Europe is on the verge of banning Russian oil: what will happen next?

Russia’s decades-old dominance of the European energy market is collapsing, and the biggest blow is expected this week as the European Union heads toward an embargo on Russian oil.

Analysts say it will be possible Cutting off 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 an economic recovery from the pandemic.

It’s going to be complicated, said Richard Bruns, head of geopolitics at research firm Energy Aspects. “You have a disconnect between two very intertwined parts of the global energy system,” he said, adding, “There will be disruptions and costs associated with that.”

“But policy makers are increasingly convinced that it is necessary and better to do this relatively quickly, to try to reduce revenue to fund Russia and reduce Europe’s exposure to Russian influence,” said Mr Bruns.

The objectives of the European Union are clear. As Russia continues to wage war in Ukraine, Europe wants to deprive President Vladimir Putin of funds from oil sales, usually his largest source of exports and a cornerstone of the Russian economy. Russian oil sales to Europe are estimated at $310 million a day, estimates Florian Thaler, CEO of OilX, an energy research firm.

The move against oil would be part of an effort to end Moscow’s ability to twist the European arms of energy. In her last attempt to do so last week, Russia Cut off natural gas supplies to Poland and Bulgaria. Analysts say Russian oil may be an easier target than gas. “The oil system can reconfigure itself,” said Oswald Clint, an analyst at Bernstein Research, adding that oil was a “very deep, liquid and replaceable market” served by thousands of tankers.

However, for the European Union, isolating itself from Russian oil would be a daunting task that could risk sowing the seeds of division. About 25 percent of European crude oil comes from Russia, but there are significant differences in the level of dependence between countries, with the general rule being that countries that are geographically closer to Russia are more intertwined in their energy grid.

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

On the other hand, many countries, including Hungary, Slovakia, Finland and Bulgaria, import more than 75 percent of their oil from Russia and may struggle to replace it with alternative sources soon.

“It is virtually impossible to run Hungary and the Hungarian economy without crude oil from Russia,” Hungarian Foreign Minister Petr Szyjjarto said on Tuesday.

While concerns center on gas pipelines, huge quantities of oil are also flowing from Russian oil fields through the Druzhba pipeline (named after the word for Russian friendship), whose northern branch feeds Germany and Poland and the southern line goes to Slovakia, the Czech Republic and Hungary. .

OilX’s Mr. Thaler said refineries along this route, including the PCK facility in Schwedt, near Berlin, “have been working with Russian crude for the past 50 years.” “You need to get an agent for that in the international market.”

Mr Thaler said Hungary and Slovakia could receive more oil from tankers in the Adriatic, via a pipeline running through Croatia, while the Czech Republic could be fed from a terminal in Trieste, Italy. Policymakers in Brussels may give Hungary and perhaps other countries long leeway to win their support.

On the other hand, Germany and Poland seem determined to end their dependence on Russian energy, and this change of attitude in Germany appears to be the key to European politics. Germany plans to transport oil through the eastern port of Rostock as well as across the border in 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 Schweidt refinery and another refinery in eastern Germany called Leona, which together account for nearly 12 percent of the country’s imports from Russia.

“This means that the ban is already being implemented step by step,” German Economy Minister Robert Habeck said on Monday.

While oil is talked about as a single commodity, there are many types with different properties, and refineries are often configured to run certain grades of crude. Analysts say that moving away from Russian oil could incur costs if the fuel could even be found.

Zsolt Hernadi, president of MOL, a large Hungarian oil company, said recently that 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 the ban could lead to costly competition for alternative oil sources.

Of the potentially available alternatives to Russian oil, only Saudi production was a good fit, said Victor Katona, an oil expert at Kpler, which tracks energy flows. So far, the Saudis, who will chair the OPEC+ meeting on Thursday, have shown little inclination to increase their production more than they do. Katuna said Iranian oil may also work, but US sanctions continue to hamper Iranian fuel sales. Oil from Venezuela, also hampered by sanctions, is often cited as a potential swap for Russian crude.

Breeds are already appearing In the diesel market, which is used by both regular drivers and truck drivers. Diesel is in short supply because European distributors are wary of buying refined products from Russia, which has been providing large amounts of fuel for Europe. Diesel is selling at the equivalent of about $170 a barrel, well above the $107 per barrel futures price for Brent crude, the international standard, and Katona expects the price to continue rising. at the pumpDiesel prices in Britain have risen more than 35 per cent in the past 12 months, according to RAC, a motorists’ club.

Mr Katona said the ban “would do significant damage to the European refiner, and thus to the European customer”.

Analysts say that Oil releases from reserves The announcement by Washington and the Paris-based International Energy Agency, which is set to provide more than 1 million barrels of additional oil per day over six months, has so far had a greater impact on the US market than the European market.

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

“These companies will not have much incentive to run non-Russian crude oil,” Bruns said.

Germany’s Economy Ministry said it did not expect a “voluntary termination of supply relations with Russia” in Schwedt, and was exploring legal options, including whether a state takeover could be justified.

Then there is the question of whether imposing a Russian oil embargo on Europe will achieve the goal of cutting off the Kremlin’s revenue. So far, the pressure on Russia seems to raise prices, and thus revenues. Rystad Energy, a consulting firm, predicts that while Russian oil production is likely to decline in 2022, the Russian government’s total fuel income is likely to rise by about 45 percent, to $180 billion.

Russia is also looking for a home for its oil in India and, to a lesser extent, Turkey, where buyers benefit from deep discounts. “It might just be a game of musical chairs,” Katona said.