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U.S. sanctions chill the Arctic oil of Russia

According to sources familiar with the logistics, U.S. sanction on Russian tankers and depots is causing major disruptions in Russia's vast Arctic Oil business. Crude supplies that were previously purchased by Asian buyers are now stuck in storage. The U.S. sanctions announced on Friday were the most severe yet against Russia's oil industry. They target major oil producers Gazprom and Surgutneftegas, as well as 183 ships that shipped Russian oil.

According to three sources, who spoke on the condition of anonymity, all three Russian Arctic oil grades, Novy Port ARCO and Varandey with a combined daily output of about 300,000 barrels, are facing disruption.

Two sources claim that the vessels and infrastructure required by Russia's Arctic Oil Business, which represents a tenth its oil exports at sea, are unique.

A special type of ice class vessel is used to transport Novy Port crude oil from Gazprom Neft’s Novoportovskoye Field, where temperatures are as low as -55 C. Varandey from Lukoil’s Timan-Pechora field and ARCO from the Prirazlomnaya platform.

The cargo is then transferred to larger vessels, such as the Aframax and Suezmax, which can transport 100,000-140,000 tonnes compared to 30,000 tons for the smaller vessels.

The United States have now sanctioned Umba and Kola as well as more than a half dozen small tankers that were used to shuttle oil from the field.

According to LSEG, at least 15 tankers sanctioned on Friday by the U.S., including the Mikhail Ulyanov, Aulis and Shturman Scherbinin were actively involved in shipping Russian Arctic grades over the past two months.

The shuttle tankers are smaller and designed for northern seas. They can carry more oil with no compromise to keel clearance.

There is no way to replace them quickly. You can't buy anything like this anywhere else. "The vessels were built specifically for the project," said one source.

Sources said that Russia could be left with millions of barrels in storage of oil it has not sold. One source said that the limited storage capacity at all three projects could lead to a reduction in production if there were a few weeks of disruptions to loading.

Lukoil declined to respond to requests for comment while Gazprom Neft refused to do so.

Gazprom Neft (which produces ARCO and Novy Port) was added directly to the U.S. sanctions package, while Lukoil (which produces Varandey) was not.

ASIA BORDER

Novy Port, Varandey and other refined oils are highly sought after by refiners around the world for their superior quality. Both are light with 0.1-0.4% sulfur. Refineries in India and China have recently purchased the Arctic grades that were previously bought by refineries from northwest Europe prior to an EU embargo in 2022.

One source familiar with the Indian oil market stated that "Light Arctic Oil Grades from Russia were priced higher than the (G7) cap price due to their superior quality." India and China, however, have demonstrated that they are not willing to accept oil from sanctioned tanks and have begun to look for alternatives to Russian oil.

One of the traders on the Asian oil markets said that the absence of Russian Arctic oil grades will likely drive up the price of WTI, the U.S. flagship oil grade. WTI is also a light oil.

India has reduced its U.S. crude oil purchases after it began to buy cheap Russian barrels on the market two years ago. However, a source from an Indian refiner says that his company may be looking at purchasing more U.S. crude oil.

No Domestic Link

There is no system in place to feed the Russian oil pipeline system with the oil volume from the Arctic projects. All the oil volume will be exported.

The sources stated that in the event there are no buyers of these oil grades, then volumes will either have to be stored on floating storage or Gazprom will have to reduce output for both projects.

One source said that although it is possible to ship some grades via sea to refineries in southern Russia, this could be expensive and in limited quantities.

Technically, Lukoil Varandey's oil supplies could be shipped directly to international markets from the Varandey terminal. One source said that the cost would be higher and the company needed time to bring replacement tankers into the region. (Reporting from MOSCOW; additional reporting by Nidhi in NEW DELHI, editing by Guy Faulconbridge & Jan Harvey).

(source: Reuters)