Russian oil companies are warning that their refineries in Europe could significantly reduce runs or shut down as a ban on Russian crude imports comes into play.
Replacing Russia's Urals crude oil export blend would require time and sizable investments in the plants' processing units to enable them to refine other grades.
Russian owners see no sense in making such investments given the growing risk of their European assets being expropriated.
The board chairman of Lukoil's Neftokhim Burgas refinery in Bulgaria, Ilshat Sharafutdinov, told Russia's Tass news agency that if supplies of crude from Russia stop, the plant would be forced to halt operations.
Theoretically, the plant, which can refine up to 190,000 barrels per day of crude, could process Middle East and North African grades, but this would lower its capacity because of technological constraints, according to Lukoil.
Lukoil's 320,000 b/d Isab plant in Priolo near Syracuse, Sicily, faces similar problems.
All of Lukoil's European refineries, which are held by its Swiss-registered trading arm Litasco, including its 50,000 b/d Petrotel plant in Romania, could replace Urals with other grades. This would require time, however.
Sources say though that close to $700 million would be needed to adjust the configuration of the Isab refinery to new feedstock. But as plans have been floated for the “temporary nationalization” of Isab, Lukoil is reluctant to take on such a burden.
The refinery is one of the biggest employers in the region and the government cannot afford to let it be shut down.
Nationalization is also an option under consideration by the German government for the 220,000 b/d PCK Schwedt refinery, majority owned by Rosneft. The plant supplies Berlin and the Brandenburg region with 90% of its refined products requirements, so it could not simply be closed without significant impacts.
The proposed EU ban on Russian oil will likely impact Serbia's Naftna industrija Srbije (NIS) oil and gas company, owned partly by Gazprom Neft. Serbia is not formally an EU member, but NIS currently imports crude for its 96,400 b/d Pancevo refinery via the system of Croatian pipeline operator Jadranski Naftovod (Janaf).
Gazprom Neft on May 6 reduced its stake in NIS from 56.15% down to 50%, according to the Belgrade stock exchange. The balance of 6.15% was transferred to parent company Gazprom, Russia's state-controlled gas giant. Industry sources say Gazprom Neft, which was earlier sanctioned by the EU, hopes the reduction of its ownership will protect NIS from possible new restrictions.
"The change in the ownership structure provides conditions for the smooth implementation of the activities of NIS JSC Novi Sad on the market," NIS said in a statement.
In a move to put pressure on Belgrade, Janaf had threatened to stop supplies to Pancevo because of the sanctions against Gazprom Neft. It later abandoned the threats, but the formal ban on Russian crude within the EU would form a legal basis to halt deliveries.
NIS has long been trying to diversify imports and was testing various crudes, including Iraqi and Nigerian barrels. In the past couple of years, Pancevo's main sources of supply have been Iraqi Kirkuk crude and Gazprom Neft's Novy Port crude from the Arctic project.
NIS earlier said that it buys roughly 70% of its crude under long-term contracts, with the rest being purchased under spot contracts. Industry players believe that NIS will find options to replace Russian barrels but some alternatives will take time to become permanent.
EU members still cannot come to a joint decision on the Russian oil import ban. Hungary keeps insisting that a cutoff of Russian oil would destroy its economy. Budapest is reportedly seeking exemptions for pipeline imports from Russia.
Meanwhile, the EU has seemingly, at least temporarily, dropped the idea of banning EU-owned vessels that ship Russian crude to third countries, but questions still remain on whether a ban on providing insurance for such vessels will be imposed.
Even without those restrictions, vessels shipping Russian oil already face difficulties with insurance and freight, but that has more to do with possible sanctions rather than with a real ban. The ban was reportedly objected to by Greece, which is heavily dependent on shipping revenues.
Russia's largest shipping company Sovkomflot is reported to be looking to sell up to a third of its fleet because of sanctions-related troubles with repaying loans. According to reports, some 40 out of 121 vessels might be up for sale to buyers in China or Dubai.
Russian Foreign Minister Sergei Lavrov said on May 11 that "Russia has enough customers of our energy resources ... so, let the West pay much higher ... and explain to its population why they have to become poorer."
Deputy Prime Minister Alexander Novak was quoted as saying on May 9 that at the beginning of this month, Russian production was higher than in April.
Russia's crude oil and gas condensate production dropped by 974,000 b/d last month from March to 10.033 million b/d. Excluding condensate, oil output stood at 9.123 million b/d compared to 10.01 million b/d a month ago.
Russian seaborne exports from the Baltic and Black seas averaged 1.672 million b/d in the first 10 days of May, down from 2.057 million b/d in April, according to Energy Intelligence calculations. The drop was mainly in the Black Sea port of Novorossiysk.
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