Ins and Outs of the EU's Russian Oil Embargo
Energy Intelligence looks at some of the key questions around the ban on imports of Russian oil that is set to become part of a sixth round of EU sanctions in response to Vladimir Putin's invasion of Ukraine.
How much crude oil are we talking about and how much crude will be exempted?
Last year, EU countries imported around 2.3 million barrels per day of Russian crude, accounting for around 24% of its overall intake. The lion's share — around 1.6 million b/d — came in by sea, with Italy and the Netherlands among the largest receivers. The rest, around 720.000 b/d, was pumped along the northern leg of the Druzhba pipeline to Germany and Poland, and along the southern leg to the Czech Republic, Slovakia and Hungary. The northern leg passes through Belarus and the southern leg through Ukraine.
The three countries supplied by the southern leg have been granted exemptions, but that won’t make a huge difference in practice. Together they import only around 300,000 b/d, which is less than 15% of Russia's exports to the EU. Bulgaria said it had also been granted an exemption. It imports around 100,000 b/d for the Bourgas refinery, which is owned by Russian oil producer Lukoil.
How will the ban affect the Russian economy?
The impact could, in theory, be huge. Russian customs data show that the country's exports of crude to the EU were worth around $50 billion in 2021, almost half of the country's total oil export revenues. But, with the price of Brent moving above $120 per barrel again this week, Russia will continue to make good money from its oil and gas exports — even if it has to sell crude at huge discounts. The EU will continue to buy Russian gas in large volumes for some time to come, because it does not have sufficient alternative sources of supply in the short term.
Can the EU afford to drop Russian oil and what are the alternatives?
The embargo won't kick in for another six months, so there should be enough time for the EU to line up alternatives. But it won't be easy, as countries compete against each other for new sources of supply.
Germany would appear to face the toughest challenge, as it was previously buying over 500,000 b/d of Urals crude, mostly via the Druzhba pipeline, that will be difficult to replace. Official statistics show that Germany's Druzhba intake rose by more than 13% in March to 407,000 b/d, all of which went to two refineries in the former East Germany — PCK Schwedt, majority-owned by Russian giant Rosneft, and Leuna, which is owned by TotalEnergies. However, Economy Minister Robert Habeck said that by late April, Russia's share of Germany's crude oil imports had fallen to 12% from 35% before the invasion of Ukraine.
Bulgaria finds itself in a similar situation. Its Bourgas refinery — like Schwedt and Leuna — was built to run on sour Urals crude. Russia cut off gas supplies to Bulgaria in late April after it refused to pay for gas supplies in rubles.
Poland was getting all of its oil from Russia five years ago, but it is now well on the way to reducing that volume to zero, thanks in large part to a long-term crude supply deal between refiner PKN Orlen and Saudi Aramco. Aramco also agreed to buy a 30% stake in the Lotos refinery on the Baltic Sea.
In the months ahead, EU countries are hoping to buy more crude from other Mideast suppliers, including the United Arab Emirates and Iraq, as well as stepping up imports from the US. "They are already looking beyond Russia, and mapping out the road ahead," says a veteran European trader. But he also flags the risk that some European refineries could be forced to shut down for lack of crude, leading to job losses.
Will Russia be able to offset the loss of sales to Europe?
Russia will try to sell more crude into Asia — especially India and China — and also to Turkey. As Urals and other Russian grades are now heavily discounted, non-EU refiners will surely step up their purchases. Russia can also put more of its crude into tankers on the water — much as Iran has done in recent years — and do multiple ship-to-ship transfers to disguise the origin of its oil. But, it's likely that Russian producers will struggle to find a home for all of their barrels and will have to shut in more production.
Will the EU struggle without Russian oil products?
Russia exports over 1.1 million b/d of oil products to the EU — mainly gas oil and fuel oil — with Northwest Europe as its main market. The EU should be able to manage the shortfall, but a deficit of diesel in the coming months could push today's sky-high prices even higher and hurt some sectors of the EU economy, especially agriculture. The outlook is rosier in the medium- to long-term, as renewables start to play an ever greater role in Europe.
Who benefits from the embargo?
Non-EU refiners can look forward to making a fortune by buying even more heavily discounted Russian oil, and selling their products into the EU at market rates. Turkey is especially well positioned, and its refiners are already taking full advantage of the price distortions that have arisen.