The war in Ukraine has become a major shock for the Russian energy sector as Western countries introduced different kinds of sanctions, including an embargo on crude & petroleum products and other restrictions. The results was decline in exports and a record spread of Urals to Brent (up to $30-35/barrel).
On May 30, the European Council agreed to introduce a partial embargo on the import of Russian oil and petroleum products. By December 22, the EU plans to completely abandon supplies by sea and stop imports via the Northern branch of the Druzhba oil pipeline (Poland/Germany). Oil imports via the southern branch of Druzhba (Hungary/Slovakia/Czech Republic) may stop by mid-2023.
But Western sanctions had so far a rather limited effect on the Russian oil sector. Over the past couple of months, Russian companies managed to reorient exports to new markets. India has become one of the major buyers of Russian crude while China also increased its purchases. It helped to recover oil exports and production in May-July. We expect that oil production will stay resilient in 2022 due to the global deficit and but will decline in 2023 by 5% as the European embargo will start. Petroleum product exports are in the most difficult position. Most of the Russian diesel and fuel oil was sold on the European markets, and it is harder to sell it to other markets as China & India have their downstream capacity. Probably Russian majors will have to shut down some of the older and less sophisticated refineries in the Volga region.
Natural gas is a different story. The EU and Russia are mutually more dependent in terms of pipeline supplies. Russian supplies are around 40% of the European demand and 65% of Russia’s exports in 2021. But the current "gas war" includes EC’s official strategy to abandon Russian supplies by 2027 and Russia’s desire to speed up the process. It looks likely that supplies of gas to Europe might stop by 2024 or even in 2023.
It will be a new reality for the EU gas market without Russian supplies. Gazprom will lose most the of export revenue stream and will have to focus on other markets. At least in the next few years, there are very few alternatives to substitute exports to Europe. Probably Russia will increase exports to Turkey and Central Asia but the maximum incremental volume will be in the range of 5-7 bcm. China is the most promising long-term alternative. But the Power of Siberia gas pipeline has its resource base and is not connected to major fields in Siberia. To start the construction of Power of Siberia - 2 Russia needs to sign another long-term contract with China which has not yet happened. New LNG capacity is not an option. Existing projects are dependent on Western technology solutions. It will take at least a couple of extra years to switch them to domestic technology solutions.
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