EU looks to better implement measures targeting Russian energy in upcoming 11th sanctions package

EU looks to better implement measures targeting Russian energy in upcoming 11th sanctions package
/ bne IntelliNews
By bne IntelliNews May 15, 2023

The EU continues work to hash out an 11th sanctions package on Russia in response to its invasion of Ukraine, which will require the approval of all 27 member states to be finalised.

As far as the energy sector is concerned, the main relevance of the package will be additional measures to combat the circumvention of sanctions. “We propose to ban ‘shadow’ entities from Russia and third countries who are intentionally circumventing our sanctions,” European Commission President Ursula von der Leyen said in a statement on May 9. She added that the measures were designed “in very close co-ordination” with the G7 group.

Von der Leyen also said the package would involve transit bans on additional products, including advanced tech products or aircraft parts that are exported to third countries via Russia, and a new tool to prevent sanctions circumventing, whereby the Commission could propose member states to sanction the export of certain goods if they are being delivered from the EU to third countries, but where Russia is found to be the final destination.

The 11th sanctions package, then, essentially focuses on the implementation of previous sanctions. There were reports that Russia’s nuclear power sector would be targeted in the package, but this was denied by the government in Hungary, where Russia’s Rosatom continues to develop the Paks nuclear power plant (NPP).

There are numerous reports of Russian crude oil and petroleum products still finding their way into EU markets through the use of intermediaries with alleged ties to Russia, despite the bloc imposing respective embargos on these goods in December and February. Meanwhile, six little-known companies have emerged as major Russian oil traders to take the place of leading international houses that have reduced their exposure in Russia, raising concern these intermediaries might too be linked to Russia. 

Venezuela and Iran were found to have used intermediaries to avoid sanctions on their Russian oil exports, indicating that Moscow might be doing the same to sidestep embargoes as well as Western price caps.


Targeting Druzhba North

The sanction package also includes a proposal to formalise a halt in Russian pipeline oil flow to Germany and Poland via the northern section of the Druzhba system, according to a document seen by Bloomberg. Both nations have already stopped receiving shipments by this route, even though they are permitted to do so under a decoration of EU sanctions granted when the EU decided to ban most Russian oil imports in June last year. Therefore ending the derogation would be largely symbolic.

Refineries affected by the halt in Druzhba North supplies scrambled to receive alternative shipments including seaborne cargoes. But at least one of the plants, the Schwedt refinery near Berlin, had to curtail output, raising fuel security concerns given its importance as a supplier to the German capital. Germany and Poland imported around 480,000 barrels per day (bpd) via Druzhba. 

Another derogation was given to allow Russian oil flow via Druzhba’s southern branch, which delivers shipments to Hungary, Slovakia and the Czech Republic.


Nord Stream and Yamal Europe gas flow

Another proposal that has been tabled is to ban Russian gas imports via pipelines which Moscow closed last year – namely the Yamal-Europe and Nord Stream pipelines, the Financial Times (FT) reported on May 14. That decision, which will likewise be co-ordinated with the G7, is set to be finalised this week.

Citing a draft G7 statement, the FT said the group would look at “preventing the reopening of avenues previously shut down by Russia’s weaponisation of energy” at least until “there is a resolution of the conflict.”

Once more this measure is seen as symbolic, seen as since the start of the war, the EU has avoided any immediate cuts to Russian pipeline gas supply given the bloc’s heavy dependence on them. Instead, it was Moscow that drastically cut deliveries, which now are at only 10-15% of the pre-war level. Gazprom reduced flow via the Nord Stream 1 in stages last summer, eventually closing it down completely at the end of August, citing maintenance. But the pipeline is inoperable anyway as a result of sabotage attacks in September. The Yamal-Europe pipeline, on the other hand, remains intact, but has been rendered incapable of delivering gas westwards anyway because of sanctions and counter-sanctions imposed by Russia and Poland.

There were grave concerns that Europe would not have enough gas to make it through last winter given Russia’s cuts in supplies. But thanks to entering the coldest season with plenty of gas in storage, mild temperatures, ample LNG and demand reduction and destruction, gas prices began falling significantly in December and they are now at only twice the level they were in 2021. 

“With European gas storage unusually high for the time of year and wholesale prices inching back to what might just be considered their normal price-range, you can understand why Europe’s leaders are confident this plan will not scupper security of supply any time soon,” Tom Marzec-Manser at energy consultancy ICIS told the FT, commenting on the proposal. “It’s important nevertheless not to become overly complacent regarding the European gas market outlook.”