Europe is about to ban Russian oil: what will happen next?

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

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 could penalize oil producers. consumers already struggling with inflation and ultimately derailing 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 best to do it relatively quickly, both to try to reduce revenue to finance Russia and to reduce European exposure to Russian influence,” Bronze said.

The objectives of the European Union are clear. As Russia continues to wage war in Ukraine, Europe wants to deny President Vladimir V. Putin funds from oil sales, usually his main source of export earnings and a cornerstone of the Russian economy. Russia’s oil sales to Europe are worth $360 million a day, estimates Florian Thaler, chief executive of OilX, an energy research firm.

The move against oil would be part of an effort to end Moscow’s ability to twist European arms on energy. In its latest attempt to do so last week, Russia cut off natural gas supplies to Poland and Bulgaria. Russian oil may 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, fungible market” served by thousands of tankers.

Still, for the European Union, isolating itself from Russian oil will be a Herculean task that may risk sowing division. About 25 percent 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 enmeshed in its energy web.

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

On the other hand, several nations, including Hungary, Slovakia, Finland and Bulgaria, typically import more than 75 percent of their oil from Russia and could find it difficult to replace it soon with alternative sources.

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

While concerns center on pipelines, large volumes of oil also flow from Russian oil fields through the Druzhba (named for the Russian word for friendship) pipeline, whose northern branch feeds Germany and Poland and the southern line runs to Slovakia, the Czech Republic and Hungary. .

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

Mr Thaler said Hungary and Slovakia could potentially receive more oil from tankers in the Adriatic Sea, via a pipeline through Croatia, while the Czech Republic could be fed from a terminal in Trieste, Italy. Policy makers in Brussels it can give Hungary and perhaps other countries a long time 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 heart in Germany appears to be key to European policy. Germany plans to bring oil through the eastern port of Rostock and across the border with 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 eastern Germany called Leuna, which together account for about 12 percent of the country’s imports from Russia.

“That means the embargo is already being implemented, step by step,” Robert Habeck, Germany’s economy minister, said on Monday.

While oil is talked about as a single commodity, there are many types with different characteristics, and refineries are often set up to process certain grades of crude oil. Moving away from Russian oil may involve costs if the fuel can be found, analysts say.

Zsolt Hernadi, director of MOL, a large 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 trigger costly competition for alternative sources of oil.

Viktor Katona, an oil expert at Kpler, which tracks energy flows, said that of the potentially available substitutes for Russian oil, only Saudi production was a good fit. So far the Saudis, who will head an OPEC Plus meeting on Thursday, have shown little inclination to increase output more than incrementally. Mr. Katona said Iranian oil could also work, but US-imposed sanctions continue to hamper Iran’s fuel sales. Venezuela’s oil, which is also affected by sanctions, is often mentioned as a possible swap for Russian crude.

Varieties are already appearing on the diesel market, used by both ordinary drivers and truckers. Diesel is in short supply because European distributors are wary of buying refined products from Russia, which once supplied large volumes of the fuel to Europe. Diesel is selling for the equivalent of about $170 a barrel, well above the international standard Brent crude futures price of $107 a barrel, and Katona expects the price to rise further. At the pump, diesel prices in Britain have risen more than 35 percent in the last 12 months, according to the RAC, a motoring club.

An embargo “is going to inflict tangible pain on the European refiner and consequently on the European customer,” Katona said.

Analysts say oil releases from reserves announced by Washington and the Paris-based International Energy Agency, which are scheduled to provide more than a million extra barrels of oil a day for six months, have so far had more impact in the United States than in the United States. The European market.

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

“Those companies would have little incentive to trade non-Russian crudes,” Bronze said.

The German Economy Ministry said it did not expect “a voluntary termination of supply relations with Russia” at Schwedt and has been exploring 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 revenue. So far, the pressure on Russia seems to be increasing prices and thus revenues. Rystad Energy, a consulting firm, projects that although Russian oil production is likely to decline in 2022, total Russian government revenue from the fuel is likely to rise about 45 percent, to $180 billion.

Russia is also finding homes for its oil in India and, to a lesser extent, Turkey, as buyers take advantage of deep discounts. “It could just be a game of musical chairs,” Katona said.

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