Europe is about to ban Russian oil: what happens next?

Russia’s decade-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.

Analysts say it will be possible sever Europe’s oil ties with Russiabut 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 consumers already struggling with inflation and ultimately derail the economic recovery from the pandemic.

“It will be 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 politicians are increasingly convinced that it is necessary and better to do it relatively quickly, both to try to reduce revenues for financing Russia and to reduce European exposure to Russian influence,” said Bronze.

The objectives of the European Union are clear. With Russia continuing to wage war on Ukraine, Europe wants to deny President Vladimir V. Putin funds from oil sales, usually his largest export income and a cornerstone of the Russian economy. Russia’s oil sales in Europe are worth about $ 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 distort European energy weapons. Russia’s latest attempt to do so came last week when it has 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 with Bernstein, a research firm, adding that oil was “a very deep, liquid and fungible market” served by thousands of oil tankers.

However, for the European Union, cutting itself off from Russian oil will be a daunting task that could risk sowing divisions. About 25 percent of Europe’s crude oil comes from Russia, but there are wide differences in the level of dependence between countries, with the general rule that nations geographically closest to Russia are more entangled in its energy grid.

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

On the other hand, several nations, including Hungary, Slovakia, Finland and Bulgaria, usually import more than 75% of their oil from Russia and may find it difficult to replace it with alternative 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 Tuesday.

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

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

Thaler said Hungary and Slovakia could potentially receive more oil from oil tankers in the Adriatic Sea, via a pipeline crossing Croatia, while the Czech Republic could be fed from a terminal in Trieste, Italy. Politicians in Brussels it could give Hungary and possibly other countries long waiting times to get their support.

Germany, on the other hand, and Poland now seem determined to end their dependence on Russian energy, and this shift in mentality in Germany appears to be the key to European politics. Germany plans to bring oil through the eastern port of Rostock and also over the border with Poland, from the port of Gdansk.

The German government says it was 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 around 12% of the country’s total imports from Russia.

“This means that the embargo has already been implemented, step by step,” said Robert Habeck, the German economy minister, on Monday.

Although oil is spoken of as a single commodity, there are actually many types with different characteristics and refineries are often configured to handle certain grades of crude oil. Ditching Russian oil could come with costs if the fuel can be found, analysts say.

Zsolt Hernadi, the head 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 a Russian oil embargo.

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

Viktor Katona, a Kpler oil expert who tracks energy flows, said that 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 inclination to increase their production more than incrementally. Mr. Katona said Iranian oil could work too, but US-imposed sanctions continue to hold back Iran’s fuel sales. Venezuelan oil, also strained by sanctions, is often mentioned as a possible trade with Russian crude.

The strains are already manifesting in the diesel market, used by both normal 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 fuel to Europe. Diesel sells for the equivalent of around $ 170 a barrel, well above the $ 107 a barrel of Brent futures, the international standard, and Mr. Katona expects the price to continue to rise. At the pumpDiesel prices in Britain have risen by more than 35% in the past 12 months, according to RAC, a motoring club.

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

Analysts say the releases of oil from reserves announced by Washington and the Paris-based International Energy Agency that they are expected to supply more than one million more barrels of oil per day within six months have so far had a greater impact on the US market than on the European one.

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

“Those companies would have little incentive to manage non-Russian crude oil,” Bronze said.

The German economy ministry said it did not expect “a voluntary termination of supply relations with Russia” in Schwedt and explored legal options, including the justification of a state takeover.

And then there is the question of whether a Russian oil embargo for Europe will achieve the goal of cutting the Kremlin’s revenues. So far the pressure on Russia seems to increase prices and, therefore, revenues. Rystad Energy, a consulting firm, predicts that while Russian oil production is likely to decline in 2022, overall the Russian government’s total fuel income is likely to increase by about 45% to $ 180 billion.

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

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