Oil production in Russia in 2022 will amount to about 535 million tons, 2% more than in 2021, Deputy Prime Minister Alexander Novak announced at the end of December. But already in 2023 a decrease to 490 million tons is expected.
This is due to the redirection of the supply of oil and oil products from the West to the East due to EU and US sanctions and restrictions.
The ban on importing oil from Russia to the EU was introduced on December 5, at the same time that our oil price ceiling ($60 per barrel) began to operate, but has not yet affected production volumes. According to the Energy Development Center (RE Center), the same amount of oil was produced in December 2022 as in November: 10.9 million barrels per day. At the same time, the export of crude oil after the embargo decreased by 11-13% compared to November.
In February, the EU ban on the importation of our oil derivatives will also come into effect, as well as a ceiling price for them, which has not yet been determined. And it could have a more serious impact on the national oil industry, since it is much more difficult to redirect the supply of petroleum products than crude oil. According to the RE Center, in the first quarter of this year, the volume of primary oil refining in Russia may be reduced by 1 million barrels per day. And this means that production will also have to be reduced.
You can expect both positive and negative scenarios. As Alexander Potavin, an analyst at Finam FG, points out, Russian oil companies have basically already redirected supplies of raw materials from the EU market to Asian markets. In this regard, oil production in the Russian Federation has not yet suffered against the background of an increase in domestic refining. Now there is a transition period after the introduction of the maximum price and the embargo, so the effect of these restrictions will become apparent only in a couple of months. In theory, Russia could continue to increase oil refining so as not to destroy the wells.
In January, 85% of the total offshore deliveries of Ural oil were supplied to the EU – 5.16 million tons out of 6 million tons, and in September – already 24% (1.78 million tons of 7.4 million), the expert on the stock market clarifies “BCS World of Investments” Yevgeny Mironyuk. In the EU and G7 embargo, what is important is not so much the “ceiling” of prices, but the restriction on transport by ships from countries included in these political blocs, as well as insurance and oil services. These activities are subject to the principle of extraterritoriality. Russia’s foreign counterparts outside the EU may be subject to sanctions. The risk of sanctions being applied to buyers of Russian oil in early December forced several buyers to abandon deals in anticipation of details. The question of whether it will be possible to redirect the entire volume to other markets by the end of 2023 lies on the legal plane: how the extraterritorial principle of sanctions will be applied, whether buyers will be afraid of it, the expert notes.
In his opinion, the strongest drop in production will occur in the first quarter of 2023, at 600,000 barrels per day. Production will then gradually recover, albeit at a slow pace. The recovery process will be driven by an increase in the Russian Urals oil discount against benchmark Brent grade, which will make our oil more attractive to Asia.
As Potavin points out, other ways to maintain high levels of Russian oil exports are in the gray area. For example, the reloading of oil from one ship to another at sea. It is no coincidence that in mid-December the amount of Russian oil shipped by sea without specifying the final destination of the route increased significantly. By December 20, 2022, more than half of all tankers leaving Arctic, Baltic and Black Sea ports with Russian oil were heading through the Suez Canal with no final destination.
But it will be much more difficult to redirect petroleum products to foreign markets, Mironyuk explains. New buyers of Russian raw materials are interested in their processing on their territory and the formation of added value through the production of gasoline, diesel, aviation and marine fuel. For example, Turkey has multiplied its purchases of crude oil from Russia, while diesel purchases, on the contrary, have decreased. In this regard, Russia will have to develop deliveries to fundamentally new markets, including South America, the expert believes.
Potavin agrees with this, the ban on the export of Russian oil products will be very painful for our oil companies. The fact is that the EU and the US are the largest importers of petroleum products in the world. China and India buy crude oil and are themselves major oil refining centers.
Therefore, after the start of the European embargo on the export of oil derivatives from Russia, their volumes may fall by 30% year-on-year. The greatest difficulties will arise with the redirection to other markets for boiler fuel and fuel oil. One of the ways that Russian petroleum products, such as fuel oil, can reach consumers is through flows through regional distribution centers, which often have large onshore or floating storage facilities and can mix Russian fuel with other products before being relabeled with a new origin and shipped. in. But this “gray” scheme is associated with increased costs, the expert clarifies.
