ED: This article is part of the series DATACRUNCH: Sanctions by the numbers that dives into the numbers and trends of UN voting, coal, oil, gas, grain.
Russia dominates Europe’s oil supplies and is the single largest supplier, accounting for a quarter of all oil deliveries. Most of Europe now wants to diversify away from Russian oil, but adding to the problems is that much of this oil is delivered not by ship but the Druzhba oil pipelines that have been operating since the 1970s, which makes switching supplier much more difficult.
Russia makes a lot of money from oil exports. Russia exports some 6mn barrels per day (bpd) to Europe – over half its total exports – and consumes a quarter of its output itself. China buys less than 20% of these exports, while the West normally absorbs over 70%. These Western imports represent more than half Russia’s entire oil output. At today’s prices, Kremlin tax receipts on export oil alone – about $500mn per day – will cover 70% of Russia’s Federal Budget for 2022, but the drive to ban Russian oil exports to Europe continues to face stiff resistance from some member states.
In the event of an embargo, Russia has threatened to redirect its Western export volumes elsewhere. But these “export substitution” threats are hollow – the volumes are far too large to redirect.
Russia can’t store the excess either, as its storage facilities are already full to the brim because since the war started oil traders have refused to buy Russian oil, even though there are no sanctions on the oil business yet.
The wells can’t be turned off either, as the way oil drilling works, once the pressure falls it is very hard to restart a well, and much of the oil in the ground is simply lost. A European ban on oil exports would lead to Russia reducing its output by half and losing significant amounts of oil that could never be recovered, as tens of thousands of marginal wells would be put out of business, according to Craig Kennedy, an associate at the Davis Centre at Harvard University.
“If export substitution is a chimera and a large-scale shut-in potentially catastrophic, Russia is far more dependent on the West to absorb its oil than many Western policy makers may realise,” Kennedy says. “This dependency gives the West significant bargaining leverage – but only if it acts collectively. Properly exploited, it can be used to design smart oil sanctions that achieve Western objectives while minimising self-harm.”
European oil demand
In 2019, the extra-EU crude oil imports came from Russia (27%), Iraq (9%), Nigeria and Saudi Arabia (both 8%) and Kazakhstan and Norway (both 7%).
Energy was targeted for the first time with a ban on coal imports in the fifth package of sanctions passed last week. The EU is already working on a sixth package, which may contain new bans on oil imports to Europe, which will be a lot more difficult to effect than coal.
The massacre in Kyiv’s suburb of Bucha on April 3 has changed everything. Before that the issue of the oil embargo was discussed as a hypothetical. Now it is very likely to happen. “We have closed coal imports, now we have to look at oil,” European Commission President Ursula von der Leyen said on April 8 after the approval of the fifth round of sanctions. EU High Representative for Foreign Affairs Josep Borrell said a day earlier that "sooner or later this [oil embargo] will happen." MEPs voted 512 to 22 so far to approve a symbolic resolution demanding a total ban on the import of coal, oil and gas from Russia.
And for Russia, this will be a very serious blow: according to the IEA, Europe accounts for 60% of Russian oil exports, which earned Russia $120bn last year, on a par with gas exports that earned $145bn, according to the Institute of International Finance (IIF) estimates. And that revenue is only going up as oil prices soar, while gas revenues are earned mainly from cheaper long-term contracts. In March 2022, oil accounted for 80.3% of all oil and gas budget revenues for the Russian budget. At the end of 2021, the share of oil and oil products in oil and gas revenues amounted to approximately two-thirds, and in total export earnings, a third.
The US has already banned Russian oil imports on March 9 that have risen since Washington slapped a ban on Venezuelan oil imports. But as bne IntelliNews reported, Russia only accounts for about 5% of US oil. As a net exporter of oil, the US can easily replace Russian oil, and as the volumes are so small Russia can easily find other buyers.
The UK has also said it will phase out the import of Russian oil by the end of the year. The UK currently is also not very dependent on Russian hydrocarbons, importing a mere 8% of its fuel needs. The vast majority of its fuel comes from imports of liquefied natural gas (LNG) from countries such as Qatar and the US. Among European countries the UK is one of the least dependent on Russian oil; nevertheless, London has given itself the whole of the rest of this year to phase out these imports.
Of the EU members, Poland has acted fastest to ban Russian oil imports. Poland’s Prime Minister Mateusz Morawiecki said on March 30 that Poland will stop buying Russian oil completely by the end of 2022. Yet critics say that the government is still not prepared to put its money where its mouth is, and has yet to take any decisive action.
Poland is one of the EU’s heaviest users of Russian oil. Pumped via the Druzhba pipeline, these supplies made up around 65%-70% of all oil imports into Poland in 2020, coming in at nearly 17mn tonnes. That is an increase of 48% versus the year 2000.
Overall, Russian oil covered 64% of Poland’s demand in 2020, which came in at 26.1mn tonnes, 97.3% of which was imported oil. Poland also imported oil from Saudi Arabia (15% of overall imports), Kazakhstan (11%), Nigeria (6%) and Norway (2%).
On March 30, Morawiecki paid a visit to the storage facility of Poland’s PKN Orlen, the state-controlled oil giant, to say that his government’s plan to end imports of Russian energy commodities was “the most radical in Europe”.
On oil, Poland says that it will use deliveries via the oil terminal in Gdansk, which can handle 36mn tonnes of crude oil annually, more than the 26mn tonnes Poland has consumed in recent years.
PKN Orlen’s contract with Rosneft, which secures Poland 300,000 tonnes of oil per month, expires in December. Another contract, with Tatneft, provides for deliveries of up to 200,000 tonnes per month and expires only in December 2024.
Breaking off with Russia
Many countries have been talking about weaning themselves off Russian oil imports, but Western Europe is Russia’s biggest customer for oil and oil products.
Russia exported $74.4bn of crude in 2020, but a third of that went to China with the EU countries of the Netherlands, Germany, Poland and Italy receiving the next 30%. German refineries in particular are heavily dependent on Russian crude and directly connected to Russian oilfields via the Druzhba pipelines.
China is the world's top importer of Russian crude oil, accounting for a third of all Russia’s exports of crude and buying an average of 1.6mn barrels per day (bpd) last year, or 15.5% of China’s total oil imports, according to the General Administration of Customs (GAC).
Russia’s exports of refined oil products are much more diversified than crude. Russia exported $48bn worth of refined products in 2020 with the Netherlands, France, Turkey and Germany being the biggest customers. The US also imported $4bn worth of refined products that year, but has now banned the trade following the invasion of Ukraine.
Disengaging from Russia oil exports is going to be hard for many countries that are heavily dependent on Russia for oil. Latvia depends on Russia for 64% of its oil imports, with its two Baltic neighbours Lithuania and Estonia importing 45.6% and 43.6% respectively. Poland also relies on Russia for more than half (54.9%) of its oil, while another half dozen EU countries get around a quarter or a third of their oil from Russia, according to a survey of the 25 counties most dependent on Russian oil imports by 247wallst.com.
And it’s not just a question of halting Russian imports and switching to oil from Kuwait. Because the sulphur content in different oil blends varies dramatically, changing supplier can mean an expensive upgrade for most refineries, which makes it harder to swap to a different supplier. Most of Europe’s refineries are set up to cope with Russia’s Urals blend that has a noticeable sulphur content but can’t cope with the “sour” oil from the Middle East and especially the “Arab Light” blend, Saudi Arabia’s main export, that has a high sulphur content. The sweetness of the crude is important, as a low sulphur content means a fuel that produces less GHG emissions.
Oil consumption is still Germany’s most important primary energy source, although it has been chipping away at this by actively developing renewables. Oil covered 31.8% of the country’s primary energy use in 2021, mostly as transportation fuel.
According to the Federal Institute for Geosciences and Natural Resources (BGR), about 98% of Germany’s primary mineral oil consumption had to be imported in 2020. The country’s domestic crude oil output from 49 oilfields amounted to 1.9mn tonnes that year.
In 2021, Germany imported 81mn tonnes of crude oil, with Russia by far the largest supplier, delivering 34.1%. In total, 30 countries supplied crude oil to Germany, with the US providing 12.5%, Kazakhstan 9.8% and Norway 9.6%.
Germany has started to diversify its oil supply, bringing the Russian share down to 25% from 35% in the first three months of this year. But weaning itself off Russian oil is made more difficult, as several of Germany’s leading refineries are connected by pipeline to their Russian suppliers. Starting in the middle of April, the Leuna refinery in eastern Germany will process only half as much Russian oil as it has in past years, but it will have to rely on crude deliveries by truck and rail from western Germany, rather than the Russian pipeline system, the economy ministry said.
The PCK refinery in the eastern German town of Schwedt is also connected to the Russian pipeline network, but stunningly the German regulator allowed the Russian state-owned oil giant Rosneft to increase its stake in the refiner to 92% the week before Russia invaded Ukraine. The German government is now wondering how to stop a Russian-owned refinery in Germany buying Russian crude that is delivered via a Russian-controlled oil pipeline without breaking the law. German media have reported that the energy ministry is looking into whether a state takeover could be justified in the name of energy security.
It will be much more difficult for Europeans to agree on a ban on oil imports than on a coal embargo, as all 27 EU countries must give their assent in order to impose sanctions. And the ban will make oil even more expensive for the customers. A complete ban on imports of Russian oil, according to the Oxford Institute for Energy Studies (OIES), will cause oil prices to rise by another 21% compared to the current “self-sanctions” scenario, in which Western companies voluntarily refuse to deal with Russian oil. A new jump in fuel prices could undermine public support for EU sanctions against Russia, writes the FT, citing European officials.
Putin has said that if Europe bans Russian oil he will simply export it elsewhere. Easier said than done. While countries like India, China and Indonesia would happily buy more Russian oil – especially discounted oil – they simply do not have the capacity to absorb all the oil currently being sent to Europe.
Asia is home to the largest and third-largest oil importers in the world, China and India. Large as they are, however, the collective West is far larger – importing double the quantity that China and India combined buy in.
At present, Russia supplies only 9% of China and India’s combined oil imports. Were they to try to absorb the volumes Russia normally sells to the West, their dependency on Russia for imported oil would jump to nearly 45%. Both countries have a policy of keeping their supplies of oil diversified.
There are logistical constraints too, as the bulk of Russia’s pipelines point west, accounting for 7.5mn bpd headed for Europe as opposed to 2mn bpd that goes east to the Asian markets. Reversing the flow would cost billions of dollars in new infrastructure that would take years to prepare.
Most Russian exports come from fields in West Siberia and the Volga-Urals basin and over 80% of them are destined for Europe. Some volumes travel via the Druzhba pipeline (opened in 1964) directly to European refineries. Others are shipped by tanker out of the Black Sea and the Baltic on short runs to Europe. En route out of Russia, 45% of Western exports are processed through one of the two dozen refineries in Western Russia, says Kennedy.
Russia’s eastern export infrastructure is young and modest in comparison to its Western counterpart. The first long-haul export pipeline from West Siberia to China reached full capacity only in 2019. At 4,188 km, it is the world’s longest oil pipeline and took over a dozen years to complete at a cost of some $25bn. It can deliver 600,000 bpd directly to China’s Daqing refinery and another 1mn bpd to Russia’s Pacific oil terminal at Kozmino. But this totals only about a fifth of Russia’s Western export capacity. Additionally, two much smaller terminals send exports out of Sakhalin Island. Russia’s eastern export infrastructure is already running at near capacity.
If Russia wanted to divert significant western export volumes to Asia, it would have to move them by tanker from terminals in the Black Sea and the Baltic. Rerouting all those western volumes would put well over 1mn bpd of additional load on Russia’s main sea terminals. That would demand the employment of a quarter of the world’s supertankers, or about 200 dedicated VLCCs (very large crude carriers). Russia has its own tanker fleet, but that only has the capacity to carry a tenth of the necessary volumes. Moreover, chartering these tankers could easily be put out of Russia’s reach using secondary sanctions. Many of the western bankers and insurance companies have already cut ties with Russia simply because of the threat of more sanctions.