Europe Is About to Ban Russian Oil: What Happens Next?

Russia’s decades-long dominance of the European energy market is crumbling, and the biggest blow is expected this week as the European Union moves towards a ban on Russian oil.

Wednesday, European Commission President Ursula von der Leyen has proposed a complete ban on Russian oil imports with a phase-out of crude oil over six months and a halt to refined products by the end of the year, subject to the approval of Member States.

With this phased approach, “we are maximizing pressure on Russia, while minimizing collateral damage for us and our partners around the world,” she said.

Oil prices rose after the announcement. Brent crude rose more than 3.7% on the day.

Analysts say it will be possible to sever Europe’s oil ties with Russia, but the effort will take time and could lead to shortages and higher prices of gasoline, diesel, jet fuel and oil. other products – a situation that could penalize consumers already struggling with inflation and ultimately derail the economic recovery from the pandemic.

It’s “going to be complicated,” said Richard Bronze, head of geopolitics at Energy Aspects, a research firm. “You have a decoupling of two very intertwined parts of the global energy system,” he said, adding, “There are going to be disruptions and costs associated with that.”

“But policymakers are increasingly convinced that it is necessary and preferable to do so relatively quickly, both to try to reduce revenues for financing Russia and to reduce European exposure to influence. Russian,” Mr. Bronze said.

The objectives of the European Union are clear. As Russia continues to wage war on Ukraine, Europe wants to deprive President Vladimir V. Putin of funds from oil sales, usually his biggest source of export revenue and a cornerstone of the Russian economy. Oil sales from Russia to Europe amount to $310 million a day, estimates Florian Thaler, chief executive of OilX, an energy research company.

The move against oil is believed to be part of an effort to end Moscow’s ability to twist European weapons on energy. In its latest attempt to do so last week, Russia cut off natural gas supplies to Poland and Bulgaria. Russian oil could be an easier target than gas, analysts say. “The oil system can reconfigure itself,” said Oswald Clint, an analyst at Bernstein, a research firm, adding that oil was “a very deep, liquid and fungible market” served by thousands of tankers.

However, for the European Union, cutting itself off from Russian oil will be a herculean task that could sow division. Around 25% of Europe’s crude oil comes from Russia, but there are big differences in the level of dependency between countries, with the general rule being that nations geographically closer to Russia are more entangled in its energy grid.

Britain, which is not a member of the European Union and produces oil in the North Sea, said it would phase out Russian energy; Spain, Portugal and France import relatively small amounts of oil from Russia.

On the other hand, several countries, including Hungary, Slovakia, Finland and Bulgaria, typically import more than 75% of their oil from Russia and may struggle to replace it with other sources soon.

“It is physically impossible to make Hungary and the Hungarian economy work without crude oil from Russia,” Hungarian Foreign Minister Peter Szijjarto said on Tuesday.

While concerns focus on gas pipelines, huge volumes of oil also flow from Russian oil fields via the Druzhba Pipeline (Russian name for friendship), whose northern branch supplies Germany and Poland and the southern line goes to Slovakia, the Czech Republic and Hungary. .

Refineries along this route, including the PCK facility in Schwedt, near Berlin, “have been running on Russian crude for 50 years,” OilX’s Mr. Thaler said. “You need to find a proxy for this in the international market.”

Mr Thaler said Hungary and Slovakia could potentially receive more oil from tankers in the Adriatic Sea, via a pipeline that runs through Croatia, while the Czech Republic could be supplied from a terminal in Trieste, in Italy. Policymakers in Brussels could give Hungary and possibly other countries long deadlines to win their support.

Germany, on the other hand, and Poland now seem determined to end their dependence on Russian energy, and this reversal of Germany seems to be the key to European policy. Germany plans to ship oil through the eastern port of Rostock as well as across the Polish border from the port of Gdansk.

The German government says it was able to terminate Russian crude contracts, except for the refinery in Schwedt and another in eastern Germany called Leuna, which together account for around 12% of imports of the country from Russia.

“This means that the embargo is already being implemented, step by step,” Robert Habeck, German Economy Minister, said on Monday.

While oil is considered a single product, there are many types with different characteristics, and refineries are often set up to run certain grades of crude. Moving away from Russian oil may incur costs if the fuel can even be found, analysts say.

Zsolt Hernadi, the boss of MOL, a major Hungarian oil company, recently said it could take up to four years and $700 million to recalibrate his company’s refineries in the event of a Russian oil embargo.

Analysts say an embargo could spark costly competition for alternative sources of oil.

Viktor Katona, an oil expert at Kpler who tracks energy flows, said of the potentially available substitutes for Russian oil, only Saudi production was suitable. So far the Saudis, who will lead an OPEC Plus meeting on Thursday, have shown little willingness to increase output more than gradually. Mr Katona said Iranian oil could also work, but US sanctions continue to curb Iran’s fuel sales. Venezuelan oil, also under sanctions, is often mentioned as a possible exchange for Russian crude.

Strains are already appearing on the diesel market, which is used by both ordinary drivers and truckers. Diesel is in short supply as European distributors are reluctant to buy refined products from Russia, which once supplied large volumes of fuel to Europe. Diesel is selling for the equivalent of around $170 a barrel, well above the international standard Brent crude futures price of $107 a barrel, and Katona expects the price to continue to rise. ‘increase. At the pump, diesel prices in Britain have risen by more than 35% in the past 12 months, according to the motoring club RAC.

An embargo “will inflict tangible pain on the European refiner and, therefore, on the European customer,” Katona said.

Oil releases from reserves announced by Washington and the Paris-based International Energy Agency, which are expected to provide more than one million additional barrels of oil a day for six months, have been reported by analysts as having up to now had more impact on the American than on the European market.

For Germany, Europe’s biggest economy, the toughest decision will be what to do with the Schwedt refinery, which is majority-owned by Rosneft, Russia’s national oil company, and has smaller stakes in two others. refineries in Germany. Another Russian company, Lukoil, also has stakes in refineries in Europe, including one of Italy’s main refineries, ISAB, in Sicily.

“These companies would have little incentive to mine non-Russian crude,” Bronze said.

Germany’s economy ministry said it did not expect “a voluntary severance of supply relations with Russia” in Schwedt and explored legal options, including whether a state takeover could be justified.

And then there is the question of whether an embargo on Russian oil for Europe will achieve the goal of cutting off Kremlin revenues. So far, the pressure on Russia seems to be increasing prices and, therefore, incomes. Rystad Energy, a consultancy, predicts that while Russian oil production is expected to decline in 2022, the Russian government’s total revenue from fuel is expected to increase by around 45%, to $180 billion.

Russia is also finding outlets for its oil in India and, to a lesser extent, in Turkey, with buyers benefiting from substantial discounts. “It could just be a game of musical chairs,” Mr. Katona said.

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