Russia’s Arctic Oil Empire Under Siege
Sanctions Disrupt Crude Supplies, Stranding Oil in Storage
The Russian oil industry is reeling from the latest round of US sanctions, which have targeted its Arctic oil business, a crucial sector that accounts for a tenth of its seaborne oil exports. The sanctions, announced on Friday, have disrupted the supply chain of three key Arctic oil grades – Novy Port, ARCO, and Varandey – which together produce around 300,000 barrels of oil per day.
Unique Vessels and Infrastructure Under Threat
The Arctic oil business relies on specialized ice-class vessels and infrastructure, including the Umba and Kola floating storage facilities near Murmansk. However, the US has now sanctioned both these facilities, as well as over a dozen small tankers used to shuttle oil from the fields. These vessels were specifically designed to operate in the harsh Arctic environment and cannot be easily replaced.
Millions of Barrels of Unsold Oil in Storage
With the sanctions in place, Russia is facing a major logistical headache. The limited storage capacities at the three projects mean that even a short-term disruption in loading could lead to cuts in output. This could result in millions of barrels of unsold oil being stranded in storage, with no clear buyer in sight.
Asian Buyers Look Elsewhere
Novy Port and Varandey are highly prized by refiners worldwide for their high quality and low sulphur content. However, with the sanctions in place, Asian buyers such as India and China are now looking for alternative sources of oil. This shift in demand is likely to push up prices of other light oil grades, such as the US flagship WTI oil grade.
No Domestic Safety Net
Unlike other Russian oil projects, the Arctic oil grades are entirely bound for export, with no logistical system in place to feed them into the Russian domestic oil pipeline system. This means that if there are no buyers for these oil grades, volumes will have to be kept in floating storage, or Gazprom Neft will need to curb output on both projects.
Costly Workarounds
While there are some possible workarounds, such as shipping oil via sea to refineries in southern Russia, these options are likely to be costly and limited in volume. Lukoil’s Varandey oil supplies could technically be loaded directly from its Varandey terminal straight to international markets, but this would also come at a higher cost and require time to fetch replacement tankers to the region.
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