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The Russian government relies heavily on revenues from oil and natural gas. Pre-war, the sector made up 45% of Russia’s federal budget. It is therefore of strategic importance to financing the Kremlin’s war in Ukraine. For the same reason, the sector has been heavily sanctioned by the US and EU. Ten months into the war, what is the state of the Russian oil and gas industry?
The situation before 24 February
In 2021, Russia exported an estimated 4.7 million barrels per day of crude to countries around the world (14% of global total supply).1 Europe imported 2.4 million barrels per day (bpd), or more than half of all Russia’s crude oil exports. The 5,500 km Druzhba pipeline (the world’s longest pipeline network), transported 750,000 bpd of crude to European refiners, or 20% of total European throughput. Seaborne exports accounted for the remainder of sales to the European market.
Russia is the world’s second-largest producer of natural gas, behind the United States.2 Russia natural gas accounted for almost 40% of European Union gas imports in 2021 (160 bcm). Germany, Turkey, and Italy were the largest importers of Russian natural gas. In recent years Russia sought to diversify by increasing market presence in China and LNG (Liquid Natural Gas) exports. In 2021, Russia exported around 10 bcm (billion cubic metres) of natural gas via the Power of Siberia pipeline to China (or just over 6% of exports to the EU). In the same year, Russia exported 40 bcm of LNG, making it the world’s 4th largest LNG exporter (8% of global LNG supply).
The US banned the import of all Russian oil and gas products in March 2022 (8% of US oil and refined product imports came from Russia; natural gas imports were minimal).
At the beginning of December 2022, EU nations ended seaborne imports of Russian oil. Refined oil products will be banned from February 2023 (the Druzhba pipeline remains operational for dependent countries like Slovakia and Hungary).
At the beginning of December, the US-EU bloc and allies approved a price cap to discourage countries paying more than $60 for a barrel of Russian crude oil. President Putin retaliated by signing a decree banning the sale of oil to countries adhering to the cap, starting in February 2023 and lasting for five months.
Similar bans and price caps were not imposed on Russian natural gas. Rather, EU countries committed to reduce gas imports from Russia by two-thirds. The UK, which only imported small quantities of Russian gas, committed to end all imports by the end of 2022. Russian refusal to sell gas to EU countries, the foolish Russian sabotage of Nord Streams 1 and 2, and opportunities with alternative suppliers resulted in the EU over-achieving its goals. Imports of Russian gas have fallen from 40% to 4% with some forecasts indicating Russia has lost the European gas market – its most important market – for ever. If this transpires it would represent a remarkable historic turn-around and end of a mutually beneficial relationship that has lasted half a century.
The effect of sanctions on Russian oil exports
Oil sanctions against Russia only came into force on 5 December 2022 but have already provoked an overall decrease in exports by sea of 22%. Oilmen quip oil always finds a buyer and this rule has been observed with Russian oil. The US-EU ban has encouraged India, China, and Turkey to increase purchases of Russian oil. These three countries now account for 70% of total Russian crude exports by sea. However, the switch in markets has come at a cost. In mid-December 2022 the discount on Urals crude was just under $30 a barrel. This is below the global benchmark Brent crude, and the US-EU $60 cap, making Putin’s decree banning oil sales to countries supporting the cap irrelevant. India has been the great beneficiary. At the beginning of the year, just 2% of its oil imports came from Russia. It is currently on course to become Russia’s biggest oil importer, at heavily discounted prices. Despite Moscow’s efforts to woo Beijing, Rosneft only accounts for 7% of the Chinese market’s total demand.
The effect of sanctions on Russian oil exports
Oil sanctions against Russia only came into force on 5 December 2022 but have already provoked an overall decrease in exports by sea of 22%. Oil sellers quip oil always finds a buyer and this rule has been observed with Russian oil. The US-EU ban has encouraged India, China, and Turkey to increase purchases of Russian oil. These three countries now account for 70% of total Russian crude exports by sea. However, the switch in markets has come at a cost. In mid-December 2022 the discount on Urals crude was just under $30 a barrel. This is below the global benchmark Brent crude, and the US-EU $60 cap, making Putin’s decree banning oil sales to countries supporting the cap irrelevant. India has been the great beneficiary. At the beginning of the year, just 2% of its oil imports came from Russia. It is currently on course to become Russia’s biggest oil importer, at heavily discounted prices. Despite Moscow’s efforts to woo Beijing, Rosneft only accounts for 7% of the Chinese market’s total demand.
High oil prices in the first half of 2022 meant Rosneft was able to report in the 9M 2022 period: ‘The operating indicators dynamics as well as the prevailing price environment allowed the Company to increase its revenue by 15.7% to RUB 7,202 bln.‘ [$100 billion] This improvement is unlikely to be sustained at current benchmark prices and with the US-EU ban taking effect. Since the June 2022 peak ($122 per barrel), Brent crude has fallen to $83 (at the rime of writing, December 2022). Rosneft’s reporting is also somewhat misleading because Russian oil companies will receive the highest ever pay-out for the ‘damper’ introduced in 2019 (the damper mechanism was designed to encourage refineries to supply fuel to the domestic market, for which they are compensated as part of the difference between the export price and the indicative price of the domestic market). According to the Ministry of Finance, for the whole of 2022, compensation to oil companies will amount to about 2.15 trillion roubles [$30 billion].3 This massive pay-out is the result of record low wholesale costs of fuel in the Russian domestic market caused by sanctions on exports. As damagingly, the war is now draining as much as a third of the federal budget. Wastefulness, corruption and mismanagement are turning the Ukrainian quagmire into a black hole for Russian finances.
The effect of sanctions on Russian natural gas exports
In his end-of-year address, Gazprom CEO Alexei Miller euphemistically reported ‘turbulence’ in 2022. In the more honest reporting of Russian business newspaper Kommersant (incidentally, the only mainstream Russian newspaper that dares publish carefully worded sarcastic articles on Putin and the ‘special military operation’):
‘[Bold added] Gazprom’s exports to its key foreign markets in 2022 fell by 46%, to 100.9 billion cubic meters, thereby reaching the lowest level in the history of the company. Almost the entire decline in exports fell on the EU countries, supplies to which decreased by 2.5 times. Against the backdrop of lower exports, Gazprom’s gas production will fall by 20% to a record low of 412.6 billion cubic meters. If current trends continue, in 2023 exports may fall by another 25%, and Gazprom’s share in the EU market will be half that of the United States.’
Such low exports to non-CIS countries were last recorded during the Soviet period. In the first half of 2022, Gazprom made a record profit of 2.5 trillion roubles [$53 billion]. It was Russia’s most profitable company. The Russian government took half of this profit in the form of taxes (paying for the war). The second half of 2022 will likely reveal profits have halved. However Gazprom and the Kremlin spin the end-of-year results, this is a disaster.
Catastrophist predictions over ending Russian oil and natural gas imports proved exaggerated. The US-EU bloc has successfully reduced dependence on Russian oil and gas without provoking recessions or inflationary spirals. Correspondingly, Russia has survived sanctions, albeit the panorama will worsen over time. Natural gas prices are now at pre-war levels. At Europe’s largest TTF hub in the Netherlands, prices have fallen to a record low of less than €77 per MWh. For comparison, the price maximum in 2022 was €350 per MWh. Oil prices, as described, have also declined. The EU has surprised with its solidarity and resolution. Dependence on Russian natural gas has been reduced to around 4% and oil imports by sea are now banned.
As the year ends, the Kremlin remains defiant and even bullish. The confidence may be misplaced. Russia can live with sanctions but will become a poorer country. The world is not becoming multi-polar in the way Moscow claims. This is not a great historic moment. It is a foolish moment. The global community is moving away from and leaving behind a country that started a senseless war. Self-isolation is self-impoverishment. Russia’s oil and gas sector is only one of several experiencing the ‘economic napalm’ of sanctions. Russia’s wealthiest oligarchs’ alone have lost an estimated $93 billion since the invasion of Ukraine. After Lenin and the October 1917 Revolution, President Vladimir Putin is the single Russian responsible for the greatest destruction of Russian wealth in the shortest time. This is not an achievement to celebrate.
Sergio Miller is a retired British Army Intelligence Corps officer. He was a regular contributor and book reviewer for British Army Review. He is the author of a two-part history of the Vietnam War (Osprey/Bloomsbury) and is currently drafting a history of the Russian invasion of Ukraine.
- The state-owned Rosneft is the largest oil producer in Russia. It is followed by the privately-owned LUKOIL. Gazprom Neft, Surgutneftegaz, Tatneft and Russneft also have significant production and refining assets.
- The state-owned Gazprom is the largest gas producer (68% of total production). Novatek and Rosneft are also significant producers.
- ‘Trln’ and ‘Bln’ can appear interchangeably in Russian reporting and on the same page. It is assumed Rosneft reported circa $100 billion revenues in 9M 2022, and Russian oil companies, including Rosneft, will be receiving circa $30 billion in compensation ‘damper’ payments in 2022.