A recent investigation by the Wall Street Journal revealed this month that there is a loophole that is allowing banned Russian crude to reach the U.S. market. If sanctioned Russian oil is processed in a refinery in a country outside of Russia, it becomes a product of that country. In this case, Russia’s second-largest oil and gas company, Lukoil, is processing Russian crude in its Italian refinery and exporting it to the U.S. to be bought by companies, such as ExxonMobil, without violating any sanctions. Most of the crude being processed at the Lukoil refinery in Sicily, the fifth largest in Europe, comes from Russia, at around 93 percent. This was not the case before, but sanctions introduced on Russian oil by the U.S. and other states have limited the places where Russian oil can be processed, and much of it is being sent here. The refinery has exported around 5 million barrels of oil products to the U.S. since March, including gasoline, naphtha, kerosine, diesel and heavy oil. This equates to enough gasoline to fuel 7 million vehicles, meaning drivers are inadvertently filling their cars with Russian gasoline and contributing to the Russian economy.
The U.S. imposed sanctions on Russian oil and gas in February this year, following Russia’s unlawful invasion of Ukraine. However, Lukoil, which has a presence in the U.S., has not been sanctioned and continues to distribute oil products in 11 states. Refined Russian oil is reaching the U.S. market, purchased by companies including ExxonMobil, via its oil terminal in Baytown, Texas, near Houston, and by Lukoil’s trading arm Litasco. However, not every buyer has been identified, and none of these buyers is doing anything illegal in buying their oil products from Italy.
However, the Lukoil refinery in Sicily will no longer be permitted to import Russian oil once European sanctions on Russian energy come into place on 5th December. This could force it to close if it does not find another crude supplier. Knowing this, U.S. private equity firm Crossbridge Energy Partners offered Lukoil a deal to purchase its Sicily refinery this month. Lukoil reportedly rejected the offer due to doubts about whether Crossbridge could come up with the money to buy the facility. The commodities trading company Vitol was expected to provide Crossbridge with the credit required to invest in the deal at a good rate, hoping to profit from supplying crude to the refinery.
Lukoil's ISAB refinery accounts for 20 percent of Italy’s refining capacity, providing around a thousand jobs on the island of Sicily. It has faced troubles in recent months as suppliers and creditor banks are reluctant to work with Russian companies for fear of stricter sanctions on Russian oil coming into place in Europe. The Italian government is invested in keeping the refinery up and running, despite new sanctions commencing in December. The refinery has reportedly requested financing of $695.59 million from several banks, with little success. Adolfo Urso, Industry Minister in Italy's new government, is helping to facilitate the sale of the refinery to ensure it does not have to close, as well as encouraging financing from lenders to keep the plant in operation.
Earlier this year, the was talk of boycotting Lukoil in the U.S., but reports suggested that it would hurt gas station owners more than the Russian company. In February, following the start of the Russia-Ukraine conflict, the hashtag #BoycottLukoil was trending, with American citizens suggesting that the country should boycott the Russian oil company. Lukoil has around 230 branded gas stations in the U.S., most of which are owned by individual American franchisees rather than the company itself, meaning a boycott would likely be more detrimental to U.S. business owners rather than Lukoil itself. Tom Kloza, global head of energy analysis at research company IHS Markit, stated “Retail gasoline sales are a tiny portion of the revenue of oil companies.” He added, “When you compare their production of crude and trading cargos and barges, it is a small fraction of their business.” This may suggest why Americans continue to see Lukoil stations across the country.
While doing business with Lukoil will likely mean a continuation of Russian imports by way of Italy and other refining powers, the oil giant controversially called on President Putin to bring an end to the war earlier this year. The company released a statement “calling for the soonest termination of the armed conflict.” It stated, “We express our sincere empathy for all victims, who are affected by this tragedy. We strongly support a lasting ceasefire and a settlement of problems through serious negotiations and diplomacy.” This demonstrates how complicated it can be to introduce sanctions on a whole country’s oil without damaging production and supply in other parts of the world.
At present, Lukoil continues to provide the U.S. with refined Russian oil products, thanks to its significant refining capacity in Italy. However, when European sanctions on Russian oil and gas come into place in December, this loophole supply could come to an end. While this will have the intended effect of restricting the export of Russian oil, it could also harm Italy’s refining capacity as well as limit the supply of oil goods to other parts of the world.
By Felicity Bradstock for Oilprice.com
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