US sanctions on Russian oil supply chain pose challenge for Indian refiners

The latest round of sanctions by the outgoing Biden administration in the United States may be among the most disruptive for buyers of Russian crude oil — India and China — since Washington started tightening strictures on Russian oil flows in December 2022.

 

On Friday night India time, the US announced measures to sanction 183 vessels, or nearly every third tanker carrying Russian oil, two Russian insurers, which offer coverage to most of India’s Russian oil purchases, two leading Russian oil and gas producers, and a bunch of traders, which contribute to a third of Russian flows to India, according to sanction documents, refining officials, and ship tracking data.  

 

Unlike in the past, when Washington used to sanction certain sections of the Russian oil trade, this time it has simultaneously slapped strictures across the entire oil supply chain — from producers to traders to insurers to banks, hurting buyers like India the most.

 

What is however unclear is enforcement. In some cases involving oil producers and insurers, the cutoff date is February 27. But, on sanctions barring tankers and “opaque” Russian traders, the document is silent. In December 2023, when SunShip Management, Russian state-shipping behemoth Sovcomflot’s Dubai-based affiliate, was barred, the enforcement was immediate and hurt several shipments of Russian Sokol grade to India. But in subsequent sanction orders, a 45-day grace period was given to complete voyages.

 

Top refining officials say they will seek clarifications from Washington because some of these tankers are headed to India laden with oil.

 

India’s slowing economy is most exposed to the latest bans because refiners must pay much more to purchase alternative crudes from West Asia in the short term, two top refining officials say. State-run refiners, which accounted for nearly two-thirds of all Russian crude purchased in 2024, may have to incur additional costs of $6-10 per barrel, around 8-10 per cent of current Russian sourcing costs, to buy oil from Saudi Arabia, Oman, and Iraq, according to calculations based on Indian customs data and top company officials. Also, West Asian nations may charge higher premiums because of disruptions to Russian flows, a state refiner says.

 

Higher sourcing costs will impact refining margins by around $4 per barrel, even after accounting for the superior quality of the Gulf grades compared to Russian oil, another top refining official says. With prices of petrol, diesel and LPG virtually fixed, there is little leeway for state refiners to pass through higher sourcing costs to end consumers, eventually stressing the national Budget, analysts say. 

 

European benchmark Brent has jumped by nearly 6 per cent this year to move close to $80 per barrel in response to US sanctions, increasing costs for India. 

 

The sanctions will impact at least one-third of the 1.8 million barrels a day India imported from Russia last year, 38 per cent of the country’s total oil imports, according to sanction documents, ship tracking data, and industry sources. India may have to source 600,000-800,000 barrels per day of crude from West Asia in the near term to substitute any shortfall in Russian supplies, refining officials say. That entails additional sourcing costs of $4-$8 million a day at current oil price levels, which on a quarterly basis translates to as much as Rs 6,000 crore for all refiners.

 

Of course, all this will depend on the actions of the incoming Trump administration in the US and on how fast Russian suppliers build firewalls against these new sanctions, a refining official says. 

 

‘Meanwhile, there will be a contraction in the discounts offered by Russian oil traders, many of which have been barred in the latest sanction round, officials say. Discounts averaging $3-4 per barrel, a fraction of the $15-20 per barrel seen in early 2022 and early 2023, are already at record lows. Another official explains that the sweeping ban on more than a third of the tanker fleet shipping Russian cargoes will increase freight rates and squeeze traders’ margins, which in turn will reduce discounts.

 

The sanctions may also impact a 500,000 bpd term contract between Reliance Industries and Rosneft for supplies this year. While Rosneft, the biggest supplier of Russian oil, is not sanctioned, many of its vessels are; so it will need to find tankers to deliver the cargoes and pay more for freight. Reliance and state-run refiner Indian Oil are the biggest buyers of Russian oil. 

 

Reliance declined to comment on the sanctions. Indian Oil did not reply to queries seeking comments.

 

Finding vessels is a problem. There are around 500 tankers that are deployed to transport sanctioned oil from Russia, Iran, and Venezuela, according to market intelligence agency Vortexa. More than 60 vessels were already barred in previous sanction rounds. Now, Washington has sanctioned another 183 vessels. Over 75 of those ships have delivered Russian Urals and other lower sulphur grades to India in the last few months, according to calculations based on access to exclusive ship tracking data and industry sources. Of  those vessels, more than half belong to the so-called “shadow fleet”, defined by Washington as those that participate in high-risk shipping practices to facilitate illicit or sanctionable activity. To put it in perspective, Russia used around 70 tankers to deliver India’s November crude supplies. 

 

In addition, the US has imposed sanctions on Gazprom Neft and Surgutneftegas, two of Russia’s biggest oil and gas producers, and their subsidiaries, which on an average supplied around 380,000 barrels per day of oil to India in the last two years, around a fifth of Russian supplies.

 

The US has also banned “opaque Russian traders”, which may have supplied at least 15 per cent of Russian cargoes to India, according to ship tracking data and refining officials. Some of these traders include Black Pearl network, UAE-based Demex Trading, which bought over 700 shipments of crude oil and diesel fuel from Russia worth at least $8 billion in 2023, Eterra Crude Oil Abroad Trading, consignee for over 300 shipments between September 2023 and April 2024, Guron Trading, consignee for over 400 shipments between May 2023 and April 2024, UAE-based Marion Commodity, supplier of over 250 shipments between January 2024 and May 2024, and UAE-based Marsa Energy Trading, consignee for over 300 shipments of crude oil originating from Russia between March 2022 and April 2024.

 

There are also strictures against some of Russia’s biggest insurers, Ingosstrakh Insurance Company and Alfastrakhovanie Group, which provide coverage for most of India’s Russian supplies. Typically, Russian cargoes costing below $60 per barrel can use western shipping services and insurers but the increased pressure from Washington and EU and the tendency among traders to adjust FOB prices to escape sanctions has prompted western agencies to avoid servicing Russian oil shipments, industry officials say.

 

Also sanctioned is a $130 billion Vostok oil project, in which Indian state oil companies have spent billions of dollars for stakes in the Vankor producing areas. Vostok comprises the operational Vankor cluster of fields — Vankor, Suzun, Tagul and Lodochnoye — as well as Irkinskoye and West-Irkinskoye, together with the Payakha field. The Vankor cluster is already producing more than 300,000 b/d. ONGC Videsh, Oil India, Indian Oil and Bharat Petroresources own 49.9 percent of the Rosneft subsidiary Vankorneft, which is developing the Vankor oil and gas condensate cluster in East Siberia. Rosneft is the operator. State-run explorer ONGC said it would need to study the US orders before commenting on the Vostok project. 

To whom the US sanctions apply

 

> 183 vessels, largely oil tankers that are part of the shadow fleet as well as those owned by Russia-based fleet operators

> Gazprom Neft and Surgutneftegas, two of Russia’s most significant oil producers and exporters

> Two Russia-based maritime insurance providers, Ingosstrakh Insurance Company and Alfastrakhovanie Group

> Two active LNG projects, a large Russian oil project, and third-country entities supporting Russia’s energy exports

> More than 30 Russia-based oilfield service providers and more than a dozen leading Russian energy officials and executives

> Sovcomflot, Russia’s state-owned shipping company and fleet operator