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Japan, Korea Try to Balance Price Cap and Security

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As G7 members finalize plans to cap the price of Russian crude, Japan and South Korea are increasingly having to grapple with how strictly to comply with the cap and its associated restrictions on shipping, insurance and other services. While refiners in both countries can easily find substitutes for the relatively small Russian volumes they have historically imported, political considerations could be more significant as both countries are keenly focused on energy security and maintaining some diversity in suppliers. Japan is a member of the G7 and officially supports imposing a price cap on Russian crude. The country can easily amend its regulations to enact the cap, a diplomatic source told Energy Intelligence. But it has also secured an exemption to the cap for volumes from the Sakhalin 2 project where Japanese companies hold an equity stake through at least September next year, according to the latest price cap regulations published by the US. “Japan will not explicitly oppose the price cap sanction among G7, but also will not proactively support the idea,” said a Tokyo-based analyst. Hanging over the Japanese government’s price cap strategy is the threat by Russia’s former Prime Minister Dmitry Medvedev to kick out Japan from its equity interests in Russia’s Far East and cut off supplies if it follows the cap. The Japanese consortium Sodeco, retained its 30% stake in Russia’s Sakhalin-1 producing venture, with approval from Moscow earlier this month. South Korea is not a G7 member but is a close US ally. South Korean Finance Minister Choo Kyung-ho said in July that the government was willing to back a US-led price cap. But Georgy Zinoviev, head of the Russian foreign ministry's First Asia Department, threatened “serious” economic consequences in September if Korea joined the G7 price cap plan, according to local media.

Japanese refiners voluntarily stopped importing Russian crude in June. Korean refiners have cut back but continue to buy some volumes. The importance of the volumes on overall Russian crude exports and the refiners themselves are small. While the two countries are among the world’s largest crude importers, the volumes of Russian crude they bought were low to begin with and are easily replaceable, sources tell Energy Intelligence. Korea and Japan imported a combined 119,000 barrels per day of Russian crude in the first nine months of this year, split between 71,000 b/d for Korea and 47,000 b/d for Japan. The total is down 106,000 b/d from a year ago. But the average is propped up by heavier buying pre-invasion. Japanese refiners have backed away from buying spot Russian crude after the invasion of Ukraine and no Russian imports have arrived at Japanese ports from June onward. Korean buying also plummeted in the wake of the invasion. Korean imports of Russian crude ranged from 96,000 b/d to 169,000 b/d in the first four months of this year. But from May onward, those monthly volumes dropped to levels ranging from zero to a high of 33,000 b/d.

The key question is whether the Korean government might push refiners to completely stop Russian purchases or if the price cap makes it so problematic that refiners stop on their own. If Russian sellers or traders acting as middlemen offer volumes on a delivered basis, then Korean refiners could be able to continue buying, said two Northeast Asian refiner sources. Korean buyers have mainly been buying Russian light, sweet Sokol crude when they do touch Russian volumes, three trading sources told Energy Intelligence. Sokol replacement crudes are easily available, they added. Potential candidates include Abu Dhabi light, sour Murban, other Emirati light sours, Saudi light, sour Arab Extra Light, US grades and Latin American crudes, market sources said. And given that Korean refineries are generally “extremely sophisticated,” they wouldn’t even need a like-for-like replacement, said an Asian refining source. The economics of a replacement crude rather than how close its quality is to Sokol are likely to be a more important consideration, he added.

Topics:
Sanctions, Oil Demand, Crude Oil, Refining
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