Now It's Gone, Gone, Gone, - U.S. Crude Oil Helps Replace Russian Barrels in Europe
Until just over a year ago, Russia was a large “baseload” supplier of crude oil, refined intermediates and finished products to Europe. However, following Putin’s invasion of Ukraine in late February 2022, most European countries moved to eliminate imports of Russian petroleum. In today’s RBN blog, we review the shift in Russian crude oil imports to Europe with an eye on the specific source grades and qualities that have filled the gap.
Russia supplied significant volumes of crude oil and refined products to Europe for many years. Its primary crude oil export grade, medium-sour Urals (approximately 30 API and 1.7% sulfur), was a benchmark, both in quality and price, that European refiners long relied on to plan refinery processing configurations and that served as a signal for crude oil pricing dynamics in Northwest Europe and the Mediterranean. In addition to crude oil, Russia was a large supplier of gasoil (diesel) as well as a more limited supplier of other refined products such as fuel oil (including intermediate feedstocks) and naphtha. In today’s RBN blog, we review the abrupt reduction in Russian crude oil movements to Europe following Putin’s invasion of Ukraine 13 months ago with an eye on the specific grades that have filled the gap.
In Like a Rolling Stone, we reviewed the new destinations for displaced Russian barrels. In today’s follow-up, we will focus on crude oil and the various sources that have displaced Russian supplies. Before we dive deeper, it helps to take a quick look at the historical trends. As shown in Figure 1, Russian exports of crude oil and refined products bound for Europe averaged about 4.7 MMb/d in 2019 (stacked bar segments to far left) before declining to 3.8-4.2 MMb/d in the COVID years of 2020-21. Prior to the Ukraine war and resulting sanctions, Russian volumes accounted for 38% of total European imports of crude oil and refined products (12.4 MMb/d) and about 25% of all crude oil and refined products supplied to Europe (17.7 MMb/d) — the latter category including intra-European transfers (e.g., North Sea crude oil to the European continent). But by February 2023, total Russian volumes into Europe had declined by three-quarters to only 1.1 MMb/d, representing less than 10% of long-haul barrels supplied.
The mix of Russian volumes still headed to Europe as of February 2023 (stacked bar segments to far right) is still dominated by crude oil, which accounts for about 60% of total imports. Russian crude exports to Europe are supplied via pipeline (blue segment in stack to far right) and waterborne vessels (orange segment). In 2022, largely before sanctions took hold, piped-in crude oil volumes averaged about 0.8 MMb/d while waterborne imports averaged about 1.5 MMb/d. The next-largest category is gasoil (diesel; gray segments), which generally ranged from 700-800 Mb/d before 2023.
A European Union (EU) ban on Russian imports took effect on December 5, 2022, for crude oil supplied via water and on February 5, 2023, for refined products. There are certain exceptions or delayed implementation dates for the Russian import bans, notably the exemption for crude oil supplied by pipeline, especially to land-locked countries with no easy alternative (e.g., Czech Republic, Hungary and Slovakia). One exception is Bulgaria, which in June 2022 received an exemption allowing it to continue importing crude oil and petroleum products from Russia until the end of 2024. And there’s Turkey, which is not part of the EU and whose refineries have continued to import Russian crude oil. One other catch-all category is worth mentioning: Certain countries and companies have voluntarily ceased purchases from Russia and/or Russia has decided to discontinue supplying certain customers (e.g., Polish refiners).
Before examining how Russian crude oil is being replaced, let’s take a quick look at how Europe received — or, in some cases still receives — it. Figure 2 shows the array of major pipelines (thin black lines) and water routes (thick black lines) used for transporting Russian crude to the European continent and the volumes supplied in 2021 and in February 2023. The sheer volume of Russian crude oil to be exported requires a vast array of pipelines that move the oil to landlocked countries and coastal ports. Russia’s Druzhba crude oil pipeline system, for example, in 2021 was moving 520 Mb/d of oil to Poland and Germany through its northern leg (but is no longer), and Hungary, Slovakia and the Czech Republic still receive about 250 Mb/d of Russian crude oil through Druzhba’s southern leg.
Russia exports — or, in some cases, exported — waterborne volumes via four large coastal ports: (1) Primorsk and (2) Ust-Luga, both of which provide access to the Baltic Sea; (3) Novorossiysk to the south on the Black Sea; and (4) Murmansk to the north on the Barents Sea. As shown in Figure 1, total crude oil exports of about 1.7 MMb/d were supplied to Europe in 2021 (orange bar segment in 2021 stack), with Primorsk and Ust-Luga providing almost two-thirds of this volume. The crude oil import ban has essentially turned off oil exports from the Baltic and Murmansk (which primarily targeted Northwest Europe), while sources from Novorossiysk on the Black Sea are relatively unchanged, with Turkey and Bulgaria continuing to receive supplies.
Before the late-2022 ban on waterborne imports was implemented, the Russian crude being sent to Europe was dominated by Urals (30 API, 1.7% sulfur), which accounted for 74% of all Russian oil exports to Europe in 2021. Urals was exported mainly via the Baltic and Black seas, with primary destinations of Rotterdam, Poland, Finland, Lithuania and Italy. The second-most-prevalent export grade to Europe was Novy Port (9%), a light-sweet grade (35 API, 0.1% sulfur) produced on the Yamal Peninsula; Novy Port loaded from Murmansk and primarily targeted the Rotterdam refining center. Other grades rounded up the Russian export mix, including light-sweet grades Siberian Light, Varandey and CPC Russia (collectively 15%), among other heavy Arctic grades. The aggregate quality, heavily weighted by Urals, amounted to 31 API and 1.4% sulfur.
Depending on the reference point, Russian crude oil exports to Europe declined between 1.7 MMb/d (2023 vs. 2022; blue bar to far right in Figure 3) and 2.0 MMb/d (2023 vs. 2021; orange bar to far right). Both reference years are a bit tainted in that crude oil imports from Russia declined toward the end of 2022, while 2021 was a year of demand recovery from COVID. Nonetheless, the reduction has been considerable by any reasonable standard and was driven primarily by a decrease in waterborne imports of about 1.1-1.5 MMb/d and about 0.5 MMb/d by pipeline (Northern Druzhba).
As shown by the smaller pairs of orange and blue bars in Figure 3, Russian crude oil imports to Europe were largely replaced by increased processing of crude oil from the U.S., Kazakhstan, Norway and Saudi Arabia (the “big four”), in addition to smaller sources such as Angola, Iraq, Brazil, Guyana and the UK. The “big four” covered 90% of the reduced Russian crude oil imports when compared to 2021 (66% when compared to 2022).
Crude oil production and exports from the U.S. have been increasing for several years, so it is no surprise that U.S. suppliers have been called on to fill the gap left by displaced Russian barrels at Northwest Europe’s coastal refineries. Figure 4 provides a snapshot of the key U.S. export points, grades and destinations that have shifted to fill the Russian void. U.S. crude oil deliveries to Europe have increased by 667 Mb/d between 2021 and early 2023, with nearly two-thirds of those volumes coming from the Port of Corpus Christi. Houston was a distant second (although it posted the largest percentage increase), with the Louisiana area third. (For the latest on U.S. crude oil exports, see RBN’s weekly Crude Voyager report.)
The primary grade of increased U.S. crude oil has been a light-sweet Midland-sourced barrel, which comprised more than half of the total. An even lighter and sweeter grade, WTI Light (WTL), was the second-largest source, followed by medium-sour grades from the U.S. Gulf of Mexico (GOM). The crude oil quality in aggregate of all U.S. grades was a light-sweet barrel, in contrast to the displaced medium-sour Russian volumes. Primary destinations for incremental imports of U.S. crude oil have been mainly coastal Northwest Europe, along with Mediterranean destinations in Italy and Spain.
Next, let’s look at how the rest of the “big four” are getting their barrels to Europe.
Most of the crude oil being delivered to Europe from Kazakhstan is produced in the Tengiz, Kashagan and Karachaganak fields. The crude flows through the Caspian Pipeline Consortium (CPC) pipeline system, which brings export barrels to a marine terminal at Novorossiysk on the Black Sea, then is transported in oil tankers that access various ports in Europe. The grade of Kazakh crude oil shipped on CPC is called CPC Kazakhstan and is of high quality (44 API, 0.5% sulfur).
A CPC pipeline debottlenecking project — involving both mechanical improvements such as new pump stations and the use of drag-reducing agents (DRA) — completed in late 2022 allowed an increase in capacity of 8%-15%. This expansion was likely a big factor in the increased flows from Kazakhstan to Europe of more than 400 Mb/d. In addition to Black Sea waterborne exports, Reuters recently reported that Kazakh oil had started flowing to Poland using the Druzhba pipeline for delivery to Germany for the first time in late February 2023.
A second source of Kazakh crude oil, recently rebranded as “KEBCO” (Kazakhstan Export Blend Crude Oil), originates from the onshore Uzen field and is transported north via the Uzen-Atyrau-Samara (UAS) pipeline. The UAS pipeline links with the Russian Transneft system and is mingled with Russian Urals on its way to the primary destination at Novorossiysk on the Black Sea or to the Baltic Sea port Ust-Luga. This crude oil is commingled with Russian Urals and is sold as a medium-sour grade (30 API, 2% sulfur). The commingling of this grade with Russian oil drove the rebranding to KEBCO to distinguish it from oil originating in Russia (Russian Export Blend Crude Oil or “REBCO”). The increase in Kazakhstan crude oil following the EU sanctions is mostly CPC-grade exported at Novorossiysk with a higher quality than Urals.
Processing of increased barrels from Norway has been driven largely by the expansion in Norway’s Johan Sverdrup field. As shown in Figure 5, crude oil supplies from Norway to the rest of Europe increased by 373 Mb/d from 2021 to early 2023, almost all of it from Johan Sverdrup and most of the rest from Yme. Johan Sverdrup is the third-largest oil field on the Norwegian continental shelf and the entire field is now on stream after completion of Phase 2 in December 2022 (see Do You Believe In Brent After WTI). Yme is produced in the North Sea field following Repsol’s efforts to bring the reservoir back on stream after being abandoned 20 years ago. Johan Sverdrup is a medium-gravity (28 API), medium-sulfur (0.8%) grade, whereas Yme is light-sweet (38 API, 0.2% sulfur).
The last of the “big four” replacements did not depend on increased crude oil production (U.S., Norway) or debottlenecked pipeline systems (Kazakhstan). Instead, these barrels were sourced from Saudi Arabia. Although Saudi Arabia increased production for several months in mid-2022, it reduced production by a similar amount by October and announced on Monday that it and other OPEC producers will be reducing production by a combined 1 MMb/d in May. In 2023, data show that increased waterborne movements that originated at the Egyptian Sidi Kerir terminal at the delivery point of the Sumed pipeline were comprised of grades from Saudi Arabia and helped backfill the missing Russian volumes. The increased Saudi imports appear to mostly comprise light-sour grades (e.g., Arab Light) with a 33 API gravity and 2% sulfur, similar to Russian Urals.
Refiners accomplished large shifts in crude oil imports into Europe in a relatively short time frame. The need to displace both waterborne and Druzhba pipeline imports resulted in much higher waterborne sourcing from global producers. Refiners in Northwest Europe displaced Russian medium-sour grades with better quality light/medium-sweet grades from growing production in the U.S. and Norwegian basins. Therefore, on the margin, refiners improved their product yields. The marginal bottom-of-the-barrel residue yield was lower and of a better quality (lower sulfur), which is beneficial for producing premium IMO 2020 ship bunkers. Furthermore, better quality crude oil generally requires less hydroprocessing, a plus for refiners operating in a high natural gas price environment where hydrogen is costly to produce (see Bring Me Some Natural Gas).
In the Mediterranean, oil refinery operations also benefited but to a lesser extent. Some of the Russian import volumes were displaced by higher-quality Kazakh crude oil, with the remainder displaced by similar-quality Saudi grades. In the next blog in this series, we’ll look at how Russian gasoil (diesel) and other refined products have been replaced in Europe following the cessation of imports in February.
Note: The article was authored by Kevin Waguespack of Baker & O’Brien and published on RBN Energy’s Daily Energy Post on April 4, 2023.
“You’ve Lost That Lovin’ Feelin’” was written by Phil Spector, Barry Mann, and Cynthia Weil. It appears as the first song on side one of The Righteous Brothers’ fourth studio album, You’ve Lost That Lovin’ Feeling, was released in January 1965 on Philles Records.
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