The European Commission began to prepare a second strike on Russian hydrocarbons
Following coal, they want to ban Russian oil as part of the sixth package of sanctions. Overseas, they are sure that then Russian oil will no longer be accepted anywhere. However, Iran’s experience shows that there are ways to escape the oil embargo. Europe should consider not only the consequences of a strike on its own population, but also the retaliatory step that Russia can take.
Europe has just introduced the fifth round of sanctions against Russia, in which it imposed restrictions on Russian coal for the first time. But the European Commission has already begun work on a sixth package of sanctions against Russia, with possible sanctions against the Russian oil sector, Deputy Head of the European Commission, Lithuanian Foreign Minister Landsbergis said on Monday.
Lithuania is the most active in promoting the oil embargo against Russia. It wanted to introduce it as part of the fifth package of sanctions. However, there is no consensus in the EU on this matter. In particular, Germany and Hungary strongly oppose the oil embargo, and it is impossible to introduce it without the consent of all EU members. The Europeans imposed an embargo on coal, in fact, with a long delay until August 10 for existing contracts.
But abandoning oil for Europe has even more dire consequences. Russia provides 25% of EU oil imports. According to the EC, in 2021, the EU countries imported from Russia crude oil worth 48.5 billion euros, oil products – 22.4 billion euros. Only Germany last year bought 81.4 million tons of oil, of which Russia accounted for 27.7 million tons, or more than a third of imports (34%). As for Lithuania, it does not really need Russian oil. Because Russian oil is bought only by the Lithuanian Mazeikiai oil refinery (the only one in the Baltics). However, this plant belongs to the Polish company PKN Orlen, which will have to deal with the lack of oil for processing.
“There are disagreements within the European Union on the issue of the oil embargo, some European countries are not ready for such a decision. For example, Hungary will have to be strongly bent. Secondly, there is a banal understanding that there are few free oil production capacities in the world, and Russia cannot be replaced so quickly. Therefore, the oil embargo will lead to an even more significant increase in oil prices. The diesel crisis will break out, which is already approaching Europe, with all the ensuing consequences for the popularity of the authorities”, says Stanislav Mitrakhovich, a senior researcher at the Financial University under the Government of Russia and a leading expert at the National Energy Security Fund.
Britain, which imposed an oil embargo along with the US, is already facing a fuel crisis. The abandonment of Russian oil led to a 40% increase in fuel prices compared to December 2021. Gasoline already costs two pounds per liter, or about 210 rubles. The British have even begun to switch to public transport. Freight transportation has also risen in price, which has led to an increase in the cost of products on the shelves in stores.
In Europe, fuel prices have already risen sharply. For example, in Paris, a liter of gasoline costs almost two euros, or 180 rubles, and in some areas it reaches up to 2.5 euros, or 220 rubles. These are record high prices for Europeans. In Germany, truck drivers are staging car rallies to protest record-breaking petrol and diesel price hikes. Further aggravation of the situation by the hands of politicians is fraught not only with an unprecedented surge in inflation, but also with social consequences.
The International Energy Agency said that Russian oil production in April will be reduced by 25%, which will lead to the loss of world oil supplies by 3 million barrels per day. In fact, the IEA is hinting that already in April Russia will lose European oil supplies and will not be able to redirect these volumes to other markets. However, Mitrahovich does not believe in such a strong drop, although he points out that Russia closed the statistics on oil and gas so that the West would not be able to use it to tighten the sanctions rhetoric.
Indirect data indicate a drop in our exports. Thus, the Central Bank reported a 47.8% reduction in the volume of payments in the oil and gas industry in March compared to the fourth quarter. A similar drop in incoming payments in the oil and gas sector was recorded in the spring of 2020, when the COVID-19 pandemic began. But then there was a collapse in energy prices, while in recent months the prices of both oil and gas are very high. Even with a discount, Russian oil is well worth around $89 per barrel. However, the Central Bank itself notes that such dynamics may be associated with delays in payments for exports. This means that bank data may not reflect reality.
“In my opinion, the IEA is exaggerating when it talks about a drop in oil production in Russia by almost a third in April. How trustworthy is this agency? Recently OPEC+ refused the IEA data in the assessment of oil production,” says Mitrahovich. Since February, OPEC+ has started using data from Rystad Energy and Wood Mackenzie instead of IEA data. The cartel explained this by the fact that the IEA understates production data in OPEC+.
According to the results of April, oil production in Russia may decrease by 4-5% compared to March, Deputy Prime Minister of Russia Alexander Novak said. The reasons, according to him, are the change in logistics, financial problems with insurance and the use of ships.
“It looks like someone will have to close the wells. We already experienced this process when there was a coronavirus. Unfortunately, we have been talking about the need to build storage facilities for oil for ten years already, but we have not built them. We can store oil only in some terminals in ports,” says Mitrahovich.
Of course, Russian oil has run into problems due to geopolitical confrontation. For example, Shell had to apologize last month for its traders buying a heavily discounted shipment of Russian Urals oil because it outraged some politicians, including Ukraine’s foreign minister. Shell had to promise that it would stop buying Russian oil on the spot market and phase out Russian oil products. However, Bloomberg assures that the company continues to buy Russian oil, but does it in such a way that, according to the documents, it passes under the guise of other oil.
To avoid the censure of politicians, Shell buys mixed diesel fuel from a Latvian port, which is only 49% produced in Russia, the remaining 51% of the fuel is not of Russian origin. This allows us to talk on paper about the purchase of non-Russian diesel fuel. Traders called this mixture “Latvian” by analogy with the “Singaporean” and “Malaysian” oil that Iran sells. Mixing oil and oil products in such proportions to circumvent sanctions is actively used by Iran.
Another Iranian way to circumvent sanctions is to turn off transponders on ships carrying oil so that the satellite cannot track the ship with oil. In open waters, a ghost tanker transfers Iranian oil to tankers of other countries, and the oil is of non-Iranian origin. Actually, the same methods of circumventing the oil embargo can be used by Russia.
Now there are traders who are ready to buy Russian Urals oil, which is traded at a discount of $20-30 per barrel. If the EU bans oil imports from Russia, then part of the flows will be redirected to the Asian direction. India is already actively buying up Russian oil.
According to Matt Smith, lead oil analyst at research firm Kpler,
Since the beginning of March, five shipments of Russian oil, or about six million barrels, have already been sent to India. That is, in one month, India imported half as much oil from Russia as in the whole of 2021.
India covers as much as 80% of its oil needs through imports. But Russia was not among the largest suppliers of black gold. Last year, India bought only 2-5% of its oil from Russia. The United States bought about the same amount of oil and oil products from Russia before the embargo was announced. India bought oil mainly from Iraq, Saudi Arabia, the United Arab Emirates and Nigeria.
The United States is already expressing dissatisfaction with the fact that India is so actively switching to Russian oil. But if Washington can still ban or complicate the purchase of Russian oil by threatening India with secondary sanctions, it is unlikely for China.
“China will buy Russian oil in any case, because it is an independent player and a strategic competitor of the United States. Beijing understands that rivalry with the United States can reach a level where sanctions similar to Russia’s will be applied to China. Therefore, China needs alternative hydrocarbons that Russia can provide,” says Mitrahovich.
The expert does not exclude Pakistan among the new buyers of Russian oil and gas, despite the victory of the pro-American authorities there.
Redirecting the flow of Russian oil from Europe to South Asia, and the flow of Middle Eastern oil from Asia to Europe will not be easy, slow and economically unprofitable, but technically it is possible in principle. But it is physically impossible to redirect pipeline gas from Europe to other markets – and this is 150 billion cubic meters per year. This means one thing – these huge volumes will simply leave the market, which will hit the entire world market.
Mitrahovich does not rule out that another factor deterring the EU from declaring an oil embargo is the threat of a retaliatory strike from Russia in the form of shutting off the gas valve. If Russia itself raises rates in response and imposes a ban on gas exports to Europe, then, of course, there will be no detours for delivering gas to Europe.
“In terms of gas, the biggest decline in production in Russia was not during the coronavirus, but during the global crisis of 2008-2009. Then Gazprom reduced production by 90 billion cubic meters. This is close to the 150 billion cubic meters that Europe bought from Gazprom in 2021,” Mitrahovich concludes.
Olga Samofalova, VIEW
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