Page 6 - AsianOil Week 09 2023

AsianOil COMMENTARY AsianOil

all the oil products covered by the February interest in Russian crude after concerns around
embargo remains an open question. potential blowback from the US and allies kept
If the goal of the sanctions was to cut the them on the sidelines. Russia’s overall crude and
Kremlin off from its biggest revenue earner, so fuel oil exports to China reached 1.66mn bpd last
far they have completely failed. Russia's goods month, according to Kpler data as of February
exports reached a record $532bn in 2022, result- 20. That’s more than the previous record set in
ing in an all-time high trade surplus of $316bn. April 2020, when the Asian nation was emerg-
The export of oil and gas reached $333bn in ing from its initial virus restrictions. Deliveries
2022, representing 63% of total goods exports, to India are also running at record levels of about
with crude oil accounting for $142bn, oil prod- 1.5mn bpd.
ucts for $83bn and natural gas for $108bn. “At first glance, it seems as though the price
In 2021, Russia produced 540mn tonnes of cap on Russian oil at $60 per barrel is working
crude oil, accounting for 13% of global pro- like a charm. The market is well-supplied, and
duction. Of this, 260mn tonnes were exported there does not seem to be a market deficit that
directly as crude oil, comprising 13% of global many were fearful of. Russia has not curtailed
exports. Domestically, Russia refined the its production in an attempt to force an increase
remaining 290mn tonnes, of which 140mn in prices; it has indeed increased supplies,” said
tonnes were exported as refined products Vakulenko in a note. “However, this picture
(11% of global refined exports) and 150mn may be misleading, as it suggests that Russia
tonnes were consumed domestically, accord- as a whole has lost a substantial portion of its
ing to BP. revenues. In reality, the situation is much more
The two major routes for exporting crude nuanced.”
oil are by pipeline and by oil tanker at sea. The
Druzhba pipeline system carries oil to the EU, FOB shenanigans
while the ESPO pipeline carries oil to China. The price of Urals is key, as the twin oil sanc-
The remaining Russian crude oil has historically tions are key to the FOB (free on board) price
been exported by sea to the EU, China and other of Urals when it is delivered to the tanker that
countries to a lesser extent. is supposed to deliver it to the customer. How-
The ESPO oil is not included in the sanctions ever, that gives Russia a lot of leeway to play
regime and the SSRN paper found that the aver- games with the price of Urals to keep it below
age price of oil since December on this route out the $60 cut-off, after which the oil price cap
of Russia is $82 per barrel, with half of it exported mechanism kicks in. The reported Urals price
via the ESPO pipeline to China and another half is increasingly becoming a guess.
of it on ships owned by Russian shipping com- “The Urals price, according to official Rus-
pany Sovcomflot, which also operates outside sian statistics, and reiterated in the press, is a
the sanctions regime. notional value. Extremely little oil, if any, is sold
Historically, seaborne EU crude oil imports at this price. This figure is an average of FOB Pri-
from Russia originated from Urals fields and morsk and FOB Novorossiysk price assessments,
travelled via western ports in the Baltic and calculated according to methodology, which is
Black Sea. This is where the largest impacts of irrelevant to the current market environment,”
the embargoes and price caps are being felt. says Vakulenko.
In the fourth quarter of last year, China and There are many problems with the FOB price,
India, together with Turkey, accounted for two- the price that is quoted when the oil is delivered
thirds of total Russian crude oil exports, being to the tanker. This is not the price that the cus-
sold at prices over $80, as against roughly 30% of tomer pays, as they also have to pick up all the
the total volume in the first quarter of last year. services like shipping and insurance when the oil
Russia also exports oil via the Druzhba pipe- is finally delivered at its destination.
line (chart), which has not been sanctioned at the Over the last year Russia has been increas-
EU level. The origin of this oil is also from the ingly setting up these services as a way to bring
Urals fields serving western ports. Pipeline oil to the price it is paid for providing oil without
Europe consists of 60% flows through Druzhba’s increasing the cost of Urals. For example, it has
northern branch (to Germany and Poland) and been widely reported that Russia is operating a
40% through its southern branch (to the Czech “ghost fleet” of tankers for which it can charge
Republic, Hungary and the Slovak Republic). (chart). According to recent reports there could
Over the course of 2022 both Germany and now be more than 600 ships in this fleet – enough
Poland cut their imports of oil via Druzhba to to carry all of Russia crude and oil production to
zero, but at an average price of $63 per barrel, non-aligned markets.
according to SSRN. In the chart below the number of ships reg-
Russian exports of discounted crude and fuel istered to "unknown" has sharply risen since
oil to China jumped to record levels in January the sanctions came into force. And as bne
as the re-opening of the world’s biggest energy IntelliNews reported last year, the Central Bank
importer gathers pace after the dismantling of Russia (CBR) has also recapitalised Russian
of Covid Zero restrictions. The buying spree maritime insurance companies so they can take
was likely underpinned by private refiners, but over the role of providing insurance and adds
state-owned processors are now showing more more fees at the same time.

P6 www. NEWSBASE .com Week 09 03•March•2023