Named ways to reduce the discount on Russian oil

“We need to develop our own tanker fleet”

How to reduce the discount on Russian oil, which is detrimental to the treasury – the solution to this non-trivial task is far from obvious. Meanwhile, in the very near future, the Cabinet of Ministers will have to submit its proposals to the Kremlin. We are talking about a set of measures – both tactical and strategic.

“As for oil, the main problem is a high discount as a result of the high level of freight costs, that is, freight has grown quite strongly due to the risks experienced by carriers,” Deputy Prime Minister Alexander Novak said at a government meeting with the president. He recalled that contracts on export deliveries of domestic oil do not include (at the request of the head of state) a clause on the sanctions “ceiling” of prices at $60 per barrel, which puts transport companies at risk. In response, Vladimir Putin instructed to deal with the discount, “so that it does not create any problems with the budget.”

But does the Cabinet of Ministers have specific ideas on this matter? After all, the main snag today is in the area of ​​complicated logistics and lack of transport capacity for the transportation of energy from the Russian Federation. It cannot be quickly removed. In addition, in the current circumstances, Russia cannot dictate its terms to foreign consumers. Oil of the main export brand Urals continues to fall in price: according to the independent pricing agency Argus, a few days ago it was sold in the Baltic port of Primorsk for $37.8, while the world standard Brent cost $78.5 per barrel. Observers point to the double effect of the sanctions – from the embargo on shipments by sea and the “ceiling” prices of $60. According to Bloomberg, Russia has fallen into a critical dependence on the three largest customers – India, China and Turkey, who constantly demand discounts.

“It is not yet clear on what basis the discount will be reduced,” says Artem Deev, head of the analytical department at AMarkets. – After all, for buyers who are afraid of secondary sanctions, the main thing is that the final price of Russian oil should not be higher than the “ceiling”. However, as an option, shipments can be carried out in larger volumes than now: then the cost of raw materials will be lower with a stable freight price. Also, the final parameters of the contract are affected by logistics – the shorter the delivery route, the cheaper the transportation.”

The government itself and the oil companies have not yet commented on hypothetical tools to solve the task set by the Kremlin. The decline in the price of domestic oil is an obvious shock reaction to the price ceiling. It cannot go on like this for long, Deev believes. When buyers, carriers, and insurers find guaranteed opportunities for unimpeded deliveries, the level of discount on raw materials from the Russian Federation will stabilize. Most likely, it will drop from the current $25-35 per barrel to $15-20.

“The situation is extremely uncertain and difficult to forecast in the short term,” says Nikita Maslennikov, a leading expert at the Center for Political Technologies. – It should be considered in the context of the global situation, taking into account many circumstances. For example, Saudi Arabia has now begun to lower the price of its light oil for Asian consumers, and although this is more of a seasonal factor, it has a negative impact on Urals quotes. In addition, the market is chilled by the risks of a global recession: a barrel of Brent is currently around $82, but price forecasts are being revised down as demand and consumption are almost certain to decline this year.”

Russia faces challenges both tactical and strategic. A significant part of oil supplies goes to Asia (in particular, to the port of Qingdao on the east coast of China) from Primorsk in the Kaliningrad region. The journey takes a month and a half, and such a long transport shoulder automatically inflates the cost of the freight. In addition, the infrastructure of refineries in the Far East needs to modernize old enterprises and build new ones. You can also consider the option of delivering oil to this region by road (special rolling stock, SPS), but first you need to understand what fleet of vehicles is available. In general, Maslennikov argues, the problem of a high discount on oil should be solved largely within Russia and on its own, primarily by transferring trade flows to the Far East track. This will definitely lead to a reduction in the freight price.

“In 2022, Russia bought 103 used oil tankers,” Maslennikov recalls. – Maybe they will be useful, although their technical condition needs to be dealt with. Another option is to transport oil along the Northern Sea Route – our oil companies have suitable terminals in those parts. As for the long-term strategy, Russia needs to develop its own tanker fleet, including for the transportation of LNG. In any case, the discount is not going anywhere, because it is determined not so much by logistics as by the physical and chemical properties of oil. Our Urals grade is high-sulphurous, which means we need to increase the degree of processing.”