The ban on Russian energy: a warning or a rupture? – 05/23/2022 at 08:30

Patrice Geoffron

In the short term, the impact on Europeans will depend on the ability to find suitable substitutes in terms of volume and quality (via Indian refineries, for example), and the level of world prices that is partly compromised on the health front (depending on the effects of Covid on Chinese demand and elsewhere in the Asia), but also in the possible return to the theater of the producing countries subject to sanctions (Venezuela and Iran).  (Image credits: Adobe Stock -)

In the short term, the impact on Europeans will depend on the ability to find suitable substitutes in terms of volume and quality (via Indian refineries, for example), and the level of world prices that is partly compromised on the health front (depending on the effects of Covid on Chinese demand and elsewhere in the Asia), but also in the possible return to the theater of the producing countries subject to sanctions (Venezuela and Iran). (Image credits: Adobe Stock -)

After coal, a ban on Russian oil imports is being discussed, as part of the EU’s sixth “package” of sanctions, with the possibility of ending the import of crude oil, and then refined products, by the end of 2022. According to Patrice Gauvron, between coal and oil, the issues are not from same order.

In 2021, the value of imports of petroleum products was fifteen times greater than the value of coal (according to Eurostat). Since transporting oil is more complex than transporting coal, each new embargo project is based on specific industrial and historical facts.

Russian oil is transported in part by Soviet-era pipelines, a network that maintains a heavy dependence on landlocked “former satellites” of Moscow (Czech, Slovakia and Hungary) and is fed by fairly cheap Russian oil. This has led to these countries asking for additional time for implementation and, in particular, Hungary requesting significant compensation funding (about 15 billion euros) in order to adapt the import and refining infrastructure. Obviously, it is difficult to exclude any ulterior motive associated with the proximity of Viktor Orban and Vladimir Putin, since the first since the beginning of the conflict declared that a ban on hydrocarbons would constitute a “red line”.

The “dangerous” dependence is not limited to these three member states. Also a remnant of the Eastern Bloc, the German Schwedt refinery (near the Polish border) determines the supply of fuel to Berlin and Brandenburg, and is under the capital control of the Russian group Rosneft that guarantees the supply. Although France is far in the western part of Europe, it does not completely escape this dependence, especially by importing diesel from Russian refineries.

The Inevitable Nature of the European Green Deal

Despite these restrictions, import flows of Russian crude oil and petroleum products began to decline, regardless of the implementation of the embargo, due to perceived legal risks and the commitment of major European companies to reduce their activities with Russia. Admittedly, some of these streams find their takers elsewhere, such as currently in India, but at a high discount (about 1/3 compared to world prices).

Therefore, as agreed by Vagit Alekperov (who was forced to resign as CEO of Lukoil, Russia’s leading oil company), a ban on oil imports would force Russia to freeze production from some of its wells, being unable to redirect. All volumes destined for Europe to other markets in the short term. Moreover, the oligarch emphasizes the difficulties in financing the billions of investments required to redirect the flow of Russian oil to other markets, the years necessary for this, declaring permanent damage to the Russian economy.

In the short term, the impact on Europeans will depend on the ability to find suitable substitutes in terms of volume and quality (via Indian refineries, for example), and the level of world prices that is partly compromised on the health front (depending on the effects of Covid on Chinese demand and elsewhere in the Asia), but also in the possible return to the theater of the producing countries subject to sanctions (Venezuela and Iran). There are a lot of uncertainties that will reinforce the inevitable nature of the European Green Agreement, and the need to plan for France’s transition efforts.

This is given that the amount of Russian oil and gas that will continue to enter the EU depends to a large extent on the determination of the Europeans to implement the embargo as well as on Russia’s will to maintain its exports. The danger of a rupture already suffered by Poland, Bulgaria and Finland.

Leave a Comment