Russia Targets Europe With a Commodity Weapon: Kazakh Crude

(Bloomberg) — Russian President Vladimir Putin has found another weapon to use against European countries supporting Ukraine — Kazakhstan’s crude — and it will cost him almost nothing, writes Bloomberg oil strategist Julian Lee.

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While a grace period ticks down before European sanctions on Russian oil kick in on Dec. 5 and the G7 group of industrialized countries considers a price cap on Moscow’s crude exports, Putin is getting his retaliation in early. A court in the town of Novorossiysk has ordered the Caspian Pipeline Consortium to halt shipments from its Black Sea export terminal for a month as punishment for violating oil spill regulations.

The beauty of the move, from a Russian perspective, is that the flow that will be curtailed is not primarily Russian crude, which can be diverted elsewhere anyway, but output from neighboring Kazakhstan. Almost 1.5 million barrels a day of crude supply can be taken off an already tight market at virtually no cost to Russia.

Supplies to European markets, where about two-thirds of CPC crude ends up, already are being constrained by unrest in Libya, which has slashed the north African country’s exports by half and looks likely to send them even lower, as well as the shunning of Russia’s own barrels by former customers.

After operating relatively trouble-free for more than 20 years, the CPC pipeline has been hit with a series of outages in the months since Putin’s troops invaded Ukraine and European countries began sending aid and arms to the government in Kyiv.

March saw a storm damage two of the loading buoys, taking the entire terminal out of operation for several weeks and cutting flows well into April. After a quiet May, a seabed survey in June revealed a World War II mine that required the suspension of loading from two of the three buoys. No sooner were they back in operation than the port was hit again.

An audit of hazardous operation facilities, ordered by a deputy prime minister of the Russian Federation, revealed “a number of documentary violations under the Oil Spill Response (OSR) Plan,” according to a statement on the CPC website. Even though the company was given until Nov. 30 to rectify the violations, an application was made to the court to suspend operations as punishment for the offense.

The halt, if implemented, will have virtually no impact on Russia’s oil exports. Crude of Russian origin makes up only about 10% of CPC volumes and can be rerouted to alternative outlets. The bigger hit will be felt by Kazakhstan, which relies on the pipeline for almost 80% of its hydrocarbons exports and has little flexibility to reduce that dependence.

But losing what could be as much as a million barrels a day of light, sweet crude would be a hefty blow for Europe. By halting CPC flows, even if only briefly, Russia could punish its tormentors to the west by stoking already elevated crude prices, while potentially increasing state revenues from its own virtually undamaged exports.

NOTE: Julian Lee is an oil strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.