ISTANBUL

The European Union (EU) could phase out 80% of Russian oil by the year-end and 100% by the end of 2023 with an orderly plan supported by further releases of strategic petroleum reserves (SPR) to fill the supply gap, according to energy experts.

The replacement of around 800,000 barrels per day to the EU via the Druzhba pipeline could pose difficulties given that it directly feeds some refineries in the bloc, experts told Anadolu Agency in a recent interview.

European Union (EU) could phase out 80% of Russian oil by the year-end and 100% by the end of 2023 with an orderly plan supported by further releases of strategic petroleum reserves (SPR) to fill the supply gap, according to energy experts

— ANADOLU AGENCY (@anadoluagency) April 15, 2022

The EU is considering an oil embargo on Russia, the world's largest oil exporter, although views are divided among member countries due to the varying degrees of dependency on Russian oil.

Despite many countries’ reluctance to apply an oil embargo, EU officials are drafting a phased import ban on Russian oil products and negotiations will take place on an embargo after the final round of French elections on April 24, the New York Times reported late Thursday.

An oil embargo on Russia would dramatically cripple its export revenues, as one-third of the Russian federal budget is derived from oil exports, with the EU accounting for a considerable share.

According to Robin Brooks, a chief economist at the Institute of International Finance, oil exports are the main driver of Russia's current account surplus which hit $122 billion in 2021. The surplus is mostly due to oil exports totaling $181 billion, followed by natural gas with $63 billion and coal with $17 billion.

"We would expect to see a more gradual phase-out of Russian volumes from Europe as the likely path, it being essentially the most orderly way to do it for prices and the economy. Obviously, the EU wants to minimize the economic disruption. I do, however, see it as quite likely now that Europe pushes quite hard to reduce its Russian oil imports, only on its own time frame if possible," Neil Crosby, a senior analyst at London-based data company, OilX, said.

According to Primary Vision Network data, the EU imports around 11 million barrels of crude oil and oil products daily from a number of countries, with Russia being the largest.

Germany is the biggest importer in the EU with around 1.67 million barrels per day, Italy follows with 1.31 million, the Netherlands imports 1.26 million and Spain imports 1.22 million barrels per day.

France also has sizable imports of 736,000 barrels, Poland has 619,000 and Belgium imports 590,000 barrels of oil and oil products daily.

Germany is most dependent country on Druzhba pipeline flows

As of January 2022, about 750,000 barrels a day of crude oil was supplied through the Druzhba network, with the majority at 50% destined for Germany, followed by Poland with 16%, Slovakia with 13.5%, Hungary and Slovenia with 11% and Czechia with 9.5%, according to IHS Markit.

With Germany as the largest importer, it is the foremost country against an oil embargo on Russia.

The EU's total crude imports from Russia amounted to about 2.2 million barrels per day and oil products totaled 1.2 million barrels last year. Such quantities mean that Russia accounted for 29% of EU imports in 2021.

The bloc receives about 800,000 barrels of crude oil daily via the Druzhba pipeline, one of the largest crude oil pipeline networks in the world at a total length of 5,500 kilometers including all its branches. The pipeline carries crude oil from Siberia, the Urals and the Caspian Sea, and crosses Belarus where it splits into a northern and a southern branch.

The northern part of the pipeline continues through Belarus to Poland and Germany while the southern branch passes through Ukraine, and continues to Slovakia where it further branches to the Czech Republic and Hungary. The pipeline's current capacity is 1.2-1.4 million barrels a day with the possibility of raising this to 2 million barrels.

"OECD Europe has refinery intake of roughly 11 million barrels a day. It has its own crude production of about some 3 million barrels a day. The remainder is imported. Of this, we have some 800,000 barrels a day of Russian crude flowing via Druzhba which will be difficult to replace initially, and another roughly 1.5 million barrels a day of Russian crude heading to OECD Europe via sea," Crosby said. "So potentially a very large hole in the European balance."

More strategic petroleum reserve releases expected

The other large oil suppliers to Europe last year were Saudi Arabia, Iraq, Libya, Nigeria, North Africa, Azerbaijan, Kazakhstan, and the US, Crosby said, adding that these are “quite a mixed slate with all of those listed taking up smaller chunks of between 500,000 or 1 million barrels a day."

According to Eurostat's data for the first semester of 2021, Russia accounted for 24.7% of the EU's oil imports followed by Norway and Kazakhstan with 9.1% and 8.9%, respectively. The US comprised 8.4%, Libya supplied 8.3% and Nigeria held a 6.8% share.

"The options for the bloc to immediately replace Russian oil are in some senses the same as the rest of the world, though crude located closer to home, like the US and West Africa will be favored and with more supplemented by the Middle East in theory," Crosby said.

"Inevitably there will be some losers and some refineries globally will struggle to maintain utilization rates. But there is obviously a willingness to support the economy by the release a lot of crude volumes from SPR. More releases may be expected," he said adding that large SPR releases would help keep refineries running.

Last week, the International Energy Agency (IEA) said it is "moving ahead with a collective oil stock release of 120 million barrels, including 60 million barrels contributed by the US as part of its overall draw from its SPR."

West Africa and US could be more favorable import destinations

Mark Rossano, a senior analyst at Primary Vision Network, highlighted the different dynamics of each country in relation to refining capacity.

"For example, Italy can take more Libyan crude to offset their flows from Russia, but they also need to be sure to manage sulfur content resulting in splash blending with the US light/sweet crude," he said.

"Germany is in a tougher spot because of its location and connectivity to Russia. They have increased the purchase of North Sea crude blends to help offset Russian flows,” he added.

However, Rossano noted that the broad phase-out of Russian volumes would be a long and arduous process.

"It will result in a big increase of miles per ton as Europe sources crude from further distances which will also drive up petrol prices," he said.

Europe will revert to increasing crude purchases from the Middle East, West Africa and the US to offset the loss of Russian barrels, Rossano said.

Crosby also noted that the fall in demand, proven by the latest data due to higher prices, could support a gradual phase-out of Russian imports.

Oil prices nudged near $140 per barrel in March with the growth in tension due to the war in Ukraine. International benchmark Brent crude is currently trading at $111 per barrel.

Russia needs to be "creative" to ensure flows

If a full embargo on Russian oil is applied despite misgivings from EU leaders, Russia will lose its biggest oil buyer.

According to IEA data, Russia exported 2.2 million barrels of crude a day to the EU out of a total of 4.7 million barrels, corresponding to 47% of its total crude exports.

Oil products exports to the EU of 1.2 million barrels daily account for 43% of Russia's total oil products exports.

"Russia does not want to risk shutting in production and they only have about 8 days of storage available. They can put more crude in pipeline and offshore storage, both very expensive, or they can provide steep discounts and other incentives to ensure buyers come to market," Rossano said.

Citing the example of India and China, he said India bought almost 500,000 barrels a day of Urals while China was offered waived lines of credit as well as the option to trade in yuans.

"Russia will need to be creative to ensure the barrels continue to flow to clients as insurance and day rates increase in the Black Sea. It will result in an increase in 'miles per ton' as the Black Sea to Asia is not the shortest distance," Rossano noted.

Although Russia may well offer strong discounts going forward to incentivize deals, Crosby thinks that many market players will find it too risky to do deals for quite some time.

"Some extra Russian oil will go to India and China and potentially others, freeing up volumes for the rest of the market, but it will take time and it will probably gradually ramp up," he said, adding that competition will be fierce on the open market and prices would therefore remain supported.