For months, the Russian government has opposed the idea of Western petroleum sanctions against Iran. But new threats to Iranian oil flow could have at least one beneficiary: Russia.
The Russian oil industry was already reaping the rewards of higher global oil prices from Iranian tensions, even before Tehran raised the stakes Wednesday by threatening to cut off oil to six European nations.
Now, whether Iran carries out that threat immediately or Europe proceeds with its previously planned embargo of Iranian oil this summer, the Russian industry could capitalise more directly. Its pipelines stand ready to serve customers willing to pay a premium price — with a grade of oil closely resembling Iran's.
Windfall for Putin
“It's pretty good for Russia right now,” Jesse Mercer, a senior oil analyst based in Houston with PFC Energy, said in a telephone interview. Russia is now the world's largest oil producer, pumping about 10 million barrels of oil a day, slightly more than Saudi Arabia. Of this, Russia exports seven million barrels a day. Most of it goes to customers in Europe and Asia, although small amounts from Siberia make it as far as the West Coast of the United States.
For Russian oil companies like Rosneft and Lukoil and the Russian-British joint venture TNK-BP, the international tensions that began over Iran's nuclear development programme last autumn have meant a windfall. Analysts estimate that Iran jitters have added $5 to $15 a barrel to the global price of oil, which means an extra $35 million to $105 million a day for the Russian industry. And the taxes the Russian government has received from those sales have been a political windfall for Prime Minister Vladimir V. Putin as he campaigns to return as Russia's President. The extra money has helped further subsidise domestic energy consumption, tamping down inflation. “It's good for Putin,” Mr. Mercer said. “In the United States, when oil prices go up, the president's ratings go down. In Russia, it's the opposite.” Rising prices, of course, are a boon for every oil producer, whether in North Dakota, the North Sea or northern Siberia.
But Russia has a particular advantage: a pipeline system that can supply Iran's traditional customers in both Europe and Asia. Depending on which way the geopolitical winds are blowing, Russia has the ability to direct more or less of its oil either eastward or westward. Some of its oil to Europe travels by pipeline the entire way; other oil is piped to the Black and Baltic Seas and shipped from there.
What's more, the grade of Russia's main export oil, Ural Blend crude, is similar to Iran's and has already been in greater demand as an alternative to Iranian oil for European refineries.
That's why the price of Ural Blend has risen even faster than global prices generally. In December, it traded at a $2 discount to Brent oil from the North Sea. That difference is now gone. Both grades are now trading for about $119.50 a barrel, energy analysts say. The six nations Iran threatened to cut off on Wednesday were, in descending order of the size of their purchases: Italy, Spain, France, the Netherlands, Greece and Portugal. Tehran did not explain why it selected those countries, while ignoring even bigger oil users like Germany. But all six were already planning to stop buying Iranian oil this summer, anyway, as part of an embargo the 27-nation European Union agreed to last month, to begin in July. At its recent peak, Europe was buying 500,000 to 660,000 barrels of Iranian oil a day, according to PFC Energy.
If the European sanctions do take effect then, oil prices could rise further — by as much as $7 to $13 a barrel above where they are now, in the view of Wood Mackenzie, an oil consultancy based in Edinburgh. And even if oil prices later fall, Russia's natural gas monopoly, Gazprom, would continue to benefit for a while. Russian gas prices in Europe, Gazprom's biggest export customer, are linked to the price of oil under long-term contracts that are adjusted twice annually, based on average oil prices over the previous six months. So even if oil prices decline, Gazprom's gas prices would remain high in the second half of the year. The United States, despite being a leading critic of Tehran's nuclear ambitions, has been somewhat more muted than Europe on how to punish Iranian's oil industry — as American politicians have been divided in their willingness to disrupt global petroleum trading and financing to the potential detriment of strategic allies.
In December Congress passed sanctions that, among other measures, impose penalties on foreign banks that clear payments for Iranian oil. Congressional supporters of the sanctions, and the Obama administration, have said the impact on oil prices are justified, given the stakes in Iran.
But the White House also cautioned that the bank strictures could interfere in the business dealings of American allies. And so when President Obama signed the measure, he said some provisions would be nonbinding, angering hawkish supporters of the sanctions, which along with Europe's are set to begin in July.
As it turns out, at least one exemption under discussion is meant specifically to limit the strategic benefits for Russia, which has been an outspoken critic of American and European strictures against Iran.
The United States and European Union are negotiating an exemption that would continue to provide the former Soviet state of Georgia — a nation that is now a Western ally — an alternative to Russian natural gas. The workaround allows payments to an Iranian company, Naftiran Intertrade, that has a share of the Shah Deniz natural gas field in the Caspian Sea.
The field, managed by the Western petroleum giant BP, is a supplier to Georgia. It is also a potential source for the proposed Nabucco pipeline, which would be managed by a consortium based in Vienna and backed by some Western European governments to create European competition with Gazprom. But the pipeline, seen as a manoeuvre to weaken Russia's hand in European energy politics, has been stalled in the planning phase for years.
China, meanwhile, is expected to circumvent the Iranian sanctions with tacit American approval by settling its oil purchases with Iran through banks that have no dealings in the United States. India, for its part, has negotiated to barter wheat for oil, or pay Iran directly in rupees.
To be sure, there are other limits to Russia's ability to fully capitalize on the Iranian oil upheaval. The big one is that the Russian industry is already producing petroleum from its working fields at full capacity, since so much of it comes from far northern and Arctic wells that must operate full-time year-round to keep from freezing. And so Russia cannot suddenly increase its export capacity beyond those current seven million barrels a day.
But its extensive pipeline network gives Russia enviable flexibility to direct its oil to wherever demand — and prices — are highest. That could be a boon for its Asian oil distribution.
As it happens, after a decade of Moscow's investment, a trans-Siberian oil pipeline is scheduled for completion in this year's third quarter. That will create opportunities for Russia to export petroleum more cheaply than its current railroad shipments to a Pacific port where it is then pumped into tankers for shipments to Japan and South Korea — two countries that, as strategic American allies, will be looking for substitutes to Iranian oil.
The new pipeline, called the East Siberia-Pacific Ocean pipeline, forks in Siberia so that oil can be sent either to China or to the coast, for export to other Asian customers. It will give Russian exporters the ability to easily exploit likely price differences between customers like China, if it continues as expected to buy Iranian oil, and Japan and South Korea, which probably will not.
“They could arbitrage between the two,” Mr. Mercer, the analyst, said of this Russian flexibility, “and it could play to their advantage.”—— New York Times News Service