Reaching the cap: what threatens shipping of Russia oil?

The G7 nations impose a price cap for Russian crude oil from 5 December 2022. The restrictions cover not buyers of crude oil but service companies: tanker operators, marine insurers etc. They will not be allowed to provide services on transportation of Russia oil if cargo is purchased at a price above the cap set at $60 per barrel.

In 2021, exports of crude oil via seaports of Russia totaled about 238 million tonnes with the ports of the Far East basin accounting for some 21.5%, Azov-Black Sea basin – for 35.5%, Arctic basin – for 18%, Baltic basin – for 25%.

In our opinion the key factor here is not the ‘cap’ but embargo on import of Russian oil which also comes into effect in Europe on 5 December 2022. That can lead to disruption of the sales market, about a half of oil volumes exported in 2021.

Actually, the ‘cap’ does not add or take anything – according to open data, Russia sells oil at a price below $60 per barrel while larger volumes available may entail further reduction of the price. The problem is in the delivery of that oil to the Asian consumers, primarily to China? The ESPO pipeline system (via Kozmino) is not designed for such volumes. In 2021, exports via Kozmino totaled about 35 million tonnes while the capacity of ESPO-2 running to Kozmino is 50 million tonnes per year. So, the growth potential is just 15 million tonnes per year.

In general, there is only one way left - tanker transportation from ports in other basins, which, theoretically, could take over the volumes coming from pipelines bound for Europe. Thus, the BTS pipeline system to the port of Primorsk has a design capacity of 74 million tonnes per year. In 2021, exports via Primorsk totaled about 36 million tonnes. BPS-2, which is connected to the port of Ust-Luga, has a design capacity of 50 million tonnes per year, with actual shipments from the sea terminal in 2021 having reached 23 million tonnes.

In the Azov-Black Sea basin, the Grushovaya-Sheskharis pipeline has a design capacity of 40 million tonnes per year. In fact, less than 20 million tonnes were transshipped from Sheskharis in 2021.

There are also certain opportunities for oil handling off the port of Murmansk. However, eastward transportation along the Northern Sea Route is requires involvement of ice-class tankers and, most likely, icebreaker assistance, which leads to additional costs.

Therefore, although an increase in oil shipments from seaports in almost all sea basins could be expected, large-capacity vessels are needed to ensure the profitability of such transportation. Besides, insurance covering that kind of transportation should be accepted at ports of call. In principle, both problems can be solved, but the economic viability is an open question. It cannot be ruled out that such transportation can even be subsidized if the cost of well conservation exceeds the costs of logistics. But that is a pure speculation.