Sanctions, Lower Output to Deprive Russia of $62B in 2023

Russia is poised to lose some $62 billion next year in revenues from exports of crude oil and petroleum products due to embargoes and lower output, an analysis by Energy Intelligence shows.

At the same time, the world’s third-largest producer stands to gain an additional $5 billion in export revenues this year thanks to higher oil and product prices — which, to a large extent, are the result of the war in Ukraine that Russia launched in February.

This “war premium,” in fact, will help Russia rake in an extra $10 billion in export income in the second and third quarters this year. But this benefit will begin to erode in the fourth quarter as both prices and production begin to slip, according to our analysis of the two scenarios — the current one and one without the conflict in Ukraine and subsequent upheaval in energy flows.

Russian leaders are confident the country can find alternative markets for its fuels and that it is the West, particularly Europe, that is shooting itself in the foot by rolling out restrictions on imports. The latter should bar some 90% of Russian oil imports by February 2023.

Still, Moscow has admitted that oil production is poised to decline over the next three years before recovering in 2025. Refining runs are also expected to tumble.

According to Moscow’s base-case scenario, output of crude oil and gas condensate next year will be 9.5 million barrels per day, a decline of less than 100,000 b/d compared to 2022. Energy Intelligence, by contrast, forecasts output of 9.1 million b/d in 2023 — a fall of 1.2 million b/d year on year.

For price, the analysis used forecasts by Energy Intelligence’s Research & Advisory unit, which estimates that Brent will average $108 this year and $98 in 2023. Prior to the war, these were each $10 lower.

To these forecasts we applied discounts to Russia’s exported barrels, some of which are currently sold at $40 per barrel less than dated Brent. In normal times, the differential would be about $2/bbl.

Appraising oil products is trickier, but Russian customs data in the past has shown that the country generally earns on an average barrel of products what it does on crude oil. The abundance of value-added diesel and liquid petroleum gases is offset by massive exports of cheap heavy fuel oil and other dirty products.

2023 Revenue Loss

Last year Russia earned $70 billion on products exports, customs data show; this year, it can expect to haul in some $95 billion, according to our estimate.

This is about the same as what Russia could have expected had there been no war since in such a scenario the country could have exported more — about 3 million b/d, or 10% more than forecast now — but prices for products such as diesel would have been considerably less.

By contrast, next year Russia will export less products — about 2.5 million b/d, we estimate — as refining throughput declines and the products fetch a lower price due to discounts needed to attract buyers, many of whom will have to haul the cargoes over longer distances.

Consequently, income on products exports is estimated at $80 billion in 2023, as opposed to $100 in a no-war scenario.

The same logic applies to crude exports. In a no-war scenario, Brent would have averaged $85 and Russian export revenues would have come in at $160 billion for the year. Next year these would have grown to $169 billion on $88 Brent.

With the war and its energy ramifications, Russia is forecast to earn $165 billion on crude exports this year, with the premium bringing in extra income in April-September.

In 2023, however, income will drop to $127 billion as it will be forced to sell at an average $15/bbl discount. An approximately $30/bbl discount on Urals is offset by non-discounted flows directly to Asian customers.

Compounding the problem will be a fall in output: Energy Intelligence estimates that Russian production of oil and condensate will average 9.1 million b/d next year, whereas it would have cranked out 11.2 billion had it not launched a war in Ukraine.