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Russia Implements New Pricing Method for Crude Oil Exports

From April 1, Russia officially implemented a new crude oil export pricing method linked to the international crude oil benchmark Brent crude oil price, which will lead to a reduction in Russian crude oil price discounts and is expected to increase billions of dollars in "extra" fiscal revenue.



Since the West imposed price caps on Russian crude oil and banned seaborne imports, the Russian oil industry is gradually losing touch with the global crude oil trade market.


The Russian government has begun to contemplate the reform of the "oil tax and export price mechanism", with the aim of reducing the sales discount of flagship crude oil and paving the way for a reasonable pricing mechanism that is not disturbed by political factors.


Adjust the Export Quotation Calculation Method


Russian President Vladimir Putin first announced the crude oil pricing reform plan at the end of February: from April, the Argus quotation will be completely abandoned, and it will be calculated based on the ever-shrinking discount price of the current Brent crude oil price.


The Russian State Duma issued a statement stating that starting from April 1, the price discount of the flagship Urals crude oil will be limited when pricing the export price. The discount price of Urals crude oil to Brent crude oil will be limited to US$34 per barrel in that month and will be reduced to US$31 in May. , down to $28 in June and $25 from July to the end of the year.


S&P pointed out that the new calculation formula corrects and limits the maximum discount of Russian crude oil to Brent crude oil. Previously, the average price of Urals crude oil was determined with reference to the quotations from Argus International Energy and Commodity Price Evaluation Agency. As Urals crude oil exports shifted from Europe to other regions in October last year, Argus began to estimate based on the export price of Russian crude oil. By the end of last year, the price of Argus Urals crude oil was only 43 US dollars per barrel. Russia immediately decided to "abandon" Argus, and set its own price.


Russia hopes to determine the export price benchmark by itself through customs contracts and export volumes, so as to adjust the oil export tax system on this basis to ensure fiscal revenue. Russia is struggling to cover a widening budget deficit due to Western sanctions.


Right now, more Russian crude and gas are being sold to Asia than to Europe, making previous benchmarks based on the price of Russian Urals oil at European ports redundant. As a result, Russia switched to a benchmark price based on a fixed spread to Brent.


Russia's Deputy Finance Minister Mikhail Kotyukov said the adoption of the new formula would increase Russia's state budget by 600 billion rubles ($8.2 billion) this year.


According to data from the Russian Ministry of Finance, oil, and natural gas revenues were approximately 11.6 trillion rubles (approximately US$165 billion) last year, a year-on-year decrease of 46% to 521 billion rubles (approximately US$6.91 billion) in February this year, of which crude oil and petroleum product revenues fell by 48% to 361 billion rubles.


After the implementation of the new formula, Russia's overall budget deficit is expected to drop to 4.3 trillion rubles this year.


Adjustment of Quotations Has Little Impact on China


Russia has tightened the maximum discount for Brent crude oil by adjusting the pricing method of crude oil export, to a certain extent, it is to avoid the "cheap sale" of Russian crude oil. Will it have a greater impact on China, India, and other countries that are major importers of Russian crude oil?


In this regard, analysts at Bloomberg Economics pointed out that Russia’s upper limit on crude oil discounts is mainly in response to Western sanctions, and has little impact on China and India, the two major buyers of Russian crude oil. In fact, Chinese and Indian companies have been offering discounted Prices to buy Russian crude oil.


On the Chinese side, according to the long-term oil supply agreement signed by China and Russia, the purchase price was reached according to a set of complex formulas under the condition of Brent crude oil price fluctuations. This formula is to enable both China and Russia to realize long-term profits within a reasonable range of prices maximize.


China focuses on ensuring stable supply, and Russia focuses on ensuring stable economic interests. In India, according to Indian customs data, Indian oil refiners have been importing Russian crude oil at a price higher than $60 per barrel. At the end of last year, when East Asian countries snapped up Russian Far East crude oil delivered in January 2023, they also bought the goods at CIF, which means that the freight and insurance costs of these crude oils were borne by the seller Russia. The crude oil was quoted at US$67.11 per barrel.


The Wall Street Journal pointed out that the average price of all blended crude oil exported by Russia in December last year was close to $74 a barrel, which was only $10 lower than the price of Brent crude oil in the same period and far above the upper limit of $60 a barrel.


It is noteworthy that Japan, which participated in the formulation and implementation of the Russian crude oil price ceiling, has taken the lead in "bowing its head" to Russia because of the severe shortage of energy and electricity.


TASS quoted data from the Ministry of Economy of Japan as showing that Japan imported about 232,700 barrels of oil from Russia in February at a total cost of 2.125 billion yen (about 15.945 million U.S. dollars), equivalent to a price of 68.52 U.S. dollars per barrel.


Although Japan emphasizes that the oil comes from the Russian Sakhalin 2 project in which it is a shareholder and is not subject to Western price cap control, the chairman of the Japan Petroleum Association and the president and CEO of Idemitsu Kosan Co., Ltd. Shunichi Kito said frankly that Japan may need to resume the imports of Russian crude oil.


Russian Crude Oil Trade Expected To Increase


The Central Bank of Russia stated that Russia's reform of crude oil export pricing is to fully and truly reflect the value of Russian crude oil and petroleum products, while the Russian Ministry of Energy is using a new tracking mechanism based on Russian customs and commodity data.


"This will track the real cost of crude oil sold and lay the groundwork for launching our own Russian crude oil price benchmark this year to better attract buyers," Russian Energy Minister Nikolay Shulginov said.


"The Russian government is not doing it blindly to change the way crude oil is priced," said Sergey Vakulenko, former strategic director of Gazprom's oil department and a senior fellow at the Carnegie Endowment for International Peace. "Russian crude oil producers mainly export most of its oil through affiliated traders and stores shipping costs in accounts outside Russia."


Commodity traders around the world are broadly open to increasing Russian crude output for now, with Trafigura, Vitol, and Gunvor all saying they would push for more Russian production this year if the political and financial environment allows it.


Trafigura Chief Executive Jeremy Weir said Trafigura would change its stance if there was a broad consensus among banks, insurers, and Western countries to facilitate smooth and safe shipments of Russian crude. “Trafigura completely stopped trading Russian crude last year and is only releasing a ‘limited’ amount of refined products that are permitted by Western sanctions waivers.”


Vitol CEO Russell Hardy revealed that Vitol currently trades less than 100,000 barrels of Russian crude oil per day. "If the general environment improves, this number will increase slightly."


The Financial Times reported at the end of March that the United States had begun privately urging some large trading companies to restart trade activities with Russia, provided they abide by the ceiling price of $60 per barrel.


 

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