By K Raveendran
The price cap of $60 for Russian crude is coming into force full steam, with EU countries joining the G-7 and American punitive measure aimed at squeezing out Moscow’s financial resources so as to force it abandon the Ukraine war. A few countries, such as Poland, had initially refused to toe the line, but were prevailed over in the collective drive.
The embargo prevents shipments of Russian crude by tanker vessels to the EU, which account for two thirds of Russian crude imports, potentially depriving Russia’s war chest of billions of euros.
The development has no immediate implications for India, which is now buying significantly large quantities of Russian crude, offered by Moscow at discounted rates. But the new squeeze will put further pressure on Kremlin to protect current supplies, building a case for even more favourable discounts. India is one of the major takers of Russian oil as New Delhi has flouted calls for sanctions against Moscow on the ground that national energy security is the overriding concern for the country.
According to published accounts, Russian crude which amounted to hardly 1 percent of India’s import basket pre-Ukraine action has now increased to over 20 percent, more than what it used to import from Saudi Arabia and similar to imports from Iraq. The current supplies had been tied up at prices fixed much earlier. So, it will be some time before the new squeeze exerts influence on future prices.
Russia rode out the western sanctions quiet remarkably in the initial phase by finding alternative buyers, such as India and China. This more than made up for the disruptions in the Europe-bound offtakes, with the result that oil earnings had actually gone up. But the sanctions are now beginning to bite harder and latest estimates speak of a possible plunge in Russia’s upstream investments.
According to Rystad Energy research, the upstream investments are expected to fall to $35 billion in the current year, in contrast to earlier estimates of $50 billion. Investments last year had totalled $45 billion, rebounding from $40 billion in the covid-hit year of 2020. The investment stagnation is expected to hit project spendings by major domestic players, including Gazprom and Rosneft.
Greenfield investments are set to suffer the largest drop in spending due to the sudden sharp decline in approval activity this year. Investments in new Russian projects are projected to fall 40 percent from last year, tumbling from $13.7 billion to just $8 billion this year. According to Rystad, only around 2 billion barrels of oil equivalent of resources were sanctioned last year, with almost all those volumes coming from the Baltic LNG project at which Gazprom started construction in May 2021. In the wake of the Ukraine invasion, financing the project will be a struggle for Gazprom. Service companies have already started leaving Russia, while Linde, which is providing its proprietary LNG technology for the project, has also exited.
But brownfield investments are expected to drop by only 14 percent as oil production has not taken a significant hit. The impact of lower oil demand will be visible next year when brownfield investments will drop by approximately 20 percent compared to 2021. Rosneft and Lukoil will account for roughly 42 percent of the spending.
Gazprom had recently approved its updated investment plan for 2022, showing capital expenditure increasing by 22.5 percent to $28.6 billion. It is estimated that about $10.4 billion of that spending will be funnelled into upstream operations, a marginal drop from the $11 billion spent on upstream investments in 2021. Most of these investments will go towards developing its enormous gas-condensate reserves in the Russian Far East and the Yamal Peninsula. Although some of these discoveries were intended as feedstock for gas deliveries to Europe before the war with Ukraine and are now estimated to take longer to come on stream, Yamal is still positioned to be the next largest gas hub for the country in the coming years.
Gazprom is still developing some of its major fields and building the infrastructure to connect the fields. Gas from the Yamal fields is predominantly used as feedstock for the European market, but once the pipelines are in place, these volumes can be redirected towards Asia, opening the market to more Russian gas flows. (IPA Service)