EU Hawks Take Hard Line on Russia Price Caps

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A coalition of the Baltic states and Poland is holding up negotiations to set a price cap for exports of Russian oil products as they seek to renegotiate the price cap set by G7 nations for Moscow's crude oil.

Poland, Lithuania, Latvia and Estonia have been pressing within the EU for an immediate reduction in the price cap for Russian crude exports to $40-$50 per barrel from its current level of $60, rather than wait until March as was tentatively suggested in mid-January.

These countries see Russia as a physical threat to their national security and want to drive down the price caps for both crude and products "to limit the income for Russia from [these] revenues, which they use to fund their war," says an EU diplomat from a Baltic state.

The group is also looking to shorten a proposed 55-day transition period that would allow Russian products loaded before Feb. 5 to be exempt from the products price cap as late as Apr. 1.

The G7 price cap regime aims to keep Russian oil flowing while limiting revenues for Moscow, by allowing exemptions to bans on the use of Western shipping services for Russian oil exports.

The crude price cap took effect on Dec. 5 and the products cap will follow on Feb. 5.

An initial European Commission proposal seen by Energy Intelligence proposed a price cap of $100/bbl for lighter, higher-value products including diesel and $45/bbl for heavier, lower-value products such as fuel oil.

Price Review

Talks started on Jan. 27, and EU ambassadors resumed negotiations on Tuesday.

They will meet again Wednesday in a bid to find a compromise on the twin products price caps ahead of the Feb. 5 deadline.

The Poland-Baltics coalition is pointing to language in the EU crude price cap sanctions package that requires members states to review the price in "mid-January" based on advice from the International Energy Agency on the prevailing price for Russian crude.

"The EU must review the price cap for crude oil as of January in accordance with EU regulations," says a proposal submitted to the EU by the Baltic states on Jan. 25 and seen by Energy Intelligence.

"The IEA estimates an average of $54/bbl in December for all types of Russian crude oil and $52/bbl in the first weeks of January," the proposal states.

"Record price discounts on Russian benchmark export grades are up to $40/bbl. This shows that $60/bbl is an 'empty cap' which must be lowered in order to have further effect on Russian revenues," it adds.

For products, the original European Commission proposal suggested a transition period of 55 days for Russian exports through Apr. 1, as long as cargoes are loaded by the Feb. 5 deadline. That would allow sufficient time for products to be shipped to longer-haul markets.

The coalition of Russia hawks argues that this grace period is too generous.

Marginal Concessions

So far, other G7 members have deferred to the EU in setting prices for the price cap mechanism.

But sources have told Energy Intelligence it is unlikely that the EU would be allowed to set prices as low as those sought by the more hawkish members.

"It is unclear how feasible those asks are, as they would have to be cross-checked with the G7," says a second EU diplomat.

The same group of countries took a hardline approach to negotiations over the price cap for Russian crude and won a concession to lower the price to $60/bbl from an initial proposal of around $70.

Sources in Brussels told Energy Intelligence that they believe the current negotiations are likely to have a similar outcome, with marginal concessions on product prices made to move the process along ahead of the Feb. 5 embargo date.

For now, it does not sound "from the tone of the debate like these points would be dealbreakers," says another diplomat.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact >

Sanctions, Oil Products, Crude Oil, Oil Prices, Prices, Diesel/Gasoil, Ukraine Crisis
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