Hidden within the bone dry ledgers of China’s international trade reports, an apparent anomaly revealed itself in late 2022. Analysts examining the movement of oil around the world located an extraordinary imbalance in the country’s accounts; a bland aberration that helped to reveal the risky game being played by the US and its allies to maintain a high supply of oil around the world.
It was November 2022 and Chinese imports of Malaysian oil had reached a record high of more than one million barrels a day. The problem? Malaysia’s total national oil production was just 521,000 barrels a day, almost half of the amount China claimed it was importing.
Earlier this week, the US Energy Information Administration (EIA) reported that somehow, this phantom production of oil has only increased in 2023. The federal agency noted that “during this period, [China’s] import volume from Malaysia exceeded total production in Malaysia.”
According to the EIA the truth is both shockingly brazen and increasingly common; oil originating in countries currently sanctioned by the US and its allies is being systematically relabelled as coming from third-party countries like Malaysia, Oman and the UAE, in order to skirt international embargos.
Under this now well recognised process, oil is taken from Russia, Iran or Venezuela to meeting points in South-east Asia and transferred from tanker to tanker, where it is then relabelled as coming from a nearby oil producer, before it is shipped on to China.
These ship-to-ship transfers of oil are highly risky, threatening both the environment and the safety of the crews involved. They occur with little oversight and often in dangerous conditions on the high seas. Despite this, such transfers are being performed daily while local officials and western governments turn a blind eye.
Malaysia’s ministry of investment, trade and industry failed to respond to the Guardian’s questions on whether anything was being done to crack down on the practice. However, the country’s marine department which looks after shipping and port affairs said that efforts to curb such activities were taking place.
Despite such efforts, the trade in sanctioned oil from countries like Russia and Iran has boomed over the last year. Iranian monthly oil exports alone hit an estimated five-year-high in August of this year, according to watchdog group United Against a Nuclear Iran (UANI). The group estimate that 91% of that oil was imported by China.
Analysts say that this trade is going on with the full knowledge of the Biden administration, who have prioritised diplomatic overtures with Iran over enforcing their own sanctions.
Last week, in a deal months in the making, the US and Iran took part in a controversial prisoner swap, that also included the return of $6bn in Iranian oil money that had been frozen by Washington.
Ignoring sanction breaking trade is part of the White House’s strategy to accelerate further rapprochement efforts, says energy analyst Thomas O’Donnell.
“When you have such thorough sanctions on Iranian oil and you start looking the other way, you can use this as a carrot to get them to participate,” he says.
In January, the Biden administration’s then special envoy for Iran, Robert Malley, told Bloomberg that the US was not OK with Iran’s increasing oil exports and that they would do “everything in our power” to enforce sanctions.
However, maritime security expert Jan Stockbruegger believes that the US might have more immediate reasons not to clamp down on the trade.
“Sanctioned oil helps reduce oil prices. Without Russian or Iranian oil, our oil price would be higher. Elections are usually decided through the price of gas … [Biden] has an incentive to make sure oil prices are low.”
O’Donnell agrees, saying that with the price of oil heading towards $100 a barrel, it’s in the Biden administration’s domestic interests to keep supply of oil around the world as high as possible.
“Oil is a very touchy issue in US politics,” O’Donnell says. “If the price of gasoline goes up, everyone points at the president … This will be used by the GOP to say Biden is screwing up.”
Living on borrowed time
In December 2022, the G7, the European Union and Australia agreed to a price cap on Russian oil in response to its invasion of Ukraine. Under the terms of the deal, insurers are prohibited from covering vessels which sell oil above the maximum price set by those western powers.
While US state department data shows that the price cap has had a profound effect on Russian oil profits, this proliferation of sanctions has led to a boom in the number of so-called ‘shadow tankers’ shipping oil.
O’Donnell says that in this environment, Russia and Iran are now competing to sell discounted oil to China.
“In some ways, [sanctions] have been beneficial to China,” says O’Donnell. “They can play countries off each other and get the best deal.”
But what’s good for China’s bottom-line could prove to be disastrous for the environment.
The growing fleet of shadow tankers are transporting sanctioned oil with little regard for industry regulations. Performing dangerous mid-ocean transfers of oil in order to hide their sanctioned cargo, an increasing number are also now operating without insurance in order to circumvent the oil price cap imposed on Russia.
In 2022 there were at least eight groundings, collisions or near misses involving tankers carrying sanctioned crude or oil products, according to an analysis by the Reuters news agency.
In March of that year, a tanker carrying Iranian oil ran aground in China, causing a small spill in port waters. Three days later, a ship carrying Venezuelan oil collided with a tanker in Cuba.
None of the incidents resulted in any injuries or significant pollution – but experts say that the industry has up until now been extraordinarily lucky.
With the shadow fleet characterised by its ageing and poorly maintained ships, industry figures fear this parallel trade carrying tens of millions of barrels of oil around the world could undermine decades-long industry efforts to increase shipping safety.
In April, Rolf Thore Roppestad, chief executive of Norwegian insurer Gard, told the Financial Times that there was now a much greater risk of a worst-case scenario in which “nobody will be there to pay” to clean up after an accident. “As the shadow fleet continues to grow, it will only become more acute.”
Haylena Krishnamoorthy contributed to this report