REGIONS

A. Europe’s Reliance on Russian Oil & Gas

For years, Russia has been Europe's largest supplier of coal, oil, and natural gas. The EU imported 83% of its natural gas in 2021. Russia's natural gas importing share of the EU market was around 50% until H2 of 2021. Since then, the Russian natural gas share started to decline rapidly and the market shares of other suppliers began to grow, particularly after Russia invaded Ukraine until it reached below 20% in June 2022, then 12.9% in November, according to the Council of the EU and the European Council.

On the other side, the EU imported 20% of its oil and petroleum products from Russia in 2021. After the war, the EU’s importing of oil and petroleum products from Russia started to fall gradually, until it reached about 16% of the total amount imported over the period (March - November 2022) after it was around 23% of the total imports over the same period of 2021, according to Eurostat data.

It is worth noting that the two main routes for exporting Russian crude oil are by pipeline and by oil tanker at sea. The Druzhba pipeline system carries oil to the EU, and the remaining Russian crude oil has historically been exported by sea to the EU, China, and other countries, according to the Bruegel Website. The Druzhba pipeline supplies oil from Russia to Europe directly into the refineries of Poland, Germany, Hungary, Slovakia, and Czechia, and is currently exempt from sanctions, according to the European Parliament.

» EU Restrictive Measures Against Russia

In response to Russia's war on Ukraine, the EU agreed on a series of measures intended to thwart Russian abilities to continue the aggression effectively. These measures were represented in prohibiting the purchase, import, or transfer of crude oil and certain petroleum products from Russia into the EU, with some temporary derogations for some countries, according to the Council of the EU and the European Council.

Announcing Date

Jun 3, 2022

Moreover, the international price cap coalition, which consists of Australia, Canada, Japan, and the US, in addition to the 27-nation EU, has introduced a $60 per barrel price cap on Russian crude from December 5, 2022, on top of the EU embargo on imports of Russian crude by sea, and from February 5, 2023 for refined petroleum products according to the European Commission. This resulted in a reduction in Russian oil and petroleum products imports to the EU by about 26% from June to November 2022, compared to an increase of about 21% over the same period of 2021, according to Eurostat data.

» Natural Gas Consumption Fallback

On May 18, 2022, the EU Commission unveiled its REPowerEU plan in an attempt to make the EU energy supply more secure, and independent from Russia. The plan focuses on achieving several measures through energy savings, diversification of energy supplies, and accelerating the roll-out of renewable energy to replace fossil fuels in homes, industry, and power generation. With this plan, the German government hopes to reduce gas usage by 2% by rationing the use of lighting and heating in public buildings this winter. Also, Spain has brought in similar measures and Switzerland is considering doing the same.

As a part of the REPowerEU plan to end EU dependence on Russian fossil fuels, the EU Council issued a regulation on August 5, 2022, to set a reduction target of 15% in natural gas consumption for the period between August 2022 and March 2023, compared to the average of the same period of the five previous consecutive years.

Starting in February 2022, EU natural gas consumption began to fall significantly. The most significant decrease was registered in August 2022, with around a 63% reduction compared to January of the same year. This was in parallel with the significant decrease in natural gas volumes imported from Russia after the war. Between February and December 2022, the EU imported around 4,691 million cubic meters (mmcm) on average from Russia, compared to about 7,182 mmcm over the same period of 2021, based on Eurostat data.

» LNG Revolution

Natural gas imports from Russia to the EU have been significantly reduced. This has mainly been compensated by a sharp increase in liquefied natural gas (LNG) imports from other suppliers, particularly from the US. Between January - November 2022, LNG imports from the US accounted for over 50 billion cubic meters (bcm), more than twice as much as in 2021, according to the European Commission.

In late 2022, India became the largest buyer of Russian crude followed by China which achieved significant growth in Russian inflows between January and November 2022. Russian crude's share in the Indian crude basket in 2021 was only around 2.2%. From that level, Russia became India's top crude supplier, and this was evident in the huge increase in Russian oil exports to India which recorded an increase of 1500% in January 2023 compared to January 2022.

Also, China, the world's top oil importer, has increased its Russian oil imports by around 35% from January 2022 to January 2023, despite Western sanctions. This can be justified by the no-limit partnership that was launched by Russian President Vladimir Putin and Chinese leader Xi Jinping before the war in Ukraine, according to Reuters.

IEA also professed that Russia accounted for around 40% and 20% of Indian and Chinese crude imports, respectively, in February 2023, explained in IEA Oil Market Report published in March 2023.

» Russian Crude Oil Production & Exports

The Russian invasion of Ukraine in February 2022 rattled the global energy markets, as Russia dominated the global oil and gas industry for decades prior to the invasion. As a result, Russian crude oil production and exports are still dominant.

3: WHAT HAPPENED IN RUSSIA?

A. Russian Oil & Gas Supply, Exports

Between March and November 2022, Russian crude oil production increased slightly during the war year, as Russian crude oil production was 91.77 mmbbl/d, compared to 91.34 mmbbl/d in the same period in 2021, according to EIA data.

With regard to Russian seaborne crude oil exports, in February 2022, the war month, Russia’s seaborne exports witnessed the biggest decrease in 2022 at 13.11 million tons (mmt) with the beginning of the war, while the exports reached the highest level in October 2022 at 17.88 mmt.

Exports amounted to about 146.3 mmt from March to November in the war year 2022, compared to 120.3 mmt in the same period in 2021, with an increase of 21.6%.

» Russian Natural Gas Production & Exports

In response to the war, many Western countries imposed sanctions on Russia, which resulted in the country curbing its supplies to the West. This significantly affected Russian natural gas production and exports.

In 2022, Russia’s total natural gas production volume was 672 bcm, 12% down from the previous year. Furthermore, the Russian company Gazprom produced 412.6 bcm of natural gas compared to 514.8 bcm which was around 20% less than in the previous year, according to Gazprom.

For Russia’s natural gas exports, Gazprom exported 784.8 bcm of natural gas in 2022, compared to 1,267 bcm in 2021, with a decrease of 38.1%.

Gazprom exports were clearly affected in February 2022, the month when the war began, as it exported 23.2 bcm in February 2022, compared to 34.5 bcm in February 2021, with a decrease of 32.8%, according to Gazprom data.

This decline was related to the Russian invasion of Ukraine, in response to which several European countries announced plans to reduce dependence on Russian gas. Furthermore, the Russian government demanded payments for gas in Russian rubles at the end of March 2022.

B. Nord Stream 1 & 2

Nord Stream’s business model provides natural gas transportation capacity coming from western Russia for distribution into the European gas grid. The gas transportation system consists of its twin, 1,224 km pipelines through the Baltic Sea. Each has the capacity to transport 27.5 bcm of natural gas a year, according to Nord Stream.

The Nord Stream 1 pipeline opened in 2011 and supplies gas to EU states from the Russian coast to north-eastern Germany. It is owned and operated by Nord Stream AG, whose majority shareholder is the Russian state-owned company Gazprom.

The Nord Stream 2 pipeline launched in 2015, connects Russia and Germany directly via the Baltic Sea, following a similar route to Nord Stream 1 and it is also owned and operated by Nord Stream AG.

In February 2022, Germany halted the Nord Stream 2 Baltic Sea gas pipeline project after Russia formally recognized two breakaway regions in eastern Ukraine. Despite the potential benefits, the pipeline had faced opposition from the EU and the US on the grounds that it would increase Europe's energy dependence on Russia as well as deny transit fees to Ukraine, host another Russian gas pipeline, and make it more vulnerable to Russian invasion, according to Reuters.

Between January and June 2022, the volume of natural gas flows running via the pipeline Nord Stream 1 from Russia to Germany was measured at nearly 1.8 billion kilowatt-hours daily (bkwh/d). Then, the flows fell over between June and August 2022 from nearly 1.8 bkwh/d to about 0.3 bkwh/d. As a result of the explosion of the Nord Stream 2 pipeline, the flow of natural gas stood at zero from September 2022 to January 2023, according to Statista data.

B. Largest Importers of Russian Crude Oil

A year on from Russia’s invasion of Ukraine, EU imports from Russia declined dramatically. As a result, Moscow has successfully re-routed crude oil shipments to Asia and the G7 price caps are helping to keep the oil flowing.

In light of the sanctions imposed against Russia due to the invasion of Ukraine, Russia is struggling to find buyers. The country would curb output by 500 kbbl/d in March 2023 rather than sell to those that comply with the G7 price caps. Even if supply falls sharply, Russia will continue to play an outsized role in global oil markets, ranking as the world’s third largest producer behind the United States (US) and Saudi Arabia, Deputy Prime Minister of the Russian Federation Alexander Novak said in early February 2023.

C. Russia’s Reaction to the West’s Sanctions

In response to Western sanctions imposed on Russia, Moscow decided some measures to protect itself by redirecting import flows to non-sanctioning countries and re-routed crude oil shipments to Asia. Also, Russia has banned exports of more than 200 goods, including telecoms, medical, vehicle, agricultural, electrical equipment, and timber products. Moreover, it is blocking interest payments to foreign holders of government bonds, and banning Russian firms from paying overseas shareholders. Furthermore, it has stopped foreign investors who hold billions of dollars worth of Russian investments from selling them.