue-sharing scheme will see 25% of the revenue from each barrel going to Iraq as a royalty, and 75% back to stakeholders.

【Latest Oil Policies】

The United States will continue to buy crude when prices are in the $70s a barrel or lower and plans to add several million barrels of crude to the Strategic Petroleum Reserve early next year. The U.S. Department of Energy DOE is continuing its efforts to bolster the depleted SPR with new oil purchases. DOE's Office of Petroleum Reserves has recently announced a call for bids to supply up to 1.5 million barrels of oil to the Bayou Choctaw site in January 2025. An additional solicitation will follow on August 12, 2024, for another 2 million barrels destined for the Bryan Mound site, also for delivery in January 2025.

This move is part of a strategic plan to replenish the SPR while taking advantage of favorable oil prices. The DOE’s stated goal is to buy crude oil at or below $79 per barrel. The replenishment strategy comes in the wake of the SPR's critical role in stabilizing the market during global supply disruptions, notably the release of more than 180 million barrels of oil from the SPR starting in 2021, as gasoline prices remained high.

The SPR currently houses 375 million barrels of crude—a