Europe has imposed an embargo on Russian oil products. What does it mean

On February 5, an embargo on the supply of Russian oil products to the key market, the European Union, which accounted for more than 40% of sales, came into force. RBC figured out

On Sunday, February 5, an embargo on the supply of Russian oil products (gasoline, diesel, kerosene, naphtha and fuel oil) to the European Union, which accounted for 42% of the total EXPORT of these raw materials from RUSSIA, came into force. Historically, they have taken up about the same amount - about 40% - of EU imports.

According to the International Energy Agency, the export of oil products from Russia in 2022 amounted to 2.85 million barrels. per day (about 142 million tons for the entire year), of which the EU accounted for 1.2 million barrels. per day.

Two months ago, on December 5, 2022, an embargo on Russian oil supplies to the EU came into force (33% of Russian exports in 2021). At the same time, the European Union and the G7 ( usa , CANADA, UK, France, Germany, Italy and Japan) set a price ceiling for Russian oilsupplied to third countries at $60 per barrel. A similar ceiling was set for petroleum products: for premium products (naphtha, diesel, gasoline and kerosene) at $100, and for products sold at a discount (fuel oil) at $45. This measure includes a ban on insurance and financing of tankers carrying Russian oil at a price above the agreed price ceiling. “Together with the G7, we are introducing a price ceiling for these products, depriving Russia of revenues, but ensuring the stability of global energy markets,” said Ursula von der Leyen, HEAD of the European Commission.

How the embargo will affect Russian exports

In response to the European embargo, the Russian authorities announced that they would not supply oil and oil products to those countries that would join the price ceiling. At the end of 2022, President Vladimir Putin issued a corresponding decree. “The goal is clear to our geopolitical opponents and opponents - to limit the revenues of the Russian budget, but we do not lose anything from this ceiling. There are no losses for the Russian fuel and energy complex and for the budget economy - there are no losses, because we sell at these prices, ”he said.

Deputy Prime Minister Alexander Novak admitted that at the beginning of 2023, oil production could be reduced by about 500-700 thousand barrels. per day, or by 5-7%. In January, it fell by only 0.4%, from 10.9 million to 10.86 million barrels. per day, the Kommersant newspaper reported. But according to the forecast included in the budget, oil production in Russia in 2023 will fall by 8.4%, to 490 million tons (9.8 million barrels per day). And experts from the consulting company Kept (former KPMG) predict that the fall could be 10-15%, to 455-485 million tons.

How will this affect the budget?

Oil production forecasts are broadly in line with the new fiscal rule, which has come into effect since 2023, and bases oil and gas revenues on production of 9.5 million barrels per barrel. per day (about 470 million tons), but it assumes an equilibrium price of Urals at $60. Upon reaching these indicators, budget revenues should amount to 8 trillion rubles, “everything that is higher will go to waste,” said Finance Minister Anton Siluanov. But under the influence of the price ceiling, the discount of Urals to Brent began to increase, as a result, the average price of the Russian benchmark brand, according to the Ministry of Finance, decreased from $66.47 per barrel in November 2022 to $50.47 in December, and in January 2023 it was already $49 .48.

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Western countries have set a price ceiling for Russian oil.What does it mean Business

According to Argus Media, Russia has already managed to redirect a significant part of oil supplies from Europe to Asia: in January 2022, before the start of the military conflict in Ukraine, supplies to the EU accounted for 85% of the total offshore supplies of Urals oil (5.16 million out of 6 million tons), and in September - only 24% (1.78 million out of 7.4 million tons). India increased purchases of Urals from zero at the beginning of the year to more than 40% by the beginning of autumn, and Turkey - from less than 5 to 21%. By December 2022, Asia's share of Russian oil purchases had almost doubled to over 80%, according to BLOOMBERG.

But unlike the supply of crude oil, Russia will not be able to reorient the supply of petroleum products so quickly, says Kirill Bakhtin, a senior analyst at Sinara investment bank. In 2022, the export of petroleum products was gradually rebuilt. So, according to Comtrade, for example, in November 2022, India increased their purchases by five times, to 983.5 thousand tons, CHINA  - three times (up to 677 thousand tons), and Brazil, which had almost never bought such goods in Russia, purchased 151.7 thousand tons. But still, this is significantly less than supplied to the EU (3.08 million tons in November).

In addition, the tanker fleet to transport various types of oil products to new markets may not be enough, Bakhtin notes (they require tankers smaller than those for transporting oil, and markets in close proximity). The basis of the Russian market for the export of petroleum products is fuel oil and diesel, and the key problem is to find the required number of medium-tonnage and small-tonnage vessels adapted for the export of petroleum products, because oil tankers are not suitable for this, agrees Alor Broker investment strategist Pavel Verevkin. He suggests that now such vessels are being bought urgently (the companies do not comment on this), but no one knows for sure whether they will be enough. “If there are enough ships, then the second obstacle is the search for markets, because it is necessary to persuade foreign buyers to buy oil products from us now,

According to Sinara's estimates, about half of the volume of oil products that Russian companies supplied to the European Union (0.6 million out of 1.2 million barrels per day) will not find new markets due to infrastructure restrictions. As a result, the bank predicts a decline in exports of petroleum products from Russia by 20% in 2023. “The specifics of the trade in petroleum products, primarily in terms of their transportation, contrasts with the crude oil market, and the geography of demand for them is more limited,” agrees Kept partner Maxim Malkov. According to him, because of this, the overall drop in oil production may be even more than 15%.

What will happen to oil refining

In 2022, the production of petroleum products in Russia increased by 3%, to 272 million tons. This year, according to Russian authorities, it will decrease by more than 15%, to 230 million tons, REUTERS reported, citing official data. Western sanctions will have a significant impact on the export of petroleum products and, therefore, will lead to a decrease in their production by about 15%, a senior Russian official told the agency. But that would likely increase crude oil exports, he added.

The price of Urals in January remained below the ceiling for oil Economics

“A shortage of sales markets can lead to the fact that fuel oil and diesel will first fill our own storage facilities, and then an oversupply can theoretically lead to a decrease in the production of gasoline and diesel (since fuel oil is formed during the production of these two types of fuel),” Verevkin argues. According to him, the increase in exports of released oil, which will not be processed, “has limits”: not all the capacities of oil refineries (refineries) can simply be redirected or stopped.

Bakhtin also believes that it is possible to redistribute export volumes from petroleum products to crude oil, which will “soften” the decline in production. In January 2023, oil exports to China increased from only 0.8 million to 0.9 million barrels. per day, but India and other Asian countries became the leaders of growth (from 0.5 million to 1.4 million barrels per day). “For Russian oil companies, it is not the physical volume of exports that is at the forefront, but rather revenue, which can be helped by rising prices due to the shortage of petroleum products and potentially higher exports of crude oil,” he explains.

Russia hopes to restore exports of petroleum products from the second half of 2023 by creating new supply chains, a government source told Reuters. RBC sent inquiries to representatives of the Ministry of Energy and Deputy Prime Minister Alexander Novak.

Which company will be hit the hardest?

Against the backdrop of the European embargo and price restrictions on Russian oil products, LUKOIL and Gazprom Neft seem to be the most protected, selling most of them in Russia, the Sinara report says. Historically, these two companies have been more active in the domestic market. Thus, the share of oil product exports to non-CIS countries in total revenue in 2021 was 8% for LUKOIL and 12% for Gazprom Neft. Rosneft has 18%, Bakhtin notes.

Surgutneftegaz, which received 30% of total revenue from the export of petroleum products, will be most vulnerable to the embargo if high prices for refinery products fail to compensate for the loss of export volumes, the report says. RBC sent inquiries to the press services of Rosneft, LUKOIL, Surgutneftegaz and Gazprom Neft.

A fire broke out at one of the largest oil refineries in Russia Society

But analysts are confident that the refining segment is likely to continue to benefit from a significant difference between the cost of crude oil and refined product prices, since without “adequate investment”, global refinery capacity has recently decreased (for example, in the EU by 0.7 million barrels per day in 2021).

The EU has long been heavily dependent on imports of Russian oil products, according to a January report from HSBC bank. In 2021–2022, about half of European diesel imports came from Russia. Before the embargo went into effect, EU companies ramped up purchases in an effort to replenish stocks. In December 2022, EU diesel imports from Russia peaked at 0.7 million bbl. per day, according to HSBC. Now Europe has to somehow replace these volumes. According to the bank, among the potential options are China, the Middle East and the United States. For example, the UAE plans to increase diesel supplies to France and Germany by 100 thousand barrels. per day in 2023, and Kuwait by 50 thousand barrels, as well as doubling the export of aviation fuel, Bloomberg notes. However, given the longer routes of such replacement supplies,