Plan B? November 22, 2022

From Bloomberg today.

Less than two weeks: December 5, 2022.

The European Union’s ban on seaborne imports of Russian crude is due to come into effect December 5, 2022. 

But one country is lagging in its efforts to secure alternative supplies, and it needs to step up the pace.

Italy is now Moscow’s most important European market, with a refinery owned by Russian oil giant Lukoil PJSC the single biggest buyer. That’s causing a problem for the Italian government.

While other European buyers have already backed away from Russian crude, Lukoil has moved in the opposite direction, using its European refineries as a handy consumer of crude it can’t sell elsewhere on the continent. That policy has worked well for the company so far, enabling it to avoid costly and time-consuming shipments to India that have been the sole recourse for its competitors.

Flows of Russian crude into northern Europe, previously the most important destination for shipments from the Baltic and Arctic terminals, have fallen by more than 90% since early February, before Moscow’s troops invaded Ukraine. In contrast, shipments to Italy have more than doubled during the same period.

But that’s going to have to stop about two weeks from now. And Italy has no plan for life after that, even though the implementation date for the EU sanctions was set back in June.

The Lukoil refinery is the biggest in Italy, providing the equivalent of 20% of the country’s fuel needs. Its closure would put at risk more than 3,000 jobs on the island of Sicily.

Unlike the German government, which stepped in to take control of its big Russian-controlled refinery near Berlin, Rome has done little.

Lukoil has mulled selling the plant, but earlier this month rejected an offer from a US private equity group to buy it.

The Italian government may seek a delay to the imposition of EU sanctions in order to avoid closure of the plant, but that will only provide a temporary solution at best. And there’s no guarantee it will get a waiver.

At some point Rome is going to have to take direct action, either forcing Lukoil to sell or stepping in itself. The sooner it does so, the better.

--Julian Lee, Bloomberg oil strategist