Russia Tech Sanctions Will Stall, Not Strangle Refining Industry

(Bloomberg) -- Western sanctions on the export to Russia of technology used in oil refining won't cripple the country's fuel processors, but could hamper the development of the crucial industry.

Russia isn't only a major exporter of crude oil. It has a large refining industry that last year satisfied domestic demand and delivered fuel exports of 2.69 million barrels a day, according a paper by the Oxford Institute for Energy Studies.

The country's exports of refined products have “global reach,” with the European Union receiving about 45% of those shipments, according to Oxford Energy. In 2021, Russia's earned $70 billion from shipping refined oil products overseas, nearly 40% of total petroleum export revenue, according to data from the Federal Customs Service.

The physical flow of Russian oil and gas hasn't been targeted by sanctions, but the country's ability to earn extra revenue by refining crude into higher-value fuels is now subject to restrictions in response to Russia's invasion of Ukraine.

“We and our allies and partners share a strong interest in degrading Russia's status as a leading energy supplier over time,” the White House administration said in a statement this week. The U.S. officials echoed the EU Commission Chief Ursula von der Leyen, who said European sanctions on Russia will make it “impossible to upgrade its refineries.”

The U.S. hasn't published details of its technology-export ban. The EU restrictions are aimed at limiting access to advanced equipment, such as flexicoking, which allows refineries to process heavy oil residues into more valuable products.

The restrictions so far won't strangle Russian oil refiners, but could force them to rethink their technological processes and hit a pause button on some upgrades projects, said Andrey Kostin, head of Russian consultant the Industry Research Center.

“It won't be easy for the personnel, everybody has got used to a comfortable life” with access to foreign software and equipment, he said. “Whatever equipment is already in use will probably not be recalled, even though some issues may arise with maintenance, spare parts, technical support.”

Imports of catalysts, chemicals necessary to speed up refining processes, will dry up, Kostin said. But in most cases, Russian refineries whose core technological processes were developed back in the Soviet Union and modernized in the 1990s and 2000s will be able to use domestic catalysts of earlier generations they were designed for, or switch to more modern domestic options. However, those may be less efficient, he said.

Russian oil companies that are part of an 800-billion ruble ($7.1 billion) plan to build or upgrade some 30 refinery units until 2026, will probably need to review their investment agreements, because there will either be no need for the improvements or no possibility of making them, Kostin said.

The only major -- but so far hypothetical -- risk, in Kostin's opinion, would be a complete recall of software used to automate key technological processes at the refineries. Such a move “would mean a gigantic technological security threat for the refineries,” but the threat to safe operation of the plants would be so great that it wouldn't be allowed to happen, he said.

With assistance from Bloomberg