Seven months after Russia’s invasion of Ukraine and imposition of sanctions of unprecedented breadth and severity by Western allies, information on the performance of the Russian oil and gas sector is fragmented and controversial after Moscow classified a significant part of the statistical data. Suspected sabotage of the Nord Stream 1 and 2 gas pipelines that caused leaks into the Baltic Sea is escalating the crisis.  In this piece, Tatiana Mitrova, a global research scholar with the Center on Global Energy Policy, answers questions about the current state of the Russian oil and gas industry and the impact of sanctions on it.

Have Russian Oil Exports Decreased?

The United States, the United Kingdom, Canada, Australia, and the European Union (EU) quickly introduced an import ban on Russian crude and refined products after the invasion. The US banned all Russian oil and gas imports in March 2022. The UK’s goals—to phase out Russian oil imports by the end of the year—were achieved by June, earlier than anticipated.[1] EU leaders have agreed on an embargo on Russian crude oil imports that will take full effect by the end of 2022, though Hungary, Slovakia, and the Czech Republic secured exemptions for the pipeline imports via the Druzhba pipeline they rely on.[2] The EU ban aims to halt 90 percent of Russian crude imports. Buyer boycotts of Russian exports create additional pressure.

Starting in May, Russia began classifying statistics, making it difficult to assess the full effect of these restrictions on Russian oil export volumes. But fragmented secondary estimates are available based on the national statistics of importing countries.[3] These show that exports started to decline in mid-March as the US import embargo came into effect and European buyers began to cut imports. At the same time, some buyers, notably in Asia, increased purchases of sharply discounted Russian barrels.

Since March, Russia has been rebuilding logistics and redirecting its crude supplies to non–Organization for Economic Cooperation and Development markets, away from the EU, its historically largest consumer. Russian oil is sold at significant discounts, which makes it attractive to buyers in Asia-Pacific, who are not constrained by Western restrictions. Despite a two million barrels per day (mb/d) drop[4] in Russian crude and oil product shipments to Europe, the US, Japan, and Korea since the start of the year, rerouting of flows to India, China, Turkey, and others has mitigated export losses. According to the latest International Energy Agency (IEA) report,[5] by the end of August, Russian total oil exports were 7.6 mb/d—down just 390,000 barrels per day (b/d) from prewar levels.

What Is the Impact of Western Sanctions on Russian Oil Output?

Russian oil production has also proven, so far, to be resilient. In April 2022, after Western sanctions and corporate self-sanctioning, Russian oil output[6] dropped by nearly 12 percent compared to the prewar level—a significant decline but lower than the 20 percent drop in June 2020 due to COVID-19 disruptions and Organization of the Petroleum Exporting Countries’ decision to reduce output.

After May, with Russian oil companies reorganizing their logistics and adapting to the sanctions, oil output slowly started to recover. In August 2022, oil production turned out to be higher than in August 2021, though according to Rosstat[7] (Federal Service for State Statistics) still approximately 4 percent below the prewar level. These numbers correspond with the IEA’s assessment[8] of August oil production in Russia at only 400,000–450,000 b/d below prewar levels.

What Is the Impact of Western Sanctions on Russian Gas Exports?

Given the significance of Russian gas supplies to Europe, there were no international sanctions imposed on pipeline gas or liquefied natural gas (LNG) exports. Only the US and Australia—countries that never imported significant volumes from Russia—have banned Russian LNG supplies. The other countries applied limited pressure through export controls on technologies and services for existing and new gas operations. In fact, in March there was even an increase in Russian pipeline gas flows to Europe.

Surprisingly for many observers, Russia introduced countersanctions, starting with a ruble payment demand announced in April. By May, several countries were cut off from Russian gas for refusing to comply with this order of the Russian president. Russian countersanctions on Gazprom’s former European subsidiaries have led to the termination of gas flows via the Yamal-Europe pipeline and the pipeline to Finland.[9]

In September, the Nord Stream 1 pipeline, with prewar flows of 55 billion cubic meters per year of Russian gas into Germany and other European markets, finally cut its gas flows after several months of outages and lower-than-normal capacity utilization that Russia blamed on technology issues.[10] Russian gas is now flowing only via the TurkStream gas pipeline and, surprisingly, via Ukraine—though at much lower levels than in 2021. Figure 1 illustrates these chaotic movements. By mid-September, Russian gas flows to Europe were at less than a quarter of their 2021 average.

Figure 1: Physical gas flows from Russia to Europe (excluding Turkey) by direction

What Is the Impact of Western Sanctions on Russian Gas Output?

Since March 2022 Russian gas output has been shrinking, in part due to normal seasonality but also partially as a result of the dramatic decline in pipeline gas exports. By the end of August, the Russian gas industry was producing 25 percent less gas than in August 2021 and nearly 40 percent below the output in January 2022.[11]

How Much Revenue Does Russia Get from Oil and Gas Now?

The sanctions were “aimed at weakening Russia’s ability to finance the war.”[12] Although it usually takes a long time to see the impact of sanctions, current data demonstrates that restrictive measures are already working. In fact, early results are visible through economic indicators published by select and hard to access official Russian sources.

In March–April 2022, Russian oil and gas revenues skyrocketed to historical highs, but a steep decline started in May. As of the beginning of September, Russian oil and gas earnings were still comparable to the previous year due to the extremely high energy prices—but were beginning to decline.[13] Revenues will fall further later this year as the EU oil embargo comes into force alongside G7 pledges to reduce Russian oil revenues with the price cap mechanism.

Figure 2: Russian budget oil and gas revenues

See note [14].

 

Notes

[1] Larry Elliott, “Britain Imports No Energy from Russia for First Time on Record,” The Guardian, August 24, 2022, https://www.theguardian.com/business/2022/aug/24/britain-imports-no-energy-from-russia-for-first-time-on-record-oil.

[2] Robert Perkins, Takeo Kumagai, and Herman Wang, “EU Agrees Compromise Deal to Ban 90% of Russian Oil Imports by Year End,” S&P Global Commodities, May 31, 2022, https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/petrochemicals/053122-eu-agrees-to-ban-russian-seaborne-oil-imports-hitting-two-thirds-of-supplies.

[3] Main importers of Russian oil can be found in the IEA database. IEA, “National Reliance on Russian Fossil Fuel Imports,” accessed September 20, 2022, https://www.iea.org/reports/national-reliance-on-russian-fossil-fuel-imports/which-countries-are-most-reliant-on-russian-energy.

[4] IEA, “Oil Market Report—September 2022,” accessed September 20, 2022,

https://www.iea.org/reports/oil-market-report-september-2022.

[5] Ibid.

[6] CGEP analysis based on Rosstat data. Rosstat, “Динамика промышленного производства в апреле 2022 года” (“Dynamics of Industrial Output in April 2022”), June 1, 2022, accessed September 20, 2022, https://rosstat.gov.ru/folder/313/document/167298; Rosstat, “О рынке нефти в январе 2022 года” (“About Oil Market in January 2022”), March 23, 2022, accessed September 20, 2022, https://rosstat.gov.ru/storage/mediabank/47_23-03-2022.html.

[7] Rosstat, accessed September 20, 2022, https://rosstat.gov.ru.

[8] Ibid.

[9] National Public Radio, “Russia Has Cut Off Its Natural Gas Exports to Finland in a Symbolic Move,” May 21, 2021, https://www.npr.org/2022/05/21/1100547908/russia-ends-natural-gas-exports-to-finland.

[10] Anne-Sophie Corbeau, “A Divide and Rule Game: Will Russian Gas Supplies to Europe Be Cut?,” CGEP, August 4, 2022, https://www.energypolicy.columbia.edu/research/commentary/divide-and-rule-game-will-russian-gas-supplies-europe-be-cut.

[11] Rosstat, accessed September 20, 2022, https://rosstat.gov.ru.

[12] European Council, “Impact of Sanctions on the Russian Economy,” updated August 19, 2022, https://www.consilium.europa.eu/en/infographics/impact-sanctions-russian-economy/.

[13] Julian Lee, “Russian Oil Flows Dive, Hurting Putin’s War Chest,” Bloomberg, September 20, 2022, https://www.bloomberg.com/news/articles/2022-09-20/russian-oil-flows-dive-hurting-putin-s-war-chest.

[14] Ministry of Finance of the Russian Federation, accessed September 20, 2022, https://minfin.gov.ru. The Ministry of Finance website may not be accessible to IP addresses based outside of Russia. See also Kommersant, “Как менялись нефтегазовые доходы бюджета” (“How Oil and Gas Budget Revenues Were Changing”), August 3, 2022, https://www.kommersant.ru/doc/5492565; and L. Romanova, “Нефтегазовые доходы в июле оказались ниже ожиданий Минфина. Есть ли риски для бюджета” (“Oil and Gas Budget Revenues Turned Out to Be Below Expectations of the Ministry of Finance. Are There Risks for the Budget?”), Vedomosti, August 3, 2022, https://www.vedomosti.ru/economics/articles/2022/08/03/934474-neftegazovie-dohodi-byudzheta.