Russian Oil Industry and its market
The sanctions on Russia would have an impact on its oil exports. Countries like India and even China has been asked to reduce their imports of Russian Oil. The sanctions regime would have an impact on Russian export income but the countries are equally equipped to circumvent the US led sanctions regime.
Russia is the third largest producer of oil after US and Saudi Arabia. According to International Energy Association, Russia’s total oil production in January 2022 was 11.3 mb/d, of which 1mb//d was crude oil.[1] Crude oil is the naturally occurring unrefined form of petroleum. Russia is the world’s largest exporter of oil to global markets and the second largest crude oil exporter behind Saudi Arabia. The world’s first oil well was drilled on the Absheron Peninsula (the former Soviet Union now in Azerbaijan) near Baku way back in 1846.[2] Russia has been extracting oil since ancient times and oil exports have been the bedrock of its economy since the past almost hundred years.
Being the largest producer and exporter of oil, which is the major source of energy, Russia has established itself as an important player in international oil politics. Even though it is not a core member of OPEC it has acquired a kind of veto in regulating supplies and prices in the biggest oil cartel. Top Russian oil consumers are China, Germany, Netherlands, Poland and the US. Except for China rest of the other top importers of Russian oil are NATO members.
Some of the world’s largest oil and gas companies are situated in Russia. Russia produces 11,262,746 barrels per day of oil (as of 2016) ranking 3rd in the world.[3] Rosneft one of Russia’s biggest oil companies, and according to its website, produces 4.14 million barrels per day or 204.5 million tons of liquid hydrocarbons in 2020. Russia’s main regions of oil production are Western Siberia, Urals-Volga, Eastern Siberia and the Far East, Arkhangelsk, and the Komi Republic.[4] Gazprom(OGZY), this Russian oil company is the largest in the world. It is majorly owned by the government and it is also the top supplier to Europe.[5]The oil industry which was under government control during the Soviet era was privatized after its fall. However, the state still asserts considerable control over the energy sector. Other top Russian oil companies are Lukoil (Lukoy), the second-largest private company, Gazprom Neft(GZPFY), Surgutneftegas (SGTPY) and Novatek (NOVKY).
The Ukraine invasion by Russia has hit the companies hard, their business is tied up with European nations and with the pressure mounting from US to close trade links with Russia. European nations are planning to nationalise units of Russian giant oil companies to bolster their energy supplies.[6] The Ukraine war and sanctions on Russia have brought losses to Russian oil giants. India, the world's third largest oil importer, has increased crude oil purchases from Russia, taking advantage of deep discounts.[7]
Russia-EU complicated energy relations
A few years back there was a burning debate that the growing dependence of EU nations on Russian oil and how it is shaping the politics of the region. Europe’s dependence on Russian oil was a major concern for European Union but no major action was taken. In 2021, the EU imported $108 billion (€99bn) worth of energy from Russia, by far its biggest import from the country.[8] Europe’s oil imports from Russia have dropped by just 15 per cent in ten years between 2011 and 2021.[9] This indicates that transitioning to other forms of energy or other countries for energy supplies is difficult. However, after the Russian attack on Ukraine, the contours have changed and also is there growing pressure on governments especially developed countries to cut down their dependence on the burning of fossil fuels and move towards cleaner forms of energy. Hence, the Ukraine invasion by Russia is pushing Europe towards developing renewable sources of energy infrastructure and diversifying its sources majorly from the middle-east and US. It is not that the EU is not trying to move towards renewable energies but the progress has been slow. In 2020, less than 20 percent of the EU’s electricity came from wind and solar, and only 13 percent came from hydropower.[10]
Analysts have been warning EU policymakers for a long time to diversify their energy sources as Russia is not a reliable partner. The Russian invasion of Ukraine and the current chaos in the world energy supplies is an indication of just that. The Nord-dorm pipeline the much talked about project between EU and Russia has also been shut down. While Canada, US, Australia and UK have completely banned Russian oil imports, EU members remain reluctant. Germany and Poland have pledged to phase out Russian imports by the end of the years.
China and Russia Energy Relations
The next giant Russian energy customer is China. China imports about 20 percent of Russian oil the rest of it goes to OECD countries.[11] With a strategic alliance in place and their deepening bilateral relationship China and Russia has established a win-win relationship. Russia is the second largest exporter of oil to China after Saudi Arabia. With Russia and China both suffering from various sanctions from the US, both benefit from a deepening bilateral relationship. Russia exports oil and ammunition to China while China becomes its largest market thus keeping Russian companies afloat.
The Ukraine crisis has made imports cheaper for Russia as US and OECD countries have called for a ban on Russian oil, and Russia is exporting its oil at cheaper rates. In February 2022 only, Rosneft, Russia’s largest oil producer, agreed to deliver 200,000 bpd of crude oil to CNPC (China National Petroleum Corporation) over 10 years through the Kazakhstan-China pipeline.[12] The question which is arising is will China be able to keep Russian economy afloat when Russia has some of the most severe sanction from OECD countries? China is the world’s largest importer of crude oil and its energy needs are growing with its growing economy. Cheap oil will always be in the interest of China but how much of the Russian oil ends up in China will depend on various factors like the availability of refining and storage capacity, and the impact of Covid in Chinese markets. Also, Western sanctions are not limited to Russia alone, US and its allies are putting in all the effort to isolate Russia in its invasion of Ukraine and warning states trying to purchase Russian oil. For example, China’s independent refiners, which are concentrated in northeast China and favour Russia’s ESPO crude, and the Chinese banks that provide them with letters of credit, have been acting with caution due to concerns about running afoul of future U.S. sanctions.[13]
Conclusion
Russia is the world’s largest supplier of oil and the war is shaking up the oil market. With OPEC countries denying to further scale up production to keep prices stable, the oil consumers, especially EU countries are in flux. China and India are among the world’s largest oil importers and thus keeping their energy security in mind have refrained from condemning Russian actions. Lured by steep discounts following Western sanctions on Russian entities, India has bought at least 13 million barrels of Russian crude oil since late February.[14] China, however, is honouring previous agreements but refraining from buying new ones. But that is to show that it is a responsible international player. US however have sternly warned China of sanctions if it provides any kind of aid to Russia.[15]
Notes
[1] IEA (2022), Russian supplies to global energy markets, IEA, Paris, URL: https://www.iea.org/reports/russian-supplies-to-global-energy-markets
[2] Egorov, Boris, “Black gold: How the Russian oil industry was born”, Russia Beyond, 21 Sept 2017. URL:https://www.rbth.com/business/326217-black-gold-how-russian-oil
[3] Worldometer, “Russia Oil”, URL:https://www.worldometers.info/oil/russia-oil/
[4] The Investopedia Team (2022), “The World’s Top Oil Producers”, The Investopedia, 7 March, 2022. URL:https://www.investopedia.com/investing/worlds-top-oil-producers/
[5] Tarver, Evan (2022), “The Biggest Russian Oil and Natural Gas Companies”, Investopedia, 28 February 2022. URL:https://www.investopedia.com/articles/markets/082615/5-biggest-russian-natural-gas-companies.asp
[6] Tan, Huileng (2022), “Germany is considering nationalizing units of 2 Russian energy giants to bolster its energy supply amid the war in Ukraine, report says”, Business Insider, 4 April 2022 . URL:https://www.businessinsider.in/politics/world/news/germany-is-considering-nationalizing-units-of-2-russian-energy-giants-to-bolster-its-energy-supply-amid-the-war-in-ukraine/articleshow/90636883.cms
[7] Reuters, “Who is buying Russian crude oil and who has stopped” , 6 April, 2022 URL:https://www.reuters.com/business/energy/who-is-still-buying-russian-crude-oil-2022-03-21/
[8] Edmond, Charlotte (2022), “How much energy does the EU import from Russia?”, World Economic Forum, 17 March 2022. URL:https://www.weforum.org/agenda/2022/03/eu-energy-russia-oil-gas-import/
[9] Edmond, Charlotte (2022), “How much energy does the EU import from Russia?”, World Economic Forum, 17 March 2022. URL:https://www.weforum.org/agenda/2022/03/eu-energy-russia-oil-gas-import/
[10] Wald, Ellen (2021), “The EU contributed to its own energy crisis, but diversification can solve it”, Atlantic Council, 24 November 2021. URL:https://www.atlanticcouncil.org/blogs/energysource/the-eu-contributed-to-its-own-energy-crisis-but-diversification-can-solve-it/
[11] IEA (2022), Russian supplies to global energy markets, IEA, Paris. URL: https://www.iea.org/reports/russian-supplies-to-global-energy-markets
[12] Dr. Downs, Erica (2022), “China-Russia Energy Relations: Will New Oil and Natural Gas Deals Help Russia Weather Economic Sanctions?”, Centre on Global Energy Policy, Columbia University, 16 March, 2022, URL:https://www.energypolicy.columbia.edu/research/qa/qa-china-russia-energy-relations-will-new-oil-and-natural-gas-deals-help-russia-weather-economic
[13] Downs, Erica (2022), “China Could Be A Lifeline for Russian Energy”, Barron’s, 25 March 2022. URL: https://www.barrons.com/articles/china-could-be-a-lifeline-for-russian-energy-51648238894
[14] Reuters, “Who is buying Russian crude oil and who has stopped” , 6 April, 2022 URL:https://www.reuters.com/business/energy/who-is-still-buying-russian-crude-oil-2022-03-21/
[15] Martina, Michael (2022), “U.S. says China could face sanctions if it supports Russia's war in Ukraine”, Reuters, 7 April 2022. URL: https://www.reuters.com/world/us-says-china-could-face-sanctions-if-it-supports-russias-war-ukraine-2022-04-06/
Pic Courtsey-Nalaya Letunova at unsplash.com
(The views expressed are those of the author and do not represent views of CESCUBE.)
