🐂 Not all bull runs are created equal. November’s AI picks include 5 stocks up +20% eachUnlock Stocks

Explainer-Europe set to import banned Russian diesel without knowing

Published 12/07/2022, 07:12 AM
Updated 12/07/2022, 07:16 AM
© Reuters. FILE PHOTO: Liberia-flagged Aframax tanker Suvorovsky Prospect discharges fuel oil from Russia at the Matanzas terminal, in Matanzas, Cuba, July 16, 2022. REUTERS/Alexandre Meneghini/File Photo
RDSa
-
ICE
-
CL
-
BP
-

By Rowena Edwards

LONDON (Reuters) - European motorists could find Russian diesel in their tanks even after bans take effect because regulators lack tools to trace the origin of fuel when it has passed through other countries.

The European Union banned Russian crude imports from Dec. 5 and will ban Russian oil products from Feb. 5, as it attempts to deprive Russia of oil revenues. Britain ended oil and oil product imports from Dec. 5. The challenges in tracking crude once it is refined and diesel once it is blended, mean some Russian diesel is likely to be delivered to and re-exported from countries such as India and Turkey, market sources said.

Europe is struggling to replace up to 600,000 barrels per day of Russian supply, according to Eugene Lindell, refining and products market analyst at consultancy FGE. However, the reputational risk associated with buying Russian fuel, coupled with insurance difficulties, means only limited Russian volumes are likely to find their way into Europe, transported by small players.

HOW WILL DIESEL CUSTOMS AND EXCHANGES POLICE IMPORTS?

Dutch customs, who oversee the major Amsterdam-Rotterdam-Antwerp trade and storage hub, UK enforcement authorities, and the Intercontinental Exchange (NYSE:ICE) will check official certificates of origin for import ships. In case of doubt, UK and Dutch customs can request additional documents to help determine origin, such as contractual agreements, invoices, or bills of lading. ICE will also look at discharge certificates and proof from refiners that stock is locally refined. Participants using the U.S.-based CME group's exchanges must have their own legal advice and consult delivery terminals to ensure sanctions compliance.

WHEN DOES A CHANGE OF ORIGIN OCCUR?

To accept any diesel as of non-Russian origin, Britain, the European Union and the ICE require it to be substantially processed outside Russia.

"Processing is regarded as substantial only if it results in the manufacture of a new product or represents an important stage in manufacture, and it takes places in an undertaking equipped for that purpose," the UK Government website says. Blending Russian diesel elsewhere with a non-Russian equivalent would not change its origin, while refining Russian Urals crude into diesel elsewhere would.

HOW EFFECTIVE ARE THE CHECKS?

Britain, the EU and ICE consider diesel to be Russian if it is shipped and reloaded elsewhere. Britain says any processing to change the product must be done for commercial purposes, such as making a finished product to meet new UK specifications, not to avoid the sanctions regime. But is it virtually impossible to trace the origin of blended or refined diesel and difficult to track ship-to-ship (STS) transfers, meaning these aspects of the sanctions depend heavily on "good will", two industry sources familiar with import and tracking processes said.

The volumes of STS operations between Russian-affiliated tankers have "dramatically increased" since February, maritime analytics company Windward said.

Graphic: Ship-to-ship operations https://www.reuters.com/graphics/RUSSIA-DIESEL/EUROPE/gkvlwgydlpb/chart.png

"If you were to take Russian diesel out to a more flexible port, you could blend it and issue it with a different bill of lading with a different origin," one of the sources, involved in the storage and transport of petroleum products, said. The sources declined to be named because they were not authorised to speak to the media.

HOW WILL THIS AFFECT DIESEL FLOWS?

Russian diesel is likely to be delivered to and re-exported from countries such as India and Turkey, market sources said.

Russia could use its fleet to move diesel into Turkey where it can be transferred onto medium-range tankers, two industry sources said.

"I would have thought that Turkey is re-exporting the barrels or perhaps substituting in-country and exporting more of their domestic output," lead analyst at Kpler Kevin Wright said.

Graphic: Russian gasoil, diesel exports to Turkey https://www.reuters.com/graphics/RUSSIA-DIESEL/ICE/jnvwyewkmvw/chart.png

Britain, the EU and ICE consider diesel refined from Urals outside Russia to be a non-Russian product, which is likely to result in a further shift in trade flows. Europe has already started to replace Russian diesel imports with refined product from the Middle East, but analysts also expect India to refine more Urals and increase diesel exports to Europe.

Graphic: Crude oil tanker port calls https://www.reuters.com/graphics/RUSSIA-DIESEL/EUROPE/znpnbeaknpl/chart.png

WHO COULD TRANSPORT RUSSIAN CARGOES?

The EU price cap, which came into effect on Dec. 5, prohibits shipping, insurance and re-insurance companies from handling cargoes of Russian crude, unless it is sold for less than the $60 price set by the Group of Seven nations and its allies. Many of the larger oil companies, including BP (NYSE:BP) and Shell (LON:RDSa) have self-imposed sanctions on Russian oil and oil products.

And Russia's determination to stop selling oil to countries or companies abiding by the price cap, coupled with insurance difficulties, means "mainstream tanker owners will be unable to lift Russian crude," French shipbroking firm BRS said.

But smaller trading companies are already using shadow fleet tankers, several industry sources said, adding these have arranged insurance with providers in India.

BRS says 111 elderly tankers have been sold to private shipping companies since February probably to transport Russian oil.

European buyers are also increasingly receiving Russian diesel under the Delivered Ex-ship Incoterms rule, which leaves the responsibility for insurance in the hands of the supplier, an industry source said.

© Reuters. FILE PHOTO: Liberia-flagged Aframax tanker Suvorovsky Prospect discharges fuel oil from Russia at the Matanzas terminal, in Matanzas, Cuba, July 16, 2022. REUTERS/Alexandre Meneghini/File Photo

HOW WILL THE SHIFT IN TRADE FLOWS AFFECT DIESEL PRICES?

Dutch cooperative Rabobank expects this "flux of a global rerouting" to result in higher logistical costs, tighter tanker supply, and ultimately higher prices of imported energy products. "There is a 35-45 million barrel global deficit in middle distillates," Rabobank said. "This structural problem is going to last years."

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.