After months of planning and negotiations, the largest tranche of Russian oil sanctions to date comes into effect on Monday. The extent of their impact remains uncertain.
The Group of Seven made a last minute deal cap the price of Russian crude at $60 a barrel. Anyone who wants to access key services provided by the bloc – particularly insurance – will have to pay that price or less. The same goes for European tankers, especially the giant Greek fleet.
But there are still huge unanswered questions that will shape the impact of the measures on the oil market, including the depth of non-European insurance markets, the appetite of some tanker owners to participate in trade with Russia and the exact effectiveness of cap application can be.
Here’s everything you need to know about what could change for Russian oil.
Who sanctions what?
From Monday, the European Union will ban the import of crude oil produced in Russia and transported by sea. There is an exemption for Bulgaria, which can continue to import Russian crude by sea until the end of 2024, under contracts concluded before June 4, 2022.
Pipeline flows are unaffected, although Germany and Poland have both said they will cease such imports by the end of 2022.
The UK and EU will also introduce a ban on shipping services for the transport of Russian oil, including to third countries. The list of banned services includes insurance, brokerage and, most importantly, the EU-based tanker fleet, including vessels owned by Greece and Cyprus. These restrictions will not apply if oil is purchased at or below the ceiling price.
How will the global cap work?
If crude oil is traded at $60 or less, countries participating in the cap, which include the Group of Seven countries, the European Union and Australia, will allow access to key services.
There is a price cap for all of Russia. The $60 level will be around $10 above the key Urals level – shipped from the country’s western ports – but below the ESPO, which is loaded on tankers at Kozmino in Asia. That rating is over $70, according to data provided by Argus Media.
The ceiling price is the value when crude is loaded onto a vessel. It does not include the cost of transportation and legal fees. It will apply from the time a cargo is received on a ship until it passes through customs in a new country. Once the oil is refined, it will no longer be subject to the cap, but if it is blended with another type of crude, it still is.
The ceiling will be regularly reviewed.
How will the insurance work?
Traditionally, ships are covered for disasters such as oil spills through a London-based organization called the International Group of P&I Clubs. The IG, as it is called, uses a reinsurance program that is heavily dependent on the EU, meaning its services will only be allowed if oil is shipped below the cap.
But there are alternatives. Russian company Ingosstrakh Insurance Co. was the first Russian underwriter of P&I cover in October and could be an option. However, the company has provided no indication that it is rushing to fill the void. And the depth of the Russian insurance market is small compared to traditional markets.
Chinese authorities have not yet recognized Russian insurance, Russia’s deputy transport minister said last week, but India and Turkey do. An Indian refiner previously said Russia was insuring its crude shipments.
Russia’s response
Russia has always said that it will not sell oil to countries that participate in the price cap. Deputy Prime Minister Alexander Novak said last week that the plan could pose significant risks to commodity markets, including market deficits.
But Foreign Minister Sergei Lavrov said on Thursday that Russia would continue to negotiate “directly” with its partners on the price of crude sales, noting that “there is always an element of balancing interests”, including on prices. This leaves Russia with room to sell below the cap while pretending it’s irrelevant.
The countries to which Russia currently sells have not signed the cap, but the United States and its allies hope they will use it as leverage to secure discounts.
Many countries continue to import oil from Russia through the Druzhba pipeline, the largest in Europe, while up to 1.5 million barrels a day of oil from Kazakhstan is shipped from a terminal near the Russian port from Novorossiysk. These are not prohibited.
It’s unclear what Russia can or will do to punish companies that participate in the cap. This could harm his interests.
Who ships?
A burgeoning shadow fleet of tankers has emerged to ship Russian crude oil. It is not yet clear whether this fleet will be large enough to maintain a full rate of exports in the long term.
An increasing number of ships are registered to unknown owners and the scrapping of old tankers has virtually ceased. Still, the growing risk of transporting Russian oil has boosted tanker revenues for cargoes loaded after Dec. 5.
This has already affected Urals crude oil prices.
Since the war broke out, a slew of new traders have marketed Russian oil to buyers in Asia, as traditional entities retreated. These include companies like Coral Energy, Wellbred and Montfort. Companies trading from Dubai with no ties to the EU are not subject to the bloc’s sanctions, but would still need key services like insurance and finance.
What has been exempted?
The price cap should only apply to maritime deliveries of Russian oil – flows via the key Druzhba pipeline to Europe are still allowed. There is also an exception for Kazakhstan CPC crude oil blend which is exported from a Russian port.
However, further discussions could bring some changes to the rules.
Bulgaria benefits from an exception that allows it to continue importing crude oil due to its “specific geographical exposure”, according to the EU report. sixth penalty package. At the same time, Japan received an exemption for oil produced by the Sakhalin-2 project destined for Japan.
The UK, which was waiting for the EU, introduced an exception for environmental emergencies, which would allow spills to be cleaned up. The EU should follow. It came after Turkey said it was planning stricter insurance checks due to the risk of environmental damage.
–With help from Dylan Griffiths, Kari Lundgren and Alberto Nardelli.
Photograph: Oil pumping jacks, also known as ‘nodding donkeys’, in an oil field near Neftekamsk, Republic of Bashkortostan, Russia, Thursday, November 19, 2020. Photo credit: Andrey Rudakov/Bloomberg
Copyright 2022 Bloomberg.
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