Sunday was the day European Union regulations banning deals with Russian state-owned energy companies come into force.
This should cause a further decline in the volume of raw and refined products bought and traded by European companies, but will not stop the flow, writes energy expert Julian Lee in his analysis for Bloomberg, writes Bloomberg TV.
Even when or if the EU finally imposes sanctions on buying oil from the country, it will not stop “Russian” crude oil from leaving Russian ports, nor will the products it produces refuel European cars and trucks.
There are several reasons why.
Russia will do everything possible to keep supplies moving. Oil will continue to flow to China and India in increasing volumes. Shipping will increasingly depend on Russian ships. The state-owned Sovcomflot operates a fleet of more than 100 oil tankers, ranging from so-called medium-range ships capable of transporting 40,000 tonnes of refined products to regional markets, to the world’s largest crude oil carriers, which can transport eight times so far away.
Ships used for Russian overseas trade have largely been avoided since the United Kingdom added Sovcomflot to its list of sanctioned individuals, prompting international insurers to distance themselves from the shipowner. The company’s largest ship, the 340,000-tonne supertanker Svet, has not carried cargo since delivering Angolan oil to China in February.
Insurance for Sovcomflot ships sailing to India is likely to be provided by the Russian state, not by mutual insurance associations or P&I clubs, which usually play this role.
But trade from western Russia to Asian markets has risen since the invasion of Ukraine and looks set to increase further. The cargo has also begun to be unloaded in Fujairah in the United Arab Emirates, where crude oil can be refined or stored, blended, and resold.
There will also be exceptions for crude oil, which transits through Russia, mainly from Kazakhstan, but also in much smaller quantities than in Azerbaijan and Turkmenistan. There is already uncertainty about Kazakhstan’s Caspian Pipeline Consortium (CPC), which is delivered from a terminal on Russia’s Black Sea coast, near the country’s main export port in the Novorossiysk region, but completely separate from it. The mixture contains some molecules of Russian origin, and buyers are being chased by organizations that monitor the supply of “Russian” crude oil. Traders will still be able to trade in what appears to outsiders such as the Russian Urals or Siberian Light. This is not an attempt to avoid sanctions.
While most of the molecules in these cargoes will be pumped from the ground in Russia, the legal origin will be elsewhere. Kazakhstan, for example, is pumping crude oil into Russia’s pipeline system. This crude oil is mixed with volumes of Russian oil fields to make the standardized export classes – REBCO (Urals) and Siberian Light. Kazakhstan is then distributed the same amount of crude oil that it has invested in the system to be loaded on tankers in Russian ports.
Although the financial transaction is between the buyer and Kazakhstan, the cargo looks Russian. It is branded as a Russian class and is loaded on a Russian port. This could lead to all sorts of risks to the reputation of companies such as Vitol Group, which is engaged in the export of Kazakhstan’s Urals.
Although Europe may stop buying Russian oil, it is unlikely to avoid diesel produced from this crude oil. Direct trade in diesel fuel between Russia and European countries may stop, but the product, produced from Russian crude oil in overseas refineries, will still arrive in European ports.
Russian crude oil processed in foreign refineries is no longer Russian. Diesel produced in, say, an Indian refinery is Indian diesel, whether the crude oil is from Saudi Arabia, Russia, or elsewhere. The products are produced according to strict specifications required in the consumer countries and there is no mechanism to determine where the raw product from which they are made comes from.
The purpose of the EU measures already imposed and the proposed energy sanctions that the Member States are discussing is not to stop oil from leaving Russia on its own. The goal is to stop or at least significantly reduce Russia’s revenue from oil exports. At the same time, the world still needs at least some of this oil if we want to avoid a new jump in prices.
