Experts explained how Russia can reduce the impact of the embargo and price cap

MOSCOW, 3 Sep — PRIME. Russia can build oil storage facilities in order not to reduce production and at the same time soften the effect of the embargo and the price limit, experts interviewed by RIA Novosti believe.

“Now a situation has arisen on the market… we have interruptions in the supply of oil to Western markets… we could not stop oil production, extract this oil, put it in our oil storage facilities and wait for a convenient moment when it can be sold, in order to achieve just in order to sell our oil on the market at the best possible price in the current economic and geopolitical conditions,” Aleksey Gromov, Chief Energy Director of the Institute of Energy and Finance (IEF), told the agency.

Rosnedra also agrees with this opinion. “The presence of strategic oil reserves increases the energy security of the state, allowing it to regulate the pricing of oil,” the ministry said.

RUSSIAN OIL EXPORT

After the start of the Russian special military operation in Ukraine, Western countries began to impose sanctions against the Russian Federation, in particular on Russian energy resources. Thus, the sixth package of European sanctions provides for the gradual introduction of an embargo on oil imports from Russia. At the same time, the ban applies only to deliveries by sea, and oil coming through the Druzhba pipeline is not subject to restrictions. The sanctions also include a ban on insurance for ships carrying Russian oil. The embargo will begin to work in full force on December 5 – on oil and on February 5 next year – on oil products.

On the eve of the head of the ministries of finance of the “Big Seven” (G7), which includes the UK, Germany, Italy, Canada, the USA, France and Japan, in a final statement following the meeting, they confirmed the plan to introduce a “price limit” on Russian oil and ban sea transportation of oil and oil products from the Russian Federation, if they are not bought at a limited price, and also called on “all countries” to join the initiative. At the same time, the day before, Russian Deputy Prime Minister Alexander Novak said that Russia would not supply oil to countries that would become parties to an agreement on a forced discount on Russian raw materials.

Gromov estimates that with a full EU oil embargo, Russia could lose half of its exports – 2.7 million barrels per day of about 5 million barrels of its sales. However, the delayed ban allowed Russian companies to divert much of their oil to Asian markets. As a result, the maximum loss in exports can be no more than a million barrels. “The question is whether these volumes will be in demand on the market, because now companies from China and India are enjoying a sanctions discount, and we must be ready to continue selling oil at a significant discount,” the expert added.

At the same time, the analyst noted that he does not believe that most buyers of Russian oil will want to join the price limit. “I’m not sure that India or China will support this, because they already buy oil at a sufficient discount for themselves, and I think these countries don’t want to spoil relations with Russia against the backdrop of unpredictable situations in the global energy market,” he said.

STORE DO NOT REDUCE

Valery Semikashev, Head of the Fuel and Energy Complex Forecasting Laboratory, INP RAS, believes that in the situation of a decrease in Russian exports, it is necessary to optimize each segment: from production to processing and storage. In his opinion, the issue of making a decision on the construction of storage facilities is more strategic than commercial, although profitable in the face of price instability.

“Somewhere there is less oil to be processed at refineries (oil refineries – ed.), somewhere less export supplies, somewhere some wells should be closed, somewhere a storage facility should be built. We need to calculate … the cost per barrel of produced oil or delivered oil to the end consumer, which measures will be cheaper. It is clear that at some point, shutting down the field will be more expensive than building a storage facility. And then at some point, building another storage facility will cost more than the next well.” , the analyst said.

However, Gromov explained, the conservation of oil wells leads to the fact that in the future they can no longer be exploited. “Due to the technological specifics of oil production in Russia, we have these reservoirs where oil occurs, they are water-saturated … If we conserve old wells, then after a while, in the absence of their operation, water completely displaces oil, and after a while they will not be able to operate,” he explained.

At the same time, the easiest and most painless way for the industry is not to invest in new drilling. Oil companies may simply not drill new wells while production from existing wells is gradually declining. However, if you need a sharp reduction, this method may not work. In the face of changing energy markets, Semikashev noted, the oil industry needs to increase its flexibility. And the construction of oil storage facilities can become one of its elements.

SOMETHING SHOULD BE ORGANIZED

Rosnedra said that it would be expedient to create a network of oil storage facilities in the country that would be able to store at least a strategic oil reserve in the amount of at least 10% of Russia’s annual production.

“Today, the Caspian, Volga-Ural, Kaliningrad, Central and North Caucasian basins are the most promising for the placement of underground oil storage facilities. Main oil pipelines and railways pass through them, they are located near large sources of fresh or low-mineralized water,” the ministry added.

According to Semikashev, oil storage facilities could become an investment project, for which money could be allocated for companies from the National Welfare Fund (NWF). “We have the National Wealth Fund, which is somewhere in rubles, relatively speaking. It can also be kept in oil. Both in storage facilities and in the fields themselves, that is, to reduce production. If the business can make money on this, then why no. Only a plus will be, “the expert said.

However, according to Gromov, there are institutional difficulties in the situation with oil storage facilities. “If the system of underground gas storages, which were created only in Gazprom, they were created in a period and in a situation when Gazprom is essentially a monopolist in the market, it owns not only production capacities, it also owns the gas transmission system, manages underground gas storages … The institutional structure of the Russian oil industry is fundamentally different,” the analyst said.

In Russia, there is Transneft, which is responsible for the construction of oil pipelines, and mining companies, which are engaged only in production. “And here the fundamental question is how to organize interaction between these companies. Because … after all, none of the companies raises the question, for example, of the need to build this or that pipe, because this, as a rule, is the prerogative of Transneft. She herself this solves the issue, and then issues an invoice to the company in the form of an investment surcharge to the transportation tariff,” Gromov explained.

According to the expert, there are two ways to solve this issue. On the one hand, to really entrust the construction of oil storage facilities to Transneft and then increase the investment component of the oil transportation tariff. But this can confuse mining companies, which will have to overpay. On the other hand, oil storage facilities may have operators with state or mixed ownership who will be engaged in oil trading and thereby offset the costs of storage and investment.

AND HOW TO EARN ON THIS

Gromov suggests that oil storage operators buy oil at a cheaper price, store it, and then sell it at a higher price when a favorable economic situation arises on the market. “Companies have an alternative: either export oil abroad at prices that do not suit them, or … stop production, and here is the third option, please, you can sell this oil at some fixed price to the operator of the strategic oil reserve system,” he said. he.

The expert cited China as an example, which began to create a strategic oil reserve in the early 2000s and already ranks second in the world after the United States in terms of its volume. During the pandemic, when demand problems began and oil prices fell below $40, China began to buy oil with a large supply.

“Because he understood very well that he would now stock up on cheap oil, and then, if he needed, he would either continue to store it in storage for his needs when the situation on the market was worse, or he would sell it at completely different prices,” Gromov said.