APPEC: Asia, Europe refiners to eventually figure out, adjust to Russian crude trade complications

Asian and European refiners remain confused about how G7's plan to impose a price cap on seaborne Russian oil cargoes would function, but the oil companies would eventually find ways to have Russian crude supplies continue to flow in the market and manage alternative options to fill any gaps, industry executives and traders said Sept. 27.

G7 nations are expected to finalize a price cap on Russian crude some 30-45 days ahead of Dec. 5, the date the cap is meant to take effect.

Refiners across Asia and Europe are struggling to figure out feasibility of the price cap implementation as Moscow is highly unlikely to accept any form of price ceiling scheme, trading executives at South Asian and European refiners and upstream companies said during panel discussions at the S&P Global Commodity Insights Asia Pacific Petroleum Conference in Singapore.

The executives added that the companies want more clarity over whether the US would impose any secondary sanctions on those who may choose to continue buying Russian crude and pay prices above the cap.

"As for the price cap guidance provided by the US Treasury, we need more clarity... as of now, I am not exactly sure how it is going to be implemented and there seems to be lots of challenges on the implementation of this price cap," said Amit Bilolikar, deputy general manager of crude trading at India's Bharat Petroleum Corp. Ltd., or BPCL.

The US Treasury did indicate that it wants to ensure that Russian crude continues to flow in the market, so it's still very uncertain what conditions would be attached to the price cap scheme, while it's also unclear on the possibility of secondary sanctions on non-compliant entities, Bilolikar added.

Vivek Tongaonkar, chief corporate finance, Oil and Natural Gas Corporation Ltd, or ONGC, said, "There's simply not enough known [facts and details] on how it would be implemented and what exactly the [pricing and trading] mechanism and procedures are... I think everybody is still awaiting clarity on this subject from the US and the EU."

Maintaining Russian crude flows

However, the Asian and European refining industries would eventually figure out and adjust to the price cap rules, with many shipping companies from non-OECD nations expected to chip in to support the flow of Russian crude, while alternative financing and marine insurance facilities from Asian countries, as well as Russia, could be in play, the trading executives said.

At the very least, Russia wants to ensure that its crude would still flow into the market, while the world also needs Russian supplies. There is quite a good chance of industry and market participants working out how to maintain the Russian cargo grades, given that the continued flow of Russian oil is most oil companies and traders' incentives, said Alex Grant, senior vice president for crude, products and liquids at Equinor.

BPCL's Bilolikar indicated that refiners and traders looking to buy Russian crudes after December would find it difficult to access G7 finance and insurance services but it's possible that many services emerge from Russian, Indian and Chinese insurance companies.

Indian refiners typically purchase Russian and other crudes on delivered basis and all the cargoes are insured. Refiners simply cannot make purchases without insurance, said Bilolikar. "Nowadays, what you're seeing is more of the Russian crude cargoes are getting insured through Russian insurance companies."

More US, Norwegian crude for Europe

European refiners have plenty of options to replace Russian medium sour Urals crude, and the Norwegian Johan Sverdrup crude could serve the region's refining industry as one of the top feedstock alternatives, according to Equinor's Grant and Michael Spitzbart, senior vice president for supply & trading at OMV.

Around 50% to 60% of Norwegian crude used to flow to the Asian market, but it's now almost entirely being kept in Europe, said Simon James, vice president crude trading and refinery at Equinor.

In addition, US crude exports remain stable, with increasing number of cargoes from the North American producer feeding the European market ahead of the Dec. 5 Russian crude import ban, the executives said.

The production and supply of US crude has been very resilient, and the US cargoes would be able to take care of Russian or any other crude supply shortfalls, according to the Equinor and OMV executives.

European end-users had earlier not been overly impressed by the quality of the US crude as the supply had been sourced from different small upstream fields. However, the quality has since improved significantly and many refineries are willing to take more US grades, said Spitzbart.

The increase in US crude shipments to European buyers have led to concerns among major customers in Asia in recent trading cycles.

South Korea, Asia's biggest US crude importer, saw its crude and condensate shipments from the North American producer decline 9.9% on the year to 10.543 million barrels in July, latest data from state-run Korea National Oil Corp. showed.

South Korean refiners indicated that US suppliers have been somewhat hesitant to hand out extra cargoes in recent trading cycles due to stronger demand from Europe as well as growing political pressure in the US to reserve crude supply for the domestic market in an effort to temper surging retail gasoline prices.