Europe proposes ban on oil from Russia: What's next?

Analysts say it will be possible to sever Europe's oil ties to Russia, but the effort will take time and may lead to shortages. PHOTO: AFP

NEW YORK (NYTIMES) - Russia’s decades-long dominance of Europe’s energy market is crumbling, and the biggest blow came on Wednesday (May 5) as the European Union (EU) chief proposed a complete import ban on all Russian oil, seaborne and pipeline, crude and refined. 

The ban will be phased in with purchases of crude oil coming into force within six months and refined products by the end of the year.

Because of their high dependency on Russian oil and limited possibilities of buying crude elsewhere, Hungary and Slovakia will be able to continue to buy Russian crude oil until end of 2023 under existing contracts.

Analysts say it will be possible to sever Europe's oil ties to Russia, but the effort will take time and may lead to shortages and higher prices for gasoline, diesel, jet fuel and other products – a situation that could penalise consumers already struggling with inflation and ultimately derail the economic recovery from the pandemic.

It is "going to be complicated", said Mr Richard Bronze, head of geopolitics at Energy Aspects, a research firm. "You have a delinking of two very intertwined parts of the global energy system."

"There are going to be disruptions and costs associated with that. But policymakers are increasingly convinced it is necessary and better to do that relatively rapidly, both to try and reduce revenues for funding Russia and to reduce European exposure to Russian influence," he added.

The EU's aims are clear. With Russia continuing to wage war in Ukraine, Europe wants to deny President Vladimir Putin funds from sales of oil, usually his largest export earner and a cornerstone of the Russian economy.

Russia's oil sales to Europe are worth US$310 million (S$429 million) a day, estimates Mr Florian Thaler, chief executive officer of OilX, an energy research firm.

The move against oil would be part of an effort to end Moscow's ability to twist European arms over energy. In its latest attempt to do so last week, Russia cut off natural gas supplies to Bulgaria and Poland.

Russian oil may be an easier target than gas, analysts say.

"The oil system can reconfigure itself," said Mr Oswald Clint, an analyst at Bernstein, a research firm, adding that oil was a "very deep, liquid and fungible market" served by thousands of tankers.

Still, for the EU, cutting itself off from Russian oil will be a Herculean task that may risk sowing division. About 25 per cent of Europe's crude oil comes from Russia, but there are wide differences in the level of reliance among countries, with the general rule being that nations geographically closer to Russia are more entangled in its energy web.

Britain, which is not a member of the EU and has oil production from the North Sea, has said that it will phase out Russian energy; France, Portugal and Spain import relatively low amounts of oil from Russia.

On the other hand, several nations, including Bulgaria, Finland, Hungary and Slovakia, usually import more than 75 per cent of their oil from Russia and might struggle to replace it with alternative sources soon.

"It is physically impossible to operate Hungary and the Hungarian economy without crude oil from Russia," Hungary's Foreign Minister Peter Szijjarto said on Tuesday (May 3).

While worries focus on gas pipelines, huge volumes of oil also flow from Russian oil fields through the Druzhba pipeline (named after the Russian word for friendship), whose northern branch feeds Germany and Poland and southern line goes to Hungary, Slovakia and the Czech Republic.

Refineries along this route, including the PCK facility in Schwedt, near Berlin, have been running on Russian crude for the last 50 years, Mr Thaler of OilX said. "You need to source a proxy for that on the international market."

Mr Thaler said Hungary and Slovakia could potentially receive more oil from tankers in the Adriatic Sea, through a pipeline that runs through Croatia, while the Czech Republic could be fed from a terminal in Trieste, Italy. Policymakers in Brussels may give Hungary and perhaps other countries long lead times to win their support.

Germany, on the other hand, and Poland now seem determined to end their dependence on Russian energy, and this change of heart in Germany seems to be key to European policy. Germany plans to transport oil through the eastern port of Rostock as well as from across the border in Poland, from the port of Gdansk.

The German government says it has been able to end contracts for Russian crude, with the exception of the Schwedt refinery and another in eastern Germany called Leuna, which together account for roughly 12 per cent of the country's imports from Russia.

"That means the embargo is already being implemented, step by step," German Economy Minister Robert Habeck said on Monday.

While oil is spoken of as a single commodity, there are many types with different characteristics, and refineries are often configured to run certain grades of crude. Switching away from Russian oil may involve costs if the fuel can even be found, analysts say.

Mr Zsolt Hernadi, the head of MOL, a large Hungarian oil company, recently said it could require up to four years and US$700 million to recalibrate his company's refineries in the event of an embargo on Russian oil.

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