The effective date is approaching for a European Union ban on purchases from government-controlled Russian oil companies, and industry observers say it could be a big blow for base oil trade from Russia into the political and economic bloc.
On March 15, the European Council adopted a resolution prohibiting EU individuals and companies from engaging directly or indirectly with Russian entities that are majority owned by the central government. The regulation, which took effect the next day, stipulates that the restrictive measures are a response to Russia’s destabilizing actions in Ukraine beginning Feb. 24.
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One of a long list of sanctions adopted in response to Russia’s invasion of Ukraine, the regulation bars EU companies from signing new contracts with a number of entities, including Rosneft and Gazprom Neft, which are among the largest base oil producers in the country. The ban took effect March 16, but allows deliveries on already completed until May 15. Privately owned companies, like Lukoil and Tatneft, are exempt from this measure.
The measure will have a profound impact on the base oil market in Europe and on Russian exports, an industry insider said.
“Russia has reduced its base oil exports significantly, and we expect exports in April to be 50% of the normal volumes,” Denis Varaksin, manager at the base oil trading company DYM Resources, told Lube Report last week.
Doing business now with any Russian oil company, be it private or state owned, is difficult because European and United States banks do not execute transactions on Russian cargoes and do not accept such contracts, he said.
“And some companies just want to stay away from Russian cargoes,” Varaksin added. “For example, British companies fully banned” Russian petrochemical products.
Berlin-based DYM specializes in moving base oils and other petrochemical products, like slack waxes from Russian and other ex-Soviet refineries, to clients in Eastern and Central Europe.
The region of Eastern Europe, including Ukraine and Russia, represents 8% of the global base oil capacity, while 60% of the Eastern European base oil comes from eight refineries in Russia, according to Amy Claxton, CEO of My Energy Consulting in Hummelstown, Pennsylvania, in the United States.
“Because of the Russian base oil import bans by the EU and the U.S., Europe is seeing volume and price impacts especially on SN 500 and bright stock,” Claxton said. “Impact on worldwide Group I prices is expected as the EU is seeking alternative Group I sourcing from Asia and the Middle East.”
Europe is facing availability issues for other technical reasons, Varaksin said.
“Most likely because of production issues, both Lukoil and Tatneft have very limited availability the last couple of months,” he said.
At the same time, the situation complicates the refinery maintenance season in Europe. All big European majors, including Italian Eni, Polish Lotos and Hungarian Mol, have their refinery maintenance scheduled between March and May, Varaksin said. Temporary shutdowns like those also reduce base oil availability.