Replacing Russian oil supply to Europe nearly impossible, OPEC warns

Will the Middle East be able to increase its oil exports if the European Union sanctions Russia for its invasion of Ukraine?

The Organization of the Petroleum Exporting Countries (OPEC), which coordinates oil exports from 13 of the world’s biggest oil-producing countries, warned the European Union on Monday that possible export sanctions against Russia oil could create one of the biggest oil supply shortfalls ever, and said it would be nearly impossible to replace Russia’s oil regularly bought by Europe.

This follows a statement issued by the foreign ministers of the Netherlands, Luxembourg and Lithuania, which said the EU is drafting proposals for an embargo on Russia.

Fereydoun Barkeshli, founder of the Vienna Energy Research Group and former Managing Director – OPEC and International Affairs of Iran’s national oil company, told The Media Line that the OPEC-EU meeting and the subsequent warning from officials of OPEC were timely and fair. about.

“In fact, international oil markets had been experiencing supply shortages since late 2019, when demand exceeded the 100 MB/D (million barrels per day) threshold,” he said.

Barkeshli added that Russia considered this fact even before starting its invasion of Ukraine. “Russia’s occupation of Ukraine was partly shaped by the Russian impression that Europe cannot survive without its oil,” he said.

It will take several years to substantially replace Russian supplies, at least in Europe

Dr Ramu CM, an energy and international policy consultant, told The Media Line that the most viable solution to the problem presented by OPEC experts to EU leaders, if the EU follows through on the sanction from Russia, is a slow and gradual reduction of Russian imports of petroleum and petroleum products.

He explained that this must be accompanied by a structural recalibration of Europe’s extensive network of refineries optimized for processing Russian crude oil grades and a planned reduction in demand for petroleum products. However, this is a long term solution.

Robin Mills, CEO of UAE-based QAMAR Energy, told The Media Line that there was no immediate solution to replace all Russian oil and gas exports.

“It will take several years to substantially replace Russian supplies, at least in Europe,” he said.

However, he added, “the Middle East has almost all of the spare oil production capacity, and OPEC decisions are very important to any loss of Russian supply.”

This, according to Ahmed AlShammasi, lecturer in geopolitics in the Middle East at the Vatel Business School in Bahrain, “would suggest that the situation is very profitable at the moment for the Middle East”.

CM notes that key European representatives are already negotiating with major Middle Eastern oil exporters such as Saudi Arabia, the United Arab Emirates and Qatar.

“It arguably brings some attention back to the most sought-after epicenter of oil production,” he said. “There is no doubt that this bodes well for regional governments and national oil companies in terms of long-term revenue guarantees amid growing international opposition to investment in oil production,” he said. he adds.

However, AlShammasi added that it would take at least five years and billions of dollars for any country to build up supplies and a distribution chain for the massive amount of oil that the EU would demand.

CM points to a few other reasons that would prevent Middle Eastern oil producers from being able to replace Russia’s oil supply from Europe.

One is the obligation that Middle Eastern countries have towards certain Asian buyers. Because of this, he said, “they have minimal spare capacity to redirect to Europe.”

He notes recent events that prove Gulf capacity is not as reliable as expected.

“The Houthi missile attacks on Saudi Arabia’s Abqaiq and Quraish oil infrastructure exposed the vulnerability of the oft-cited ‘spare production capacity’ as the Saudis struggled to replace lost volumes in a timely manner,” he said. added CM.

The close ties of the Gulf countries with Russia are also an issue to consider.

“These countries are still aligned with Russia in a mutual aid mechanism courtesy of OPEC+ when it comes to allocating production quotas, which means they wouldn’t want to pump more oil at the haste and give up all leverage, and safeguard crucial oil revenues,” he said.

Finally, he continued: “Even if Middle Eastern producers can gradually increase oil supplies to Europe in the long term, they will not do so at the cost of substitution with the more valuable long-term markets towards ballast”.

Russian oil could go more to Asia, while some Mideast supplies are diverted to Europe

Despite the difficulties for the Middle East to supply more oil and gas, Mills believes that the situation increases the geopolitical and economic importance of the countries of the Middle East. “However, it’s unclear what exactly they want or could get beyond the extra income now,” he said.

Mills believes that eventually the Middle East and Russia will eventually swap oil markets.

Middle Eastern countries “are already major suppliers” of oil to Europe, he said. “Liquefied natural gas (LNG) suppliers, especially Qatar, will gain market share in Europe from Russia in the medium term. Russian oil could go more to Asia, while some supplies from the Middle East are being diverted to Europe,” he said.

All of this, according to CM, means that the next two years bode well for increased investment in the Middle East’s upstream oil sector.

Regarding Iran, which is another important player in the energy industry, CM said that “the current energy deficit could serve as a catalyst for the negotiating parties, in particular the EU, to move closer to a nuclear agreement. with Iran”.

Talks in Vienna on reviving the nuclear deal between Iran and world powers, first signed in 2015 and known as the Joint Comprehensive Plan of Action (JCPOA), are believed to be in their final stages.

However, CM added, the immediate lifting of sanctions on Iran by finalizing the deal would come at the cost in the US Congress of opposition from Iranian Republicans and hawks within the Democratic Party, as well as Israel and Washington’s Gulf allies.

Additionally, Barkeshli said, “EU retailers have been in contact with NIOC [National Iranian Oil Company] weeks, but the JCPOA is so deeply entrenched in US/EU political institutions that it has not resulted in any break in ranks,” he concluded.