Russian oil continues to flow to India and China

It has been exactly six weeks since Russia invaded Ukraine, with no end in sight for one of humanity’s greatest existential crises of modern times. In response to Russia’s unprovoked and unjustified war, the United States and the West hit the rogue nation with a plethora of sanctions, with the last announced a few days ago primarily targeting the Russian financial sector.

But so far, Russia’s vital energy sector has been largely spared. With the exception of Lithuania and Poland as well as the self-sanction of refiners and bankers, no country has yet announced a ban on Russian energy products.

So far, Russian oil and gas exports to the EU have remained largely unchanged since only the Baltic countries announced a 100% ban on Russian energy imports. Poland, a major thoroughfare for Russian energy supplies, has also been more proactive than most after taking steps to block Russian coal imports and announced measures to stop imports of Russian oil by the end of the year. Poland, home to the approximately 1.3 mb/d Druzhba pipeline that transports Russian crude to several points in Poland, Germany and the Czech Republic, directly consumes approximately 330 kb/d of Russian crude and imports approximately 9 .4 mt of Russian thermal coal in 2020, representing ~5% of Russian exports. The EU currently gets around 40% of its natural gas from Russia, which powers everything from home heating to industrial production and accounts for around 25% of the bloc’s total energy consumption.

But that could soon change.

The flow of ‘Blood money’ to Russia must stop, Kyiv mayor says as the West prepares new sanctions against Moscow after dead civilians are found on the streets of a Ukrainian town seized from Russian invaders. Since Russian forces withdrew from northern Ukraine, turning their assault south and east, dark images of the city of Bucha near kyiv, including a mass grave and tied up bodies of people shot at close range, sparked international outrage.

Experts now say the atrocities against Ukrainian civilians revealed by the withdrawal of Russian forces from areas north and east of kyiv have made it highly likely that EU countries will impose sanctions on Russian oil within months. coming. In the United States, Treasury Secretary Janet Yellen warned of “enormous economic repercussionss” of the Ukrainian war.

The million dollar question right now is how much a total ban on Russian energy products will disrupt the Russian economy.

Unfortunately, a ban on Russian oil and gas by the US and EU may not be as damaging to Russia as the West hopes, with the heavily reduced Urals presence proving too irresistible to some.

India’s increasing imports from Russia

India has never been a big buyer of Russian crude when it had to import 80% of its needs. In a typical year, India imports just 2-5% of its crude from Russia, roughly the same proportion as the US before announcing a 100% ban on Russian energy products . Indeed, India imported just 12 million barrels of Russian crude in 2021, with the majority of its oil coming from Iraq, Saudi Arabia, the United Arab Emirates and Nigeria.

But there have now been reports of a “significant increase” in Russian oil deliveries to India.

Matt Smith, chief oil analyst at Kpler, told CNBC that since the beginning of March, five shipments of Russian oil, or about 6 million barrels, have been loaded and are bound for India. In other words, India imported half as much crude from Russia in one month as in an entire year.

And, it could all be about the money.

According to the International Energy Agency (IEA), Urals crude from Russia is being offered at record prices. Ellen Wald, president of Transversal Consulting, told CNBC that a few commodity trading firms — such as Glencore and Vitol — were offering rebates of $30 and $25 a barrel, respectively, two weeks ago for the Urals blend. . Ural is the main blend exported by Russia.

Experts say simple economics is why White House push to limit crude oil purchases from Russia has fallen on deaf ears in Delhi.

“Today the motives of the Indian government are economic, not political. India will always seek agreement in its oil import strategy. It is hard not to accept a 20% discount on crude when you import 80-85% of your oil, especially in the wake of the pandemic and slowing global growth,Samir N. Kapadia, head of commerce at government relations consultancy Vogel Group, told CNBC via email.

Yet, many readers will not lose sight that India has enjoyed a warm relationship with Russia over the years, with Russia supplying the Asian nation with up to 60% of its military and defense equipment. Russia has also been a key ally on crucial issues such as India’s dispute with China and Pakistan over the territory of Kashmir.

China to the rescue?

But India may not be the only pariah funding Putin’s illegal war.

Given China’s experience with evading sanctions, one would expect it to be among the first countries to line up to lap up those cheap Ural barrels. After all, it’s been a poorly kept secret that Beijing has been using all sorts of clandestine means aka “cloaking” to import cheap Iranian oil since it was sanctioned in 2011. China is already China’s biggest oil customer. Russia, importing an average of 1.72 mb/d in 2021.

Related: The world’s richest have lost $400 billion in wealth amid the Ukraine crisis

However, Reuters reported that Chinese crude imports from Russia in the first two months of the year actually decreased by 9.1% at 1.57 mb/d.

But that has little to do with China suddenly acting in a judgmental or moral way. On the contrary, the noticeable decline was caused by Beijing’s crackdown on small independent refiners, i.e. teapots.

In a dramatic reversal of fortunes, in June Beijing announced huge cuts in import quotas for the country’s private oil refiners. According to Reuters, China’s independent refiners were reward a total of 35.24 million tons of crude oil import quotas in the second batch of quotas this year, a 35% reduction from 53.88 million tons for a similar tranche a year ago .

The big reduction came as part of a government repression on China’s private refiners known as teapots, which have become increasingly dominant over the past five years. The move aims to allow Beijing to more precisely regulate the flow of foreign oil, as it doubles down on fraudulent practices such as tax evasion, fuel smuggling and violations of environmental and emissions rules by independent refiners. Chinese teapots have steadily captured market share from well-established state players such as China Petroleum and Chemical Company (NYSE: SNP), also known as Sinopec, and PetroChina Co. (NYSE:PTR) since Beijing partially liberalized its oil industry in 2015. Teapots currently control nearly 30% of China’s crude refining volumes, up from around 10% in 2013.

But make no mistake: China has never been one to let a good crisis pass, and it is widely expected to take advantage of the ongoing snafu.

China still imports Russian oil, but would likely increase its purchases if it could pay in yuan and with discounts. Basically, Russia is under pressure because it is struggling to sell its oil. China would really prefer much cheaper oil…the prices are way too high, even in the $90 range, which is too high for China,” she added. If they can buy Russian oil at a discount, and some of those discounts are quite significant – $30 off the baseline, then I really don’t see what’s stopping China from buying a lot of Russian oil,” Wald told CNBC in an email.

Another big reason: Chinese refiners love ESPO crude.

the ESPO pipeline (Eastern Siberia Pacific Ocean) is one of the many outlets for Russian crude. The 4,188 km long pipeline with a capacity of 58 million tons per year is even longer than the Yamal-Europe pipeline and exports crude oil from Russia to Asia-Pacific markets in Japan , China and Korea.

ESPO could provide a lifeline for Russia in case flows through the Yamal and Druzhba pipelines are interrupted. Yamal connects Russia’s natural gas fields on the Yamal Peninsula and Western Siberia to Poland and Germany via Belarus, while the Druzhba pipeline transports crude oil from Russia to Poland and Germany via Belarus, Hungary, Slovakia and the Czech Republic via Ukraine.

Fortunately for the West, the IEA says absorption of heavily discounted Russian crude remains limited so far, with Asian oil importers mostly sticking to traditional suppliers from the Middle East, Latin America and from Africa. In addition, Russia will likely struggle to fill the void left by an import ban by the West, with the IEA estimating that up to 3 million barrels per day of Russian oil supplies will be shut off from April, while commodities analysts Standard Chartered said it could take years for Russia’s vast energy empire to fully recover, if ever.

By Alex Kimani for Oilprice.com

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