Explainer: What would be the impact of Russian oil sanctions on Europe?

LONDON, May 4 (Reuters) – The European Union has proposed a gradual embargo on Russian oil, tightening its sanctions on Moscow over its invasion of Ukraine. What would be the impact of banning Russian barrels in Europe?

WHAT DOES THE EU MATTER TODAY?

The European Union imported 2.2 million barrels per day (bpd) of crude oil and 1.2 million bpd of refined petroleum products before the war in Ukraine, according to the International Energy Agency (IEA).

CARS

Refueling your car will probably be more expensive. Europe not only imports crude oil from Russia, but also refined petroleum products, such as diesel to fuel industrial and passenger vehicles.

Importing diesel from further afield than Russia will mean higher freight costs and therefore higher prices at gas stations. In Germany, for example, 74% of diesel imports before the war came from Russia, data from consultancy FGE Energy show.

REFINERIES DEPENDING ON RUSSIAN OIL

Russian oil accounts for a fifth of the oil refined in Europe, according to the IEA. Some refineries that produce gasoline-to-jet fuel, such as Germany’s PCK Schwedt and Leuna, as well as refineries in the Czech Republic, Hungary, Slovakia, and Poland, are fed Russian crude oil via the Druzhba, or “Friendship” pipeline. .

Supplies along Druzhba have been fluctuating sharply in recent years, with deliveries as high as 1.5 million bpd, while falling in recent months, including February, to around 0.8 million bpd.

Poland can switch to seaborne supplies from places like Saudi Arabia or Norway through the Baltic Sea port of Gdansk.

PCK Schwedt, which supplies cars and airports in Berlin and

the region, and Leuna, near Leipzig, could get some oil from the German Baltic Sea port of Rostock, a much smaller crude oil hub than Gdansk, but not enough for them to operate at full capacity.

Poland, which is trying to replace all Russian crude in its refineries, could send some of the oil arriving in Gdansk to these two German refineries, but the details have yet to be worked out. read more

Changing these supply routes is very likely to mean higher feedstock prices for two of Germany’s largest refiners, which will translate into higher prices for end consumers.

For all the refineries in the landlocked countries, compensating for zero oil through Druzhba will be a gargantuan task. It is likely to involve more expensive and less efficient transportation via trucks, rail, rivers, or the future extension of other pipelines like TAL from the Mediterranean through Austria to Germany. Such an extension still needs the approval of the southern German authorities.

Slovakia, Bulgaria and the Czech Republic are seeking exemptions from an impending EU ban on Russian oil to classify such alternatives, while Hungary does not support the plans for fear of its energy security. read more

CAN YOU REPLACE RUSSIAN OIL WITH ANY OTHER OIL?

Refineries are usually set up to run on a specific type of crude oil, such as Russia’s first export grade Urals. Other types of crude from Norway, the Middle East, the United States or West Africa can be blended or refineries renovated, but this can change the performance of a refinery and cost more money in addition to higher freight costs.

Traditional consumers of Russian oil will now also have to compete not only with each other for alternative oil imports, but also with existing customers in Asia.

REDUCED REFINING WORKS?

An oil refinery cannot simply be shut down, as restarting is expensive and complex.

Globally, refining capacity is shrinking as the world tries to reduce its dependence on petroleum fuels. Morgan Stanley estimates that capacity has been reduced by as much as 2.7 million bpd since the start of the coronavirus pandemic.

With economic growth resurgent as lockdowns end, refining margins have soared, meaning refiners will try to get as much of the fuel into the market as possible.

However, refiners with the toughest supply problems are likely to see lower margins because their crude costs will rise, so operators can slow down processing.

Countries and refineries also often have storage tanks that they can access in the event of short-term outages.

TRANSITION TIME?

EU countries have until the end of the year to prepare for the outage and would likely fill storage in areas near refineries that could run into trouble.

It would cause more severe disruption if Russia cuts supplies first.

Germany has warned of a recession without Russian oil and gas. read more

Information from Shadia Nasralla; Edited by Veronica Brown and Emelia Sithole-Matarise

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