Malaysian maritime authorities too stretched, underfunded to stem trade in US-sanctioned Iran oil, observers say

The concerns come as a US delegation in Kuala Lumpur holds talks with officials over Tehran’s alleged underhanded selling of oil through service providers
‘Dark fleet’ of tankers believed to be operating under the guise of various brands, with secret oil transfers taking place off the Malaysian coast

Malaysia

Hadi Azmi

Published: 5:00pm, 9 May 2024

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Malaysia’s underfunded maritime authorities may struggle to contain rampant transshipment of US-sanctioned Iranian oil off its coast, experts say, as a visiting US delegation revealed that Washington’s security forces had been monitoring ship-to-ship oil transfers in Malaysian waters.

Two representatives of the US Treasury Department are meeting the Malaysian government in Kuala Lumpur this week over concerns that Tehran’s capacity to sell its sanctioned oil is reliant on service providers based in Malaysia.

Speaking to members of Malaysian media, US Treasury Under Secretary for Terrorism and Financial Intelligence Brian Nelson said the US had promulgated guidance to the Malaysian marine sector about the type of services that they are engaging in.

“These are ship-to-ship transfers, particularly at night, which we see from time to time. They are really designed to obfuscate the origin of the commodity, in this case, Iranian oil,” Nelson said.

A standby vessel nearby Velesto Naga 7 offshore jack-up drilling rig and oil production platform in Malaysian waters. The rebranding of Iranian oil as Malaysian puts Malaysia as the No 4 exporter of oil to China. Photo: Shutterstock

The trade sees Iranian oil transferred by a “dark fleet” of ageing tankers and falsely rebranded as “Malaysia Blend”, before being sold at steep discounts to small Chinese refineries. It is so large that on paper it would make Malaysia the world’s fourth-largest oil exporter to China, analysts say.

Nelson and US Treasury general counsel Neil MacBride are in Malaysia and Singapore on a four-day trip to discuss Iranian oil issues and ways to prevent Malaysia from becoming a jurisdiction where Palestinian militant group Hamas could fundraise and move money.

Analysts say the trade may be happening despite Washington’s protests, as Malaysia’s maritime assets are notoriously poorly funded and unable to fully patrol waters, including the country’s exclusive economic zone which spans some 574,000 sq km.

“[The Malaysian Maritime Enforcement Agency], despite being Malaysia’s frontline maritime law enforcement agency, has long suffered from a lack of resources and assets to carry out its mandate,” said Thomas Daniel from the Institute of Strategic & International Studies Malaysia.

The construction of three new offshore patrol vessels for the agency has been hampered by cost issues, leading to only one having been delivered while two more needing cash injection and a prospected delivery of 2026.

The US, under its Foreign Assistance Act of 1961, is transferring a US coast guard cutter boat to Malaysia by the end of this year.

Shipping containers at the Port of Tanjung Pelepas, in Iskandar Puteri, Johor. Photo: Bloomberg

Malaysia’s Communications Minister Fahmi Fadzil said the country was prepared to engage with American counterparts to better understand concerns while stressing it would comply with UN sanctions – but not committing to Washington’s own embargoes.

“When it comes to unilaterally applied sanctions, then I think we have to assess this situation,” Fahmi told reporters in Kuala Lumpur on Wednesday.

Conducted by a fleet of vintage tankers, the daily occurrence of ship-to-ship transfers are movements of crude oil, petroleum products, liquid bulk chemicals and liquefied gas between tankers while at sea, without vessels having to call at a port or other facility.

While nations do not have full sovereignty over their exclusive economic zones – with other countries guaranteed freedom of navigation over such areas – an International Maritime Organization’s convention requires oil transfers in exclusive economic waters to be flagged before they take place.

US-based Iran watchdog group United Against Nuclear Iran, which has been tracking Tehran’s oil transhipments, alleges that China has purchased over US$90 billion in Iranian oil since the inauguration of US President Joe Biden in January 2021, despite 2019 sanctions imposed on Tehran.

Concealed under rebrands as Omani Crude, Iraqi Crude, Russian Urals, Bitumen Blend, Nemina, or Malaysian Blend, China’s small, privately owned oil refineries – known as “teapots” – have bought the Iranian oil at a steep discount of US$4 a barrel below the benchmark price.

Oil is currently trading at US$83.70 per barrel under the Brent crude benchmark.

The rebranding of Iranian oil as Malaysian puts Malaysia as the No 4 exporter of oil to China, behind Saudi Arabia, Russia and Iraq, with experts noting that the import number exceeds Malaysia’s total crude oil productions.

Further complicating the situation is the important trade routes of the Strait of Malacca and the South China Sea straddling Malaysia, alongside overlapping claims over the latter with intrusions by China’s coast guard into Malaysia’s exclusive economic zone.

China was caught flat-footed in June last year when a Chinese barge was found illegally salvaging steel – and unexploded ordnance – from two World War II era British warships that sank off the coast of Peninsula Malaysia in 1941, an act condemned as looting of historical site.