His oil exports..

Squeezing Putin where it hurts: His oil exports

Oil is Russia’s main source of export earnings, so any sanctions on crude could hurt the Kremlin.

BY AMERICA HERNANDEZ

There's growing pressure on the EU to block the flow of Russian crude — a key currency earner for the Kremlin and an energy source that's easier for the EU to spurn than natural gas.

"It's unavoidable we start talking about the energy sector, and we can definitely talk about oil because it is the biggest revenue to Russia's budget," Lithuanian Foreign Minister Gabrielius Landsbergis said on Monday as he arrived at a meeting of EU foreign ministers in Brussels.

That's an idea backed by a growing number of other EU countries as the bloc looks at a fifth round of sanctions against Russia for its invasion of Ukraine.

"We will continue talking about what kind of sanctions we can think of again, more especially related with energy," said EU foreign policy chief Josep Borrell. The subject will be addressed when EU leaders meet later this week at a joint summit with U.S. President Joe Biden — who has already declared an embargo on all Russian energy imports.

It's leading to nervous noises from Moscow.

"As far as we know, they are actively discussing imposing an embargo on the supply of [Russian] oil," Kremlin spokesperson Dmitry Peskov said on Monday, adding that any such step means Europeans "will have a hard time" as a result.

Deputy Prime Minister Alexander Novak told the Russian Duma that given the West’s preparations for a ban on the purchase of Russian oil, it's increasingly urgent for Russia to boost shipments to Asia.

The problem for Moscow is that it's much more vulnerable to a crude cutoff than to sanctions on natural gas.

The EU gets about a quarter of its gas from Russia — most of that shipped by pipelines, which makes it difficult to replace quickly.

But crude is a different story. Although the EU gets about a third of its oil from Russia, only 4 to 8 percent comes by pipeline — meaning it can be more easily replaced by buying oil on international markets. It's also a much more painful blow for Russia as it earns significantly more from selling oil than gas.

Dependence on Russian crude varies a lot; France gets about 13 percent of its oil from Russia, Germany about a third, while Poland and Finland get two-thirds and Slovakia gets three-quarters, according to an analysis by Transport & Environment, an NGO.

“The key is to cut off the financing of the Russian war machine. The sanctions imposed by the West so far have in no way affected Russia's attitude,” said Piotr Arak, head of the Polish Economic Institute.

Dirty crude

The invasion of Ukraine is already making Russian oil a pariah commodity; Russia's flagship Urals crude is now trading at an almost $30 discount to the global oil benchmark and struggling to find buyers, although there has been a boost of sales to markets like India and China.

"Russian seaborne crude oil exports in March have increased from last month," said Petro-Logistics, an analysis firm tracking oil tankers, adding: "There are some cargoes awaiting destinations in the wake of Western sanctions on Moscow."

The International Energy Agency warns that Moscow could respond to sanctions pressure by cutting back on production — although that would also close off the cash spigot of about €250 million a day going from the EU to Russia — which Ukraine says helps finance the war.

Beginning next month, Russia may lower oil production by as much as 3 million barrels per day, the IEA warned on Friday — about a third of its crude exports.

"With the potential loss of large amounts of Russian supplies looming, there is a real risk that markets tighten further and oil prices escalate significantly in the coming months as the world enters the peak demand season of July and August," said Friday's IEA report.

"Losses could increase should restrictions or public condemnation escalate," the IEA added in a separate oil market analysis.

That's already happening: Over the weekend the world's three biggest oil field service providers began cutting ties with Russia and without them, Russia will have trouble keeping volumes up.

Friday's IEA report includes a list of 10 recommendations — including lowering speed limits, favoring trains over planes, and incentivizing home-working — to cut down on oil demand and buy time for governments to find replacements from other oil-producing countries.

Taken together, they could save the equivalent of 2.7 million barrels of oil by summer if fully implemented by the IEA's 31 members, most of which are EU countries. The agency will gather energy and climate ministers from around the world on Wednesday and Thursday to coordinate their response.

Prospecting for oil

IEA members have already agreed to release 63 million barrels of emergency oil stocks onto the market "to send a unified and strong message to global oil markets that there will be no shortfall in supplies as a result of Russia’s invasion of Ukraine."

But that's only a temporary buffer — and oil stocks in OECD countries are at eight-year lows, the IEA warned. The EU requires countries to keep 90 days of petroleum products on hand, so there's still time to plan.

Since the start of the Ukraine invasion, analysts have been looking into alternative sources of oil to replace the Urals crude that European refineries are set up to process. Urals is a "medium sour" crude, with a presence of sulfur that makes it more difficult and costly to refine.

Many solutions involve turning to regimes with human rights records as splattered as Russia's.

Alain Mathuren, communications director at FuelsEurope, the association of Europe's petroleum refiners, said Arab light crude from Saudi Arabia is often a go-to substitute for Urals when available — though many EU refineries can quickly adjust to handle other types.

But while "Saudi Arabia and the [United Arab Emirates] hold substantial spare capacity that could immediately help to offset a Russian shortfall," the IEA said in its monthly market report, the pair are "so far showing no willingness to tap into their reserves."

If the U.S. lifts its embargo against Iran, it has "approximately 60 million barrels in floating storage that could hit the market immediately pending a sanctions deal,” said Andy Critchlow of S&P Global Commodity Insights.

As an added bonus, Critchlow added: “Iranian light crude is virtually a like-for-like swap for Russian Urals."

U.S. oil major Chevron is seeking permission to ramp up production in Venezuela should U.S. authorities lift a ban in place since 2019.

But overall, major global producers are reluctant to ramp up.

At a March 2 meeting of OPEC and its oil-producing allies — including Russia — participants agreed to a modest overall hike of 400,000 barrels per day in April, but denied there was a global supply shortage.

IEA Director Fatih Birol called that assessment disappointing.