Ship to Ship Transfer: Clandestine Manoeuvres to Sneak Oil into North Korea

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The enforcement of international measures limiting sales to North Korea as part of an effort to force Kim to abandon nuclear weapons, is turning out to be arduous because suppliers of illicit fuel are using an old oil-trading practice that helps obscure its origin and destination.

Ship-to-ship transfers, when cargoes are pumped from one tanker to another in the ocean, are legal and typically used to break up large oil shipments into parcels on smaller vessels. But they can also be used as a trick that makes it difficult to track supplies, and have been barred by the United Nations for sales to North Korea.

Even if the tankers can be identified, seized and inspected, culprits are hidden under layers of ownership. A controversy that erupted last week over a shipment of fuel to the rogue nation has so far entangled the world’s third-biggest independent oil trader, a Hong Kong-based commodity company and mysterious shipping firms in Taiwan and the Marshall Islands. South Korean authorities have failed to identify the perpetrator and on Thursday said they are still investigating who owned the cargo.

“These STS transfers can happen 200 nautical miles or more out at sea, as long as conditions are calm, where no one’s looking,” said Rahul Kapoor, an analyst with Bloomberg Intelligence in Singapore. “It’s very easy to black out a ship and hide it.”

(Image Courtesy: Bloomberg)

All ocean-going ships are equipped with a beacon that broadcasts their location around the world, so if a vessel tried to directly load or discharge oil in a sanctioned country, it could be identified. To get around that, two tankers can turn off their transmitters, known as the automatic identification system, rendezvous in secret and transfer the cargo, masking the true origin and destination of the shipment.

A vessel, the Lighthouse Winmore, is said to have transferred 600 tons — about 4,000 barrels — to a North Korean vessel, the Sam Jong 2, on Oct. 19.

Ship-tracking data compiled by Bloomberg showed Lighthouse Winmore making trips between Kaohsiung in Taiwan and Yeosu in South Korea during September and October.

The vessel data, which are broadcast by ships voluntarily and cannot be independently verified, showed it south of Yeosu, with its destination listed as Taichung, Taiwan, on Oct. 15. The ship stopped reporting its location for the next 10 days, virtually disappearing during the period of the alleged transfer. The next transmission was Oct. 25, further to the south near Jeju Island.

While STS transfers are an integral part of the oil and fuel-trading business, when in the wrong hands, this every-day operation can be misused,” said Den Syahril, an analyst at industry consultant FGE in Singapore. During past sanctions, there’s a possibility that ships with Iranian fuel turned off their trackers and conducted these operations in the Middle East gulf, only to have the cargo labeled as Middle East origin afterwards.

Controversial Trades

Now that the practice is in the spotlight, it may become harder to get away with it. Reports that U.S. satellites have been capturing Chinese ships transferring fuel to North Korean vessels could deter perpetrators while major oil trading companies may take additional precautions not to be involved in the controversial transactions.

On Tuesday, South Korea’s foreign ministry said Trafigura Group owned the Lighthouse Winmore cargo and authorities were investigating whether it ordered the transfer to North Korea. Within a few hours, the trading house denied it was involved in the illicit transaction, saying it neither owns nor chartered the ship.

Trafigura added that it originally sold the cargo to Hong Kong-based Global Commodities Consultants Ltd., which in turn said it sold the shipment to another company called Oceanic Enterprise Ltd. Both Trafigura and GCC said their contracts stipulated that any resale of the supply must abide by international sanctions.

No contact information was immediately available for Oceanic Enterprise. South Korea identified Lighthouse Winmore’s charterer as Taiwan-based Billions Bunker Group. The company is incorporated in the Marshall Islands, according to Taiwan’s Maritime and Port Bureau.

(Image Courtesy: Bloomberg)

Risk Management

Taiwan is investigating if the head of Kao Yang Fishery Co. has any connection with the Lighthouse Winmore, according to a Kaohsiung District Prosecutors Office statement on Jan. 3. Kao Yang allegedly sold oil products in international waters instead of Hong Kong, which was identified in export declaration as its destination, according to the statement.

“Trading houses have full teams that are involved in risk management,” said Bloomberg Intelligence’s Kapoor. “Ideally, these teams will screen through counterparties, and it’s unlikely that they’ll dabble in a one-off illegitimate dealing for a small profit as there’s so much risk to reputation involved.”

China refused to designate Lighthouse Winmore and Sam Jong 2, among other ships, as sanctions violators in a disagreement with the U.S., the Wall Street Journal reported last week. While American officials shared with the UN declassified intelligence reports that they said supported Washington’s position that 10 vessels be formally declared as breaching measures, China successfully got the list whittled down to just four tankers, the newspaper said, citing unidentified diplomats.

Spy Satellites

American spy satellites had observed Chinese vessels allegedly transferring oil to North Korean ships in the sea between the two countries about 30 times since October, Seoul-based newspaper Chosun Ilbo reported Dec. 26, citing unidentified South Korean government officials. China has denied the reports.

The vast majority of ship-to-ship transfers are legal. Most of them take place in the U.S. Gulf of Mexico, where the practice is also known as lightering. It’s cheaper to ship oil on larger vessels, so oil traders tend to book the biggest vessel they can find for long haul journeys such as from Saudi Arabia to Texas.

Russian Connect

On the other hand, Russian tankers have supplied fuel to North Korea on at least three occasions in recent months by transferring cargoes at sea, according to two senior Western European security sources, providing an economic lifeline to the secretive Communist state.

The sales of oil or oil products from Russia, the world’s second biggest oil exporter and a veto-wielding member of the United Nations Security Council, breach U.N. sanctions, the security sources said.

The transfers in October and November indicate that smuggling from Russia to North Korea has evolved to loading cargoes at sea since Reuters reported in September that North Korean ships were sailing directly from Russia to their homeland.

“Russian vessels have made ship-to-ship transfers of petrochemicals to North Korean vessels on several occasions this year in breach of sanctions,” the first security source, who spoke on condition of anonymity, told Reuters.

Ship satellite positioning data consulted by Reuters and available on Reuters Eikon shows unusual movements by some of the Russian vessels named by the security sources including switching off the transponders which give a precise location.

The security sources said the Russian-flagged tanker Vityaz was one vessel that had transferred fuel to North Korean vessels. The Vityaz left the port of Slavyanka near Vladivostok in Russia on Oct. 15 with 1,600 tons of oil, according to Russian port control documents.

North Korea relies on imported fuel to keep its struggling economy functioning. It also requires oil for its intercontinental ballistic missile and nuclear program that the United States says threatens the peace in Asia. While the US desires to squeeze Kim Jong Un’s regime, these clandestine operatives are risking its mission through furtive manoeuvres, with oil tankers at sea.

Sea News, January 8

(Source: Bloomberg, Reuters)