Russia: Lost oil revenue bonanza for shippers and refiners

Western sanctions on Russia have significantly reduced state oil revenues and diverted tens of billions of dollars towards shipping and refining firms, some with Russian connections.

Most of the winners from the sanctions are based in China, India, Greece and the United Arab Emirates, a handful are partly owned by Russian companies.

None of the firms is breaching sanctions, but they have benefited from measures designed by the European Union and the United States to reduce the revenues of what they call Russian President Vladimir Putin's war machine.

As the Ukraine conflict heads into a second year, the calculations show that Russia's income has dropped but the volume of exports has remained relatively stable despite sanctions.

Putin told the West that sanctions would trigger an energy price rally. Instead, international benchmark Brent oil prices have fallen to US$80 per barrel from a near-all-time high of US$139 in March 2022, weeks after the start of the war. Before Moscow's invasion of Ukraine began on February 24 last year, Brent traded at around US$65 to US$85 per barrel.

After the Group of Seven (G7) industrialized nations imposed a price cap on Russian oil in December 2022, Moscow's oil export revenues fell by 40%YoY in January this year, Russia's finance ministry said.

"Low official oil price meant that the Russian state budget has suffered in recent weeks," Sergey Vakulenko, non-resident fellow at the Carnegie Endowment for International Peace, said.

Vakulenko was a former head of strategy at Russian energy major Gazprom Neft. He left the firm and Russia days after the start of the war.

"Judging by the customs statistics, some of the benefit was captured by refiners in India and China, but the main beneficiaries must be oil shippers, intermediaries and the Russian oil companies," he added.

Sanctions on Russia - probably the harshest imposed on an individual state - include outright bans on purchases of Russian energy by the United States and the EU, as well as bans on the shipping of Russian crude anywhere in the world unless it is sold at or below US$60 per barrel.

Russia has diverted most crude and refined products to Asia by offering steep discounts to buyers in China and India versus competing grades from the Middle East, for instance.

The ban on shipping and the price cap have made buyers wary and forced Russia to pay for transportation of crude as it does not have enough tankers to carry all of its exports.

As of late January, Russian oil firms were offering discounts of up to US$20 per barrel for crude to buyers in India and China.

In addition, Russian sellers have also paid up to US$20 per barrel to shipping companies to take crude from Russia to China or India.

As a result, Russian companies received only less than US50 per barrel of Urals at Russian ports in January, down 42%YoY and just 60% of the European Brent benchmark price, according to the Russian Finance Ministry.

By comparison, a US exporter of Mars crude - a grade similar to Urals - would pay about US$5 to US$7 per barrel for shipping a cargo to India. Given a discount of US$1.6 per barrel versus the US benchmark WTI, a US exporter would collect some US$66 per barrel at a US port, or 90% of the benchmark price.

With output of 10.7 million barrels per day (bpd) in 2022 and exports of crude and refined products of 7.0 million bpd, the discount and additional costs would see Russian producers' revenues falling by tens of billions of dollars in 2023.

The head of the International Energy Agency (IEA), Fatih Birol, said on Sunday the price cap reduced Moscow's revenue by $8 billion in January alone.

However, because some lost revenues are captured by Russian firms, the exact hit to earnings of producers and the state is difficult to quantify.

As a further complication, some Russian oil grades, including Pacific grade ESPO, are also worth more than Urals.

 

US to witness erosion in stockpiles due to pipeline outage and rig count decline

An outage of the largest oil pipeline to the United States from Canada could affect inventories at a key US storage hub and cut crude supplies to two oil refining centers, analysts and traders said on Friday.

TC Energy's Keystone pipeline ferries about 600,000 barrels of Canadian crude per day (bpd) to the United States. It was shut late Wednesday after a breach spewed more than 14,000 barrels of oil into a Kansas creek, making it the largest crude spill in the United States in nearly a decade.

The main question continues to be the duration of the potential outage. The longer the duration can potentially tighter inventories erosion of Cushing or heavy crude on the Gulf Coast," said Michael Tran, Managing Director at RBC Capital markets.

The line runs directly to the Cushing, Oklahoma, storage hub, which is currently about a third full with nearly 24 million barrels in stock.

If the outage last for more than 10 days, it could push Cushing storage to near the operational minimum of 20 million barrels, said AJ O'Donnell, Director at pipeline researcher East Daley Capital.

Volumes in the fourth quarter will be materially affected," as Keystone likely will run at a considerably lower pressure at least for some time once it restarts, said Harshit Gupta, Arc Independent research.

Other pipelines between Canada and the United States are at or near capacity, East Daley and data analytics firm Wood Mackenzie estimates.

"There's nowhere near enough to take 600,000 barrels a day. There's just not enough pipeline right now," O'Donnell said.

The spill in Kansas took place downstream from a key junction in Steele City, Nebraska, where Keystone splits to run into Illinois. That stretch of the line could be restarted, but the other segment affected by the spill will not come back until regulators approve a restart.

TC Energy aimed to restart on Saturday a pipeline segment that sends oil to Illinois, and another portion that brings oil to Cushing on December 20, Bloomberg reported, citing sources. TC Energy said it was evaluating plans to return the pipeline to service.

Volumes to the Gulf from Cushing have already dropped. Volumes on TC Energy's Marketlink pipeline, which flows from Cushing to Nederland, Texas, fell by about 300,000 bpd to less than 500,000 bpd, Wood Mackenzie estimates, after the leak was discovered.

Gulf Coast refiners, which could suffer shortages of heavy Canadian crude, can draw on supplies from offshore Louisiana facilities and from Colombia, Mexico and Ecuador.

US physical crude oil grade prices were mixed on Thursday and O'Donnell at East Daley said he expects volatility to continue as long as Keystone remained offline.

Meanwhile, a lengthy shutdown of the pipeline could lead to Canadian crude getting bottlenecked in Alberta, and drive prices lower, although the market's reaction on Friday was muted.

Western Canada Select (WCS), the benchmark Canadian heavy grade, for December delivery last traded at a discount of US$27.70 per barrel to the U.S crude futures benchmark, according to a Calgary-based broker. On Thursday, December WCS traded as low as US$33.50 under US crude, before settling at around a US$28.45 discount.

Rig Count

US energy firms this week cut the number of oil and natural gas rigs operating for the first time in six weeks as oil prices fell to their lowest this year.

The US oil and gas rig count, an early indicator of future output, fell by four to 780 in the week ended December 09, energy services firm Baker Hughes Co. said in its closely followed report on Friday. Oil rigs fell two to 625 this week, while gas rigs declined by two to 153, their lowest since July.

US oil futures were trading around US$71 a barrel on Friday, down about 6% so far this year, after topping US$130 in March after Russia's invasion of Ukraine.

US crude production was on track to rise from 11.25 million barrels per day (bpd) in 2021 to 11.87 million bpd in 2022 and 12.34 million bpd in 2023, according to federal energy data. That compares with a record 12.32 million bpd in 2019.