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.
On Wednesday, European Commission President Ursula von der Leyen proposed a complete ban on Russian oil imports, phasing out crude oil for six months and phasing out refined products by the end of the year, subject to approval by member states .
With this phased approach, “we are maximizing pressure on Russia while minimizing collateral damage to us and our partners around the world,” she said.
After the announcement, oil prices rose. Brent oil rose more than 3.7 percent for 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 for gasoline, diesel, jet fuel and other products — a situation that consumers already have with inflation. could harm and ultimately derail the economic recovery from the pandemic.
It’s getting “complicated,” said Richard Bronze, chief of geopolitics at Energy Aspects, a research firm. “You have a disconnection of two very intertwined parts of the global energy system,” he said, adding: “There will be disruptions and costs associated with that.”
“But policymakers are increasingly convinced that it is necessary and better to do that relatively quickly, both to try and reduce revenues for Russia’s financing and to reduce European exposure to Russian influence,” said Mr. bronze.
The objectives of the European Union are clear. As Russia continues to wage war in Ukraine, Europe wants to deprive President Vladimir V. Putin of money for the sale of oil, usually its biggest export earner and a cornerstone of Russia’s economy. Russia’s oil sales to Europe are worth $310 million a day, estimates Florian Thaler, chief executive of OilX, an energy research firm.
The move against oil is said to be part of an effort to end Moscow’s ability to twist European weapons for energy. In its latest attempt to do so last week, Russia has halted 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 replaceable market” served by thousands of tankers.
Yet for the European Union, cutting itself off from Russian oil will be a mammoth task that could risk creating divisiveness. About 25 percent of Europe’s crude oil comes from Russia, but there are wide differences in the degree of dependency between countries, with the general rule being that countries closer to Russia geographically are more entangled in the energy web.
Britain, which is not a member of the European Union and produces oil from the North Sea, has said it will phase out Russia’s energy supply; Spain, Portugal and France import relatively little oil from Russia.
On the other hand, several countries, including Hungary, Slovakia, Finland and Bulgaria, usually import more than 75 percent of their oil from Russia and may struggle to replace it with alternative sources any time soon.
“It is physically impossible to run Hungary and the Hungarian economy without crude oil from Russia,” Hungarian Foreign Minister Peter Szijjarto said on Tuesday.
While concerns are centered on the gas pipelines, huge amounts of oil from Russia’s oil fields are also flowing through the Druzhba pipeline (named after the Russian word for friendship), whose northern branch feeds Germany and Poland and the southern line feeds into Slovakia, the Czech Republic. and Hungary goes .
Refineries along this route, including the PCK plant in Schwedt, near Berlin, “have been running on Russian crude oil for 50 years,” said OilX’s Mr. Thaler. “You have to look for a proxy on the international market for that.”
Mr Thaler said Hungary and Slovakia could potentially receive more oil from tankers in the Adriatic, through a pipeline running through Croatia, while the Czech Republic could be fed from a terminal in Trieste, Italy. Policy makers in Brussels can give Hungary and perhaps other countries long lead times to win their support.
Germany, on the other hand, and Poland now seem determined to end their reliance on Russian energy, and this change of mind in Germany seems to hold key to European policy. Germany plans to supply oil through the eastern port of Rostock and also from across the border into Poland, from the port of Gdansk.
The German government says it has been able to terminate contracts for Russian crude, with the exception of the Schwedt refinery and another in East Germany called Leuna, which together account for about 12 percent of the country’s imports from Russia.
The war between Russia and Ukraine and the world economy
“That means that the embargo is already being implemented step by step,” said Robert Habeck, Germany’s economy minister, on Monday.
Although oil is talked about as a single commodity, there are many types with different characteristics, and refineries are often configured to use certain types of crude oil. Switching Russian oil could come at a cost if the fuel can be found at all, analysts say.
Zsolt Hernadi, the head 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 an embargo on Russian oil.
Analysts say an embargo could lead to expensive competition for alternative oil sources.
Viktor Katona, an oil expert at Kpler who tracks energy flows, said that of the alternatives that may be available to Russian oil, only Saudi production was a good fit. So far, the Saudis, who will lead an OPEC Plus meeting on Thursday, have shown little inclination to increase production more than incrementally. mr. Katona said Iranian oil could also work, but sanctions imposed by the United States continue to weigh on Iran’s fuel sales. Oil from Venezuela, which is also subject to sanctions, is often cited as a possible exchange for Russian crude.
Tensions are already emerging in the diesel market, which is used by both regular and truck drivers. Diesel is scarce as European distributors are wary of buying refined products from Russia, which once supplied large quantities of fuel to Europe. Diesel sells for the equivalent of about $170 a barrel, well above the $107-per-barrel futures price of Brent oil, the international norm, and Mr. Katona expects the price to continue to climb. At the pump, diesel prices in Britain have risen by more than 35 percent in the past 12 months, according to the RAC, a motorists’ club.
An embargo “will inflict tangible pain on the European refinery and, consequently, the European customer,” said Mr. katona.
Analysts say the release of oil from reserves announced by Washington and the Paris-based International Energy Agency, which is expected to deliver more than a million barrels of additional oil per day for six months, has had more of an impact on Americans so far. than on the European market.
For Germany, Europe’s largest economy, the hardest decision will be what to do with the Schwedt refinery, which is largely owned by Rosneft, Russia’s national oil company, and has smaller interests in two other refineries in Germany. Another Russian company, Lukoil, also has interests in refineries in Europe, including one of Italy’s main refineries, ISAB, in Sicily.
“Those companies would have little incentive to use non-Russian crude,” said Mr. Bronze.
Germany’s economy ministry said it did not expect a “voluntary termination of supply relations with Russia” in Schwedt and was exploring legal options, including whether a state takeover could be justified.
And then there’s the question of whether an embargo on Russian oil for Europe will achieve the goal of cutting off the Kremlin’s revenues. So far, the pressure on Russia seems to increase prices and thus revenues. Rystad Energy, a consulting firm, predicts that while Russia’s oil production is likely to decline in 2022, the Russian government’s total revenues from the fuel are likely to increase by about 45 percent, to $180 billion.
Russia is also finding homes for its oil in India and, to a lesser extent, Turkey, as buyers benefit from significant discounts. “Maybe it’s just a game of musical chairs,” Mr. Katona said.
