Putin’s New Weapon of Mass Disruption: Kazakh Oil

Russia is threatening to use oil from neighboring Kazakhstan as a weapon against European countries supporting Ukraine. A court order this month to shut down the export terminal on the Black Sea for a month is a clear warning to Europe of Russia’s influence.

On Tuesday, a Russian judge in the city of Novorossiysk on the Black Sea coast ordered the Caspian Pipeline Consortium to suspend shipments for 30 days. The suspension of operations was requested as punishment for a number of “documentary breaches” under CPC’s oil spill response plan, which the company had had until the end of November to rectify.

Although the facility is in Russia, about 90% of the crude that passes through it comes from Kazakhstan. This makes it an ideal weapon in President Vladimir Putin’s arsenal to inflict economic suffering on his tormentors. The CPC shutdown will remove up to 1.5 million barrels per day of much-needed crude from the global oil market, while barely reducing Russia’s own flows.

Of course, Putin didn’t explicitly say that was his goal. The use of regional courts to stop oil flows offers the Kremlin plausible denial. But the process follows a familiar pattern.

The initial investigation into oil spill response procedures at the export terminal was ordered by a Russian deputy prime minister whose recent experience was in the agriculture and land registration sectors , suggesting that there was a political motivation behind it.

Russia has a history of using the courts for political purposes. Just look at the hunt for TNK-BP and its foreign executives in 2008, before the eventual takeover of the oil company by the state-backed Rosneft PJSC; BP Plc’s experience with its Kovykta gas field in Siberia, or the multitude of obstacles put in the way of the Sakhalin 2 LNG project which resulted in Gazprom PJSC taking a majority stake in the operation in 2006.

CPC’s export terminal has suffered a series of unfortunate events since Russian troops invaded Ukraine. At the end of March, the terminal was partially closed for a month after a storm reportedly damaged two of the three loading buoys. Then in mid-June the cargoes were again suspended from two moorings for a survey of the surrounding water area, which led to the discovery of a number of World War II mines. A skeptic might have expected mine clearance to have been a priority when the buoys were first installed.

Up to two-thirds of CPC Blend exports typically end up in Europe, with significant volumes headed to Central Europe via pipelines from the Italian port of Trieste. The impact on the Mediterranean crude market, in particular, where supply has already been the tightest in years, would be severe.

Combined monthly exports from Azerbaijan, Kazakhstan, Libya, the North Sea and West Africa – all major suppliers to Europe – fell by more than a million barrels per day in June, according to tanker tracking data compiled by Bloomberg.

Libya’s exports have fallen by almost half from last year’s average and appear to be falling further this month as unrest rocks the country again. Like CPC Blend, Libyan crudes are light and sweet, which means they produce plenty of transportation fuels and contain little sulfur. This makes them attractive right now and hard to replace.

The threat of a halt to CPC shipments will hang over the oil market at least until Monday, when a court in the Krasnodar region, where the terminal is located, is due to hear the company’s appeal against the ruling. . This gives hope that the disruptions can be avoided, but there is no guarantee that CPC’s appeal will be successful.

Meanwhile, the threat has left traders scrambling to find alternatives. Regional crudes command the highest premiums for benchmarking dated Brent that several traders might remember.

Even if the ban is reversed, Russia has sent a clear warning to Europe that it can disrupt crude flows almost at will and is prepared to inflict extreme economic damage on its neighbors in the process.

More from Bloomberg Opinion:

• Talk of an oil market recession is overdone: Javier Blas

• Oil is in another bear market – for good reason: Jared Dillian

• Russian oil price cap is pure fantasy: Julian Lee

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Julian Lee is oil strategist for Bloomberg First Word. Previously, he was a senior analyst at the Center for Global Energy Studies.

More stories like this are available at bloomberg.com/opinion

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