Russia is finding ways to bypass sanctions on its oil supplies and customers are “happy to buy” its discounted crude, the country’s top energy official said March 21.
“Now there are new challenges linked to supply chain disruptions, the insurance of ships that transport our products, and with issues of financing and payment … these issues are being resolved at the moment,” deputy prime minister Alexander Novak said, the Prime news agency reported.
Novak’s remarks come as some EU ministers argue for the block to impose tougher measures on Russian oil and gas imports instead of the current policy of phasing out dependence. The US, UK and Canada have announced plans to end imports of Russian oil by the end of 2022.
The discount for a Suezmax cargo of Urals against Dated Brent hit a record high of $33.36 on an FOB Novorossiisk basis March 15, S&P Global Commodity Insights’ Platts assessment showed.
“If oil is sold at a discount, then [consumers] will be happy to buy it. We will earn less, but we will be able to place oil,” Novak said.
Details on Russian production in March have not yet been released, but February data did not show a decline in output. Russian produced 10.11 million b/d in February according to the S&P Global Commodity Insights survey. This was up 30,000 b/d on month, but below Russia’s quota of 10.227 million b/d.
“Our oil and gas production is currently being carried out in full. For two months — January-February — the data is even better than last year,” Novak said.
Russia invaded Ukraine Feb. 24, sparking Western sanctions that have seen Western energy producers, refiners, and services companies drastically reduce their cooperation with Russian companies.
S&P Global Commodity Insights estimates that as much as 1 million-2 million b/d of Russian oil production could be shut-in amid fears of energy sanctions being imposed, limited access to credit for Russian deals, and escalating shipping and cargo insurance costs.
Western sanctions introduced so far include a US embargo on Russian oil imports, and a UK target to phase out Russian supplies by end-2022.
“This has not affected us much, because we supplied very little to there. In terms of the USA we supplied 3% of our total oil exports, and 7% of oil products,” Novak said.
Before the US ban was introduced, traders and refiners had voluntarily cut US imports of Russian crude and products in the days after its Ukraine invasion.
The US imported 473,000 b/d of Russian refined products and 199,000 b/d of Russian crude in 2021, according to the Energy Information Administration.
In 2020, Russia was the third-largest source of crude oil imports to the UK, amounting to 3.9 million mt, or around 11% of imported crude, according to government data. Russia was the second-largest source of imported petroleum products, amounting to 4.0 million mt, or 16% of the total, the data showed.
The EU may also target imports of Russian crude in future sanctions.
Kremlin spokesperson Dmitry Peskov said March 21 that a European import ban would have a serious impact on the global oil market.
“It’s a very complicated issue, because such an embargo would very seriously impact the global oil market. It would very seriously affect European energy balances for the worse,” Peskov said, according to the Prime news agency.
Demand for Russian crude has fallen significantly due to Western financial sanctions, as refiners are facing major difficulties securing shipping insurance, letters of credit, and tankers to load this oil.
Novak said that Russia is working to resolve these issues at the moment.
Before the war in Ukraine, Russia accounted for some 30% of European crude imports.
Novak reiterated that Russia will diversify oil deliveries in response to Western import bans and said that companies are already doing this.
He said that Russia will create new logistics channels and supply chains, as oil can be exported in tankers to other regions, and is not solely dependent on pipelines.
Part of Russia’s response to Russia oil being traded at a discount could include changes to the taxation system, so that producers do not operate at a loss, Novak said.
Analysts see Asian countries, including China and India, as potential purchasers of additional crude volumes and investors in Russian upstream projects in the wake of Western companies reducing cooperation with Russia.
Novak also commented on Western oil services companies deciding to exit the Russian market, saying that the Russian cabinet will monitor Russian oil output following the service companies’ announcements that they will exit Russia.