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Prospects for redirecting oil to Asia

Against the background of EU sanctions, Russia redirected a significant part of oil exports from Europe to Asia on tankers. Since February, the volume of oil supplies to Asia by sea has increased by 1 million barrels per day – by about 50% compared to last year. Let’s see how stable this trend is.


In the post:


  • The capacity of the ports allows oil to be redirected to Asia, the question is that more tankers are needed;
  • There are risks that some European companies will refuse to transport Russian oil when the ban on insurance of Russian transportation comes into force;
  • The current volume of deliveries to Asia may be maintained if the issue of tanker insurance is resolved (the EU has banned European companies from insuring ships carrying Russian oil since 2023).


The capacity of the ports allows redirecting oil to Asia, the question is that more tankers are needed


In 2021, Russia exported 4.6 million barrels per day (MBD) of oil. Europe and the US accounted for 57% of exports – about 2.6 mbs. About 1.6 Mbps of oil was delivered to China.


At the same time, 114 million tons (or 2.3 mbs) were delivered to ports and then transported by sea. The rest was exported mainly via the oil pipeline, and an insignificant part was transported by rail.


The main ports through which oil is exported are Novorossiysk, Primorsk, Ust-Luga and Kozmino. Ports in the European part of the Russian Federation (Novorossiysk, Primorsk, Ust-Luga) account for about 79 million tons (or 1.6 mbs) of oil supplies, in the eastern part of the Russian Federation (Kozmino) – 35 million tons (or 0.7 mbs). In 2021, 0.4 Mbps was delivered to the port of Novorossiysk (Black Sea), 0.7 Mbps to the port of Primorsk (Baltic Sea), Ust-Luga – 0.5 Mbps (Baltic Sea).


Transneft pipelines



The oil pipeline that goes to the East is the ESPO, and last year it was fully loaded. According to Reuters, deliveries at Kozmino rose by 70,000 bpd in June thanks to chemical additives that speed up the flow of oil, and deliveries by rail can also be increased by 80,000 bpd, but this is not a significant amount. That is, now there is no way to significantly increase supplies to Asia via the oil pipeline. The possibility of supplying oil to the eastern port of Kozmino is also limited.


According to K. Rodionov, an expert from the Institute for the Development of Fuel and Energy Complex Technologies (IrtTEK), supplies to China can only be increased through tanker supplies from Primorsk and Ust-Luga to China. And this means an increase in logistics costs.


According to Bloomberg, already in April 2022, the direction of movement of ships with Russian oil changed. There was a significant increase in deliveries by tankers from the Black Sea (port of Novorossiysk) and the Baltic (Ust-Luga and Primorsk). In April, compared to the level before February 2022, oil supplies from Western Russian ports to Asia increased from zero to almost 1 mbd (up to 875,000 barrels per day).


At the same time, according to our data, the patency of western Russian ports allows increasing oil exports from them by another 0.6 mbs at the moment. And when supplies to Europe decline, the free capacity of the ports will be even greater. But the question is whether there will be enough tankers to increase oil supplies to Asia.


Increased oil exports to Asia may require 5 times more tankers than before


According to Bloomberg, it takes three times longer to deliver cargo from the Port of Novorossiysk in the Black Sea to India than it takes to deliver cargo to Italy. Delivery time from the Baltic Sea will increase even more. It takes about a week to deliver cargo from the Baltic port to the Netherlands or Germany. To make a flight to the western coast of India, it will take a month, to the east – more than a month.


According to Bloomberg, in order to deliver the same volume of oil from the Baltic ports (they account for 75% of supplies from Western ports) not to Europe, but to India, 5-6 times more tankers will be needed.


At the same time, according to a representative of one of the oil and gas companies, if supplies are redirected from Novorossiysk to Asia, the one-way route will increase by 5-7 days. And on average, the duration of the route from Novorossiysk to Europe is about 5 days. That is, the duration of delivery with a return flight increases only 2-2.4 times.


According to the expert of the Institute for the Development of Fuel and Energy Complex Technologies (IrtTEK) K. Rodionov, the delivery period to the countries of Northern and Central Europe in 2021 did not exceed a week, and to the ports of Southern Europe it was up to 20 days (average – 2 weeks). According to Credit Suisse, the delivery of oil from the Baltic ports to China will take two months in one direction and two months in the other.


That is, the time for the delivery of oil from the Baltic ports to Asia with a return flight will increase at least 5 times, and 5 times more tankers will be needed to redirect oil to Asia.


According to S&P Global, in June compared to January, Russia has already increased oil supplies to India and China by sea by 1 Mbps, which corresponds to a 50% increase relative to exports to Asia in 2021 (of which, according to the Central Bank of the Russian Federation, 0.4 Mbps fell on India).


The route of the tanker from the Baltic port to India


Image looks like a map Automatically generated description


According to S&P Global, offshore deliveries of Russian oil to Europe in June decreased by about 0.4 mbs compared to January (as deliveries to Asia rose by 1 mbs, while offshore oil deliveries increased by 0.6 mbs).


At the same time, according to Bloomberg, oil supplies from the Persian Gulf to Europe by sea increased. The total volume of oil supplies from the Middle East to Europe could increase by about 1 Mbps compared to January, mainly due to tanker deliveries from the port of Sidi Kerir. Therefore, the demand for tankers from Europe has not decreased, but probably increased. And Russia’s demand for tankers has also grown due to increased supplies to Asia.


At the same time, some EU countries plan to voluntarily stop importing Russian oil through the Druzhba pipeline by the end of the year.


Therefore, demand for tankers and transportation prices are growing, and a shortage of tankers may become a problem for redirecting oil from Europe to Asia.


Thus, if the volume of oil exports currently shipped to Europe by sea (about 1.2 mbs – 0.4 mbs lower than last year) were redirected to Asia by the same number of tankers, this would correspond to deliveries of about 0.2 mbs. mbs. This is a conservative estimate given the assumption that 5 times as many tankers are needed for the same volumes of oil.


In addition, due to high demand since the start of the NWO in Ukraine, freight rates for medium-sized Aframax class tankers have risen from $10,000 to about $40,000 per day since January, according to ship charter brokers.


There are risks that some European companies will refuse to transport Russian oil when the ban on insurance of Russian transportation comes into force


Now, not only Russian tankers are used to deliver oil from Russia to Asia, but also European tankers (from Greece, Malta, Cyprus), according to information from various sources.


According to the Institute of International Finance (IIF), tankers of Greek shipowners began to carry more Russian oil after the start of the NWO in Ukraine. Greek tankers accounted for more than 60% of all tanker capacity transporting oil from Russian ports as of early June, according to IIF Chief Economist Robin Brooks.


According to statistics from Refinitiv, ships from Greece, Malta and Cyprus carried 31 million barrels of oil from Russia in February. In May, this figure increased to 58 million barrels. Since the end of February, tankers from Greece, Malta and Cyprus have been exporting about a third of oil from Russian ports, in May – already more than half.


While EU sanctions do not currently prohibit European companies from transporting Russian oil to third countries, there are risks that they will run into problems in the future. First, a ban on the import of Russian oil to the EU countries will come into force in December. Secondly, a ban on insurance of ships carrying Russian oil for insurance companies from the EU and the UK will come into force.


According to the WSJ, European carriers are likely to fear that when European sanctions to ban oil imports come into effect, they could be blacklisted for dealing in Russian oil.


The current volume of deliveries to Asia may be maintained if the insurance issue can be resolved


According to RBC, the EU embargo does not prohibit European carriers from transporting Russian oil and oil products to third countries.


At the same time, in the seventh package of sanctions, the EU eased restrictions on Rosneft and Gazpromneft – now European companies can officially conclude new deals with them on oil supplies to third countries. But this exception may be removed in the future. Previously, the EU banned new deals with these companies. The exception was deals on oil imports to the EU, which should stop by the end of the year, according to the 6th package of sanctions.


The ban on insurance of ships with Russian oil by European companies comes into force by the end of the year. According to our data, Russian companies can find insurance and reinsurance companies in Asia, and the creation of a Russian insurance company is possible in the long term.


But now it is not known how European carriers will behave when the EU ban on oil imports and on insurance of ships with Russian oil comes into force. European companies may refuse to ship oil from Russia if insurance is obtained from an Asian company and does not meet their requirements. And if ships fail to obtain insurance coverage, in accordance with international maritime law, all their voyages will be illegal.


If some Greek and other European companies refuse to transport Russian oil, then these carriers will free up ships, for example, to transport oil from the Middle East to Europe. Then the scenario is possible that Asian and other independent carriers can replace European ones for deliveries of Russian oil to India and China, if they have enough free tankers.


Tanker companies with the largest fleet of large VLCC tankers



For example, now tankers that previously transported Iranian oil have started transporting Russian oil. Eleven of the monitored vessels that previously carried Iranian oil have loaded Russian oil and oil products since April, according to Bloomberg, for a total of sixteen loadings in the period.


conclusions


Due to the redirection of oil from Europe to Asia, the demand for tankers has sharply increased, since the delivery route from Western Russian ports to Asia is longer than to Europe. The cost of transportation, according to Bloomberg, has increased several times.


At the same time, oil exports from Russia by sea in all directions increased by 0.6 mbs relative to January. Moreover, deliveries to Asia increased by 1 Mbps (of which about 0.4 Mbps fell to India and 0.6 Mbps to China). But it is not known, due to how many tankers and what types.


According to Refinitiv and IIF, now more than half of the tankers involved in the transportation of Russian oil are European.


By the end of the year, the EU embargo on imports of Russian oil and a ban on insurance of ships with Russian oil for European companies will come into force. Despite the fact that now the sanctions do not prohibit the transportation of Russian oil to third countries, some European carriers may refuse to transport Russian oil. A possible solution is to obtain insurance from Asian companies.


Even if European companies refuse to transport Russian oil, they will have free tankers to supply oil from other countries to Europe. And it is possible that Asian and other independent carriers can replace European carriers for Russian oil supplies to India and China if they have enough free tankers.


So far, the trend of further growth in oil exports to Asia does not look stable, therefore several times more tankers will be needed for transportation, and at the end of the year a ban on insurance of tankers with Russian oil for European insurers will come into force.

About author

Oxford graduate with honors. He worked in large financial projects for well-known Wall Street corporations. After he earned his first capital and a reputation as a successful trader, he opened his own company. At the moment, the growth of the company's capital is 20% per year.
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