Analysis | Putin’s New Weapon of Mass Disruption: Kazakh Oil

Although the facility is in Russia, about 90% of the crude that passes through it comes from Kazakhstan. That makes it an ideal weapon in President Vladimir Putin’s arsenal to inflict economic pain on his tormentors. Halting CPC will remove as much as 1.5 million barrels a day of much-needed crude from the global oil market, while barely denting Russia’s own flows.

Of course, Putin hasn’t said explicitly that’s his aim. The use of regional courts to halt oil flows offers the Kremlin plausible deniability. But the process follows a familiar pattern.

The initial investigation into oil-spill response procedures at the export terminal was ordered by a Russian deputy prime minister whose recent experience was in the agriculture and land-registration sectors, raising the suspicion that there was a political motivation behind it.

Russia has history when it comes to using the courts for political ends. Just look at the hounding of TNK-BP and its foreign executives in 2008, prior to the oil venture’s eventual takeover by state-backed Rosneft PJSC; BP Plc’s experience with its Kovykta gas field in Siberia, or the raft of obstacles put in the way of the Sakhalin 2 LNG project that culminated in Gazprom PJSC taking a majority stake in the operation in 2006.

The CPC export terminal has suffered a series of unfortunate events since Russian troops invaded Ukraine. In late March, the terminal was partially shut for a month after a storm reportedly damaged two of the three loading buoys. Then in mid-June, loadings were again suspended from two moorings for a survey of the surrounding water area, which led to the discovery of a number of World War II mines. A skeptic might have expected mine removal to have been a priority when the buoys were first installed.

As much as two-thirds of CPC Blend exports typically end up in Europe, with significant volumes directed to Central Europe through pipelines from the Italian port of Trieste. The impact on the Mediterranean crude market, in particular, where the supply is already the tightest it has been in years, would be severe.

Combined monthly exports from Azerbaijan, Kazakhstan, Libya, the North Sea and West Africa — all major suppliers to Europe — fell by more than 1 million barrels a day in June, according to tanker tracking data compiled by Bloomberg.

Exports from Libya were down by nearly half from last year’s average and look like they’re falling further this month, as unrest grips the country once again. Like CPC Blend, Libya’s crudes are light and sweet, meaning they yield lots of transport fuels and contain little sulfur. That makes them attractive right now and hard to replace.

The threat of a halt to CPC shipments will hang over the oil market at least until Monday, when a court in the Krasnodar region, where the terminal is located, is scheduled to hear the company’s appeal against the ruling. That raises hopes that disruption can be avoided, but there’s no guarantee that CPC’s appeal will be successful.

Meanwhile, the threat has left traders scrambling for alternatives. Regional crudes are commanding the highest premiums to benchmark Dated Brent that several traders could remember.

Even if the ban is overturned, Russia has sent a clear warning to Europe that it can disrupt crude flows almost at will and that it’s willing to inflict extreme economic damage on its neighbors in the process.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Julian Lee is an oil strategist for Bloomberg First Word. Previously, he was a senior analyst at the Centre for Global Energy Studies.

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