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4 May, 2022

What will an EU embargo on Russian oil mean?

EU countries are fiercely debating a proposal to phase out Russian oil imports by the end of the year. There is huge uncertainty about what effect it will have on Europe – and Russia.

By Dave Keating

After weeks of painful deliberations, European Commission President Ursula von der Leyen has finally unveiled her proposal for an EU ban on Russian oil. The proposal was only made possible after Germany reversed its opposition, with ministers saying they are prepared to accept the economic pain but that the ban must be phased in between now and the end of the year.

“We now propose a ban on Russian oil,” von der Leyen told the European Parliament on 4 May. “This will be a complete import ban on all Russian oil, seaborne and pipeline, crude and refined. We will make sure that we phase out Russian oil in an orderly fashion in a way that allows us and our partners to secure alternative supply routes and minimises the impact on global markets.” Imports of crude oil will be phased down to zero within six months, and refined products like diesel by the end of the year.

European Commission President Ursula von der Leyen announces her proposal for a Russian oil embargo to the EU Parliament. (Photo by European Parliament)

“Let us be clear: it will not be easy. Some member states are strongly dependent on Russian oil, but we simply have to work on it.”

Other previously wary countries had also dropped their opposition – except two. Hungary and Slovakia say it will take several years to replace Russian oil without major damage to their economies because they are landlocked and cannot import oil by sea into ports, and are almost entirely reliant on Russian pipeline gas. In an effort to overcome their threatened veto, the proposal unveiled this morning grants Hungary and Slovakia an exemption: an extended phase-out timeline until the end of 2023, according to EU sources.

However, these two countries are far from the only ones that will be severely economically impacted by thEU EU Russian oil ban, which will have major implications for Europe’s energy system going forward.

Germany prepares alternatives

Andrei Belyi, a professor in energy law and policy at the University of Eastern Finland and founder of energy consultancy Balesene OÜ, says many EU countries would see dramatic consequences from an immediate embargo and will still feel effects from one phased in by the end of this year. For example, “the impact of the embargo will be felt by oil ports of Estonia and Latvia if the embargo is introduced with no clear alternative in mind”.

However, countries have been working on alternatives, he notes. Germany’s Vice-Chancellor and Minister for Economic Affairs and Climate Action Robert Habeck said at a meeting of EU energy ministers in Brussels on 3 May: “We have had a strong dependency on Russia in the past [for oil]. Before the war started it was 35%. Now we have reduced it down to 12%.”

“But we have a local problem that is quite big,” Habeck continued. “This 12% are [used] in the Berlin region... [Nevertheless] it wouldn’t hit the national economy as a whole. So, after two months of work, I can say Germany is not against an oil ban on Russia. Of course, it is a heavy load to bear, but we are ready to do that.”

Even before the embargo was made public, the German government had already announced it would reduce Russian oil imports by half by the middle of this year and to near zero by the end of 2022. As a result, many German companies had already decided not to renew contracts with Russian producers and are actively looking for other suppliers.

Much more needs doing between now and D-Day at the end of the year, however. Germany has received its oil from three pipeline systems going west, east and south of the country. In the south the oil comes from Italy; in the west and north it comes from German and Dutch harbours in the North Sea. However, the East is serviced by the Russian Druzhba pipeline operated by Russian company Transneft. Over the coming months, Germany will have to bring oil from west to east, and the problem is there are no pipeline connections. The oil will have to go by boat, and possibly also by road and railway.

“We have to find some ships carrying oil from west to east, we have to prepare the harbours, we have to prepare the pipelines, so time is helpful,” Habeck said.

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The biggest challenge will be connecting the oil refineries of Schwedt and Leuna in eastern Germany, which process up to 12 million tonnes of crude oil per year from the Druzhba pipeline, to these new supplies from the west. According to the Schwedt refinery, nine out of ten cars in the eastern German states of Berlin, Brandenburg and Mecklenburg-Pomerania run on processed Russian crude. Complicating matters further, the crude coming from the west is different from the crude that comes from Siberia.

Then there is the question of where the new oil is going to come from. “There are three countries who can replace Russian crude within the short term: Iraq, Libya and Iran, but each of these three have their own problems," says Belyi. Iraq and Libya remain unstable. Iran itself is under sanctions. Would it be credible to unlock Iran to lock Russia? Or is this releasing one criminal to catch another?

“In the mid-term – a year and more – more suppliers will certainly come to the market,” he adds. “Those can include Opec, Norway, the UK, North America and Africa. Some volumes will come from Azerbaijan and Kazakhstan. The high oil price means more oil can be produced from more difficult areas. We just need some time.”

The Commission’s proposal allows an extra two months for the phase-out of refined oil imports because these will be even more difficult to replace than crude. Almost 15% of diesel sold in Germany is from Russian refineries – a higher percentage than the proportion of crude that comes from Russia. It also has more crude in reserve (15 million tonnes) than of diesel and other refined mineral oil products (9.5 million tonnes).

Global impact of an EU Russian oil ban

The systemic shock of an EU embargo on Russian oil will not only be felt in Europe. “Russia is the world’s third-largest oil producer behind the US and Saudi Arabia, exporting around five million barrels per day of crude oil and 2.85 million barrels per day of other oil products,” says Belyi. “Russia stands ready to sell the oil rejected by Europe to other parts of the world.”

India has expressed interest in buying Russian oil previously destined for Europe, as has China, although Beijing would probably negotiate a price that would be a big loss for Russia compared with what Europe has been paying, Belyi says. Moreover, there are questions about whether Russia could in the medium to long term export to these countries given their limited port facilities and oil pipelines that go to Europe.

“Russia can minimise [the impact of] short-term sales losses in oil quite easily,” says Belyi, perhaps by quickly sending some oil to India and China. However the medium-term prospects are bleak. “It cannot easily deviate from its dependence on gas exports to Europe, [but] oil and oil products makes up up to 60% of export income [while] gas is about 20%. The Russian ministry of economy foresees a decline of oil production by 17%.”

What is clear is that however this pans out, citizens will feel the effects. Skyrocketing energy prices will remain volatile and analysts predict the oil embargo will exacerbate inflation. Reacting to von der Leyen’s announcement on 4 May, Belgian Green MEP Sara Matthieu noted: "These sanctions will not only harm the Russian economy. They will also affect the lives of European citizens.

“The oil embargo will impact EU citizens' homes, jobs and wallets," she said. "This could lead to more social inequality, a rise in unemployment and an increase in energy poverty. We need to protect our citizens – we need a strong social response to their fears."

Striking a balance between helping citizens with energy bills and making this oil ban part of a broader exit from fossil fuels may be difficult, however. Climate campaigners welcomed today’s announcement but complained that the phase-out is too generous, and that governments are placing too much emphasis on finding new sources of oil rather than using less of it.

“The ban will take effect too slowly, allowing Putin to find other customers for his oil between now and the end of the year,” says Silvia Pastorelli, a campaigner with Greenpeace. “The answer to Europe’s oil addiction cannot be to simply find new suppliers but to get to the root of the problem by cutting oil consumption and accelerating the transition to renewable energy.”

Today’s proposal is just the beginning. Europe must find a way to make the EU Russian oil ban part of the broader energy transition. More details on how it plans to do that will come next week when the European Commission unveils its RepowerEU plans to reduce the use of fossil fuels.

This article originally appeared in Energy Monitor.

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