Amanda Cooper
Wed, May 4, 2022, 6
Hani Amara/Reuters
The EU plans to phase out imports of Russian oil, but reports suggest the bloc will ban anyone from shipping or insuring it.
Draft legislation suggests the EU's ban will affect shipments to any country in the world, according to Bloomberg.
The EU relies on Russia for about 25% of its oil, which in turn, accounts for over half of Russia's exports.
The European Union is planning to phase out imports of Russian oil to cut off financing for Moscow's war in Ukraine, but it's not stopping there.
It's also proposing a ban on European ships and companies providing any service related to the shipment of Russian crude and refined products anywhere in the world — such as financing, insurance, or even technical support — according to draft legislation seen by Bloomberg.
Russia produces some 11 million barrels of oil a day, roughly equal to 10% of total world daily output. It exports around 7 million barrels a day to customers around the globe, on tankers and through a vast network of pipelines that stretch to Karlsruhe on the German/French border and all the way to Vladivostok on the Sea of Japan to the east.
On Wednesday, European Commission President Ursula von der Leyen announced a sixth round of sanctions proposals include a complete import ban on all Russian oil. The measure would cover both crude and refined products, such as diesel, and would affect all shipments, both seaborne and via pipeline.
Brent crude futures jumped 4.1% on the day to $109.46 a barrel. The oil price has risen nearly 40% so far in 2022, topping $100 a barrel for the first time in years, driven in part by the prospect of direct sanctions on Russia's energy sector.
The EU accounts for almost half of all Russia's oil exports, and its proposals mean it could ditch all of that over the coming six months.
However, the draft legislation shows the bloc is proposing a crackdown on any shipment of oil that originates in Russia or has been exported from there, to any country, even those outside the EU, Bloomberg reported Wednesday.
"Depending on the timing of this ban, it's a potential big deal, given the current shortage of global tanker capacity and EU carriers' huge role in Russian total oil exports," Jacob Kirkegaard, a senior fellow at the Peterson Institute For International Economics, tweeted.
Robin Brooks, the chief economist at IIF, tweeted a chart last week that shows Greece is by far the biggest shipper of Russian oil and oil products. He said the EU should target the global tanker fleet if it wanted to make any embargo truly effective.
"Russian storage capacity is super limited, so Russia's oil wells will start flooding very quickly. So, even if you just have a one month window before tankers start back up again, it'd do a lot of damage to Putin," Brooks said in a tweeted response.
With the European market already effectively out of bounds for at least 1 million barrels a day of crude, Russia has sought out buyers further afield. It is shipping growing volumes to China, India and other consumers in Asia.
However, Russia's flagship Urals crude is generally loaded onto smaller tankers that rarely make such long voyages. Given that, there would be more call for transferring this oil to VLCCs — supertankers capable of carrying as much as 2 million barrels of oil — to make those trips. The EU's draft legislation suggests even this could become impossible.
"It shall be prohibited to provide, directly or indirectly, technical assistance, brokering services, financing or financial assistance, or any other services related to the transport, including through ship-to-ship transfers, to third countries of crude oil and petroleum products that originate in Russia or have been exported from Russia," Bloomberg reported the draft text as saying.
The West has restricted exports from countries under sanction via clampdowns on insurers before, specifically with Iran and Venezuela. There will still be insurers willing to extend cover to a shipper, but the risks and the costs are far higher than they otherwise would be.
Russia's Oil Output Is Plummeting, And It May Never Recover
Editor OilPrice.com
Wed, May 4, 2022
Russian oil production is falling. In March, it shed half a million bpd, which by the end of April reached a full 1 million bpd, according to BP’s CEO, Bernard Looney. And this may well grow to 2 million bpd this month. These barrels may not be returning to the market any time soon.
As the European Union targeted a barrage of sanctions on Moscow, oil was excluded as a direct target but financial and maritime sanctions affected the industry. Now, the EU is proposing a full oil embargo, save for a handful of member states too dependent on Russian oil to comply, and this will mean a further loss of barrels at a time when the global oil market is already stretched thin.
"We could potentially see the loss of more than 7 million barrels per day (bpd) of Russian oil and other liquids exports, resulting from current and future sanctions or other voluntary actions," the secretary-general of OPEC, Mohammed Barkindo, told the European Union last month.
This does not appear to have made any lasting impression on the decision-makers in Brussels, who are moving full steam ahead with the oil embargo. Meanwhile, alternative suppliers would struggle to fill the void left by Russian oil.
Russia expects it could lose some 17% of its pre-war oil production this year, Reuters reported last month, citing a document from the country’s economy ministry. The report noted this would be the biggest production drop since the 1990s—a tumultuous time for Russia following the breakup of the Soviet Union.
That would be close to 2 million bpd—a figure similar to Looney’s forecast and also to a forecast made by Rystad Energy about lost Russian oil production between 2021 and 2030. If the Rystad projections are right, the fallout from the EU oil embargo would be limited and most Russian production will simply be redirected as it already is. If, however, production declines more, this could see international prices spike much higher.
When European buyers started refusing to accept Russian oil cargoes, those cargoes had to return home to be stored somewhere. According to local reports, however, storage space is limited, and this has probably forced the idling of some wells, which if idled, can see their ability to produce in the future affected.
Related: Upstream Oil Industry To See Highest Profits Ever In 2022
But there is also danger ahead for Russia’s future production. This may also not materialize as previously planned because of the exit of Big Oil majors from the country, Dan Dicker, host of The Energy Word, told Yahoo Finance earlier this week. Their exit, combined with financial sanctions on Russian banks, will make developing new resources in eastern Siberia more challenging.
Meanwhile, OPEC is producing less, rather than more, oil, and U.S. producers are under fire from legislators for alleged profiteering from the oil price rally and struggling with shortages of materials, equipment, and workforce.
U.S. oil production will rise by only 800,000 bpd this year, according to the Energy Information Administration’s latest Short-Term Energy Outlook. That’s not good news for America’s European partners. It’s not good news for Americans, either, because it means prices will likely remain high.
Except for OPEC and the United States, there are few producers large enough to spare oil for Europe, if any. Brazil is expanding its oil production but its total stands at around 3 million bpd, which is what the EU was importing from Russia before the war in Ukraine began. That leaves the Central Asian producers, who are parties to the OPEC+ agreement and firmly within the Russian sphere of influence, too.
What all this means is that with the loss of 2 million bpd of Russian production, a lot of the world is in for prolonged oil price pain, which means all-price pain as well. The beneficiaries are China and India, who are buying Russian crude at a discount, with no logical reason for them to stop, despite threats from Washington. But Russia’s oil production could still fall by more than 2 million bpd.
“Europe’s dependence on Russian energy has been a deliberate and decades-long and mutually beneficial relationship. In this early phase of sanctions and embargoes, Russia will benefit as higher prices mean tax revenues are significantly higher than in recent years,” said Daria Melnik, senior analyst at Rystad Energy.
“Pivoting exports to Asia will take time and massive infrastructure investments that in the medium term will see Russia’s production and revenues drop precipitously,” she added.
With most producers constrained in their capacity to boost production fast, should this scenario play out, oil could become a lot more expensive with little in the way of downside pressure, including electric vehicles. Electric vehicles are about to experience a shortage of batteries and still higher prices. There are some really interesting times ahead.
By Irina Slav for Oilprice.com
Editor OilPrice.com
Wed, May 4, 2022
Russian oil production is falling. In March, it shed half a million bpd, which by the end of April reached a full 1 million bpd, according to BP’s CEO, Bernard Looney. And this may well grow to 2 million bpd this month. These barrels may not be returning to the market any time soon.
As the European Union targeted a barrage of sanctions on Moscow, oil was excluded as a direct target but financial and maritime sanctions affected the industry. Now, the EU is proposing a full oil embargo, save for a handful of member states too dependent on Russian oil to comply, and this will mean a further loss of barrels at a time when the global oil market is already stretched thin.
"We could potentially see the loss of more than 7 million barrels per day (bpd) of Russian oil and other liquids exports, resulting from current and future sanctions or other voluntary actions," the secretary-general of OPEC, Mohammed Barkindo, told the European Union last month.
This does not appear to have made any lasting impression on the decision-makers in Brussels, who are moving full steam ahead with the oil embargo. Meanwhile, alternative suppliers would struggle to fill the void left by Russian oil.
Russia expects it could lose some 17% of its pre-war oil production this year, Reuters reported last month, citing a document from the country’s economy ministry. The report noted this would be the biggest production drop since the 1990s—a tumultuous time for Russia following the breakup of the Soviet Union.
That would be close to 2 million bpd—a figure similar to Looney’s forecast and also to a forecast made by Rystad Energy about lost Russian oil production between 2021 and 2030. If the Rystad projections are right, the fallout from the EU oil embargo would be limited and most Russian production will simply be redirected as it already is. If, however, production declines more, this could see international prices spike much higher.
When European buyers started refusing to accept Russian oil cargoes, those cargoes had to return home to be stored somewhere. According to local reports, however, storage space is limited, and this has probably forced the idling of some wells, which if idled, can see their ability to produce in the future affected.
Related: Upstream Oil Industry To See Highest Profits Ever In 2022
But there is also danger ahead for Russia’s future production. This may also not materialize as previously planned because of the exit of Big Oil majors from the country, Dan Dicker, host of The Energy Word, told Yahoo Finance earlier this week. Their exit, combined with financial sanctions on Russian banks, will make developing new resources in eastern Siberia more challenging.
Meanwhile, OPEC is producing less, rather than more, oil, and U.S. producers are under fire from legislators for alleged profiteering from the oil price rally and struggling with shortages of materials, equipment, and workforce.
U.S. oil production will rise by only 800,000 bpd this year, according to the Energy Information Administration’s latest Short-Term Energy Outlook. That’s not good news for America’s European partners. It’s not good news for Americans, either, because it means prices will likely remain high.
Except for OPEC and the United States, there are few producers large enough to spare oil for Europe, if any. Brazil is expanding its oil production but its total stands at around 3 million bpd, which is what the EU was importing from Russia before the war in Ukraine began. That leaves the Central Asian producers, who are parties to the OPEC+ agreement and firmly within the Russian sphere of influence, too.
What all this means is that with the loss of 2 million bpd of Russian production, a lot of the world is in for prolonged oil price pain, which means all-price pain as well. The beneficiaries are China and India, who are buying Russian crude at a discount, with no logical reason for them to stop, despite threats from Washington. But Russia’s oil production could still fall by more than 2 million bpd.
“Europe’s dependence on Russian energy has been a deliberate and decades-long and mutually beneficial relationship. In this early phase of sanctions and embargoes, Russia will benefit as higher prices mean tax revenues are significantly higher than in recent years,” said Daria Melnik, senior analyst at Rystad Energy.
“Pivoting exports to Asia will take time and massive infrastructure investments that in the medium term will see Russia’s production and revenues drop precipitously,” she added.
With most producers constrained in their capacity to boost production fast, should this scenario play out, oil could become a lot more expensive with little in the way of downside pressure, including electric vehicles. Electric vehicles are about to experience a shortage of batteries and still higher prices. There are some really interesting times ahead.
By Irina Slav for Oilprice.com
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