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EU Plays Long Game With Oil Embargo 

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EU sanctions could start driving down Russian oil export levels in the coming months, as Brussels prepares to phase out imports of Russian crude by a Dec. 5 deadline, and also eliminate its intake of Russian oil products by Feb. 5. A new reality is dawning in which Russian oil will be shut out of most of Europe for years, possibly for good, leaving China and India as the two dominant buyers. This process is well under way, as Russia ratchets up crude sales to both countries and looks to expand its port capacity in the Far East. 

The EU crude embargo is another five months away, so its short-term impact on Russia’s economy will be minimal. In the medium to long term, however, the damage could be huge, especially if the war with Ukraine drags on and Russian President Vladimir Putin remains in power. For decades, the EU has been the dominant overseas market for Russian oil, with total imports of crude and products last year well in excess of 3 million barrels per day. Sanctions exemptions that will allow Bulgaria to bring in products via the Black Sea, and Hungary, Slovakia and the Czech Republic to continue importing Russian crude along the Druzhba (Friendship) pipeline, are the exception and not the rule. Such flows also account for a fraction of Russia's EU oil sales

Some EU countries have already turned their backs on Russian oil. Poland, which for over 30 years had been a prolific importer of Russian crude via Druzhba, has slashed its intake in recent years by tapping into alternative crude supplies brought in by sea, including from the US and Middle East. Saudi Aramco is now Poland’s largest supplier and earlier this year acquired a 30% stake in its second-largest refiner, Lotos. The Poles have also weaned themselves off Russian gas by importing LNG via terminals on the Baltic Sea. Germany has also reduced its Russian crude imports by taking more barrels via the Baltic Sea. 

A knock-on effect of the EU embargo is that it will, almost certainly, force Russian oil companies that own refineries in Europe to give them up. This could soon happen in Germany, where regulators are looking to take over management of the majority stake in the 230,000 b/d PCK Schwedt refinery held by Russian state-backed giant Rosneft, while Lukoil’s three plants in Bulgaria, Italy and Romania are under serious threat. “Europe is closing its doors to Russian companies, that’s the sad truth of the matter,” a Russian oil executive now based in Europe says. “I don’t think there’s any way back.” 

EU sanctions have already had an impact on Russian oil export flows, by outlawing transactions — unless those deemed “strictly necessary” — with Russian state-backed oil giants Rosneft and Gazprom Neft, pipeline operator Transneft and shipping firm Sovcomflot. These measures, which came into force in mid-May, have forced the big Western oil traders Trafigura and Vitol to slash their Russian offtake, while Western insurers and shipbrokers now steer clear of Russian-owned tankers. 

Banks and Insurers 

European banks are also distancing themselves from Russia; under the EU embargo they will be barred from handling any Russian oil delivered to “third countries,” with the same deadlines of Dec. 5 and Jan. 5 applying. It has already become much harder to finance shipments of Russian oil, as fewer Western banks are willing to provide exporters with letters of credit. “This is why so much of the business has moved to Dubai,” another Russian industry source says. “Banks in Switzerland don’t want to touch Russian trade any more, it’s too dangerous.” He says Middle Eastern and Asian banks are happy to finance Russian oil purchases, as there is nothing to stop them doing so, making Dubai an ideal base for Russian traders. Over a month ago, Lukoil’s Geneva-based trading arm Litasco shifted most of its trading to its Dubai office, a trading source familiar with the company says, while smaller traders dealing with Russia have also set up shop in the emirate, he says. 

Insurers are giving Russian oil a wide berth, too. Sovcomflot, which owns a fleet of tankers that were previously handling large crude shipments from the likes of Rosneft and Gazpromneft, is much less active than before, according to port data. At the same time, more vessels owned by Chinese and Turkish firms have started to appear on shipping lists. “Russia has become very toxic, everything is now moving away from Europe, including insurance, and this is just the start of it,” a veteran ship charterer says. This week, former Russian President and close Putin ally Dmitry Medvedev said Russia was prepared to deploy its own tankers without insurance, if necessary, but with the government’s full backing. 

Filling the Gap 

Russia is banking on China and India, and a lesser extent Turkey, to fill the gap that will be left by the EU. Since the war started, Chinese and Indian refiners have upped their imports of Russian crude — largely for economic reasons, as the barrels are heavily discounted, sometimes as much as $30-$35 per barrel. Rosneft, for example, is now selling at least four crude shipments a month directly to India’s largest refinery, Indian Oil Corp. (IOC), and it continues to supply the 400,000 b/d Nayara Energy (formerly Essar) in which it owns a 49% stake. China remains the dominant buyer of East Siberia-Pacific Ocean blend crude shipped out of the Kozmino terminal in the Far East — like IOC, state refinery Unipec is now buying direct from Rosneft — and is also taking barrels that come from Baltic and Black Sea ports, port data show. Turkey has also upped its Russian crude imports in recent months, some of which is supplied by a Dubai-based trader, Coral Energy. 

How much more Russian crude India and China are willing to buy is an open question. India is likely to come under strong western European pressure to reduce its Russian imports, although government officials in New Delhi have pointed out that most EU countries are swelling the Kremlin’s coffers by importing large amounts of Russian gas. As long as Russia continues to offer its refiners heavily discounted barrels, India’s position is unlikely to change. 

Assessing Russia's actual exports will become increasingly tough, as more ships “go dark” by turning off their transponders and are also transferring some of their cargo to other, smaller, vessels under ship-to-ship transfers. New obscure offtakers of Russian crude are cropping up that have no previous track record of doing business with Russia, and more Russian producers are refusing to say which entities are selling their oil. “It is becoming like Iran and Venezuela, where you have no idea what’s really going on,” a veteran Russian oil trader says. “This is just the start.” 

Paul Sampson is a senior correspondent at Energy Intelligence based in London. A version of this article originally ran in Energy Compass

Topics:
Sanctions, Opec-Plus Supply , Oil Term Contracts
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