A model of a gas station can be seen in front of the colors of the EU and Russian flags in this illustration, made on March 25, 2022. REUTERS / Dado Ruvic / Illustration / File Photo
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LONDON, June 28 (Reuters) – G-7 leaders have agreed to explore possible price caps for Russian oil and gas to try to limit Moscow’s ability to fund its invasion of Ukraine, G-7 officials said. in Tuesday.
Officials, including US Treasury Secretary Janet Yellen, say the measure will limit the price Russia receives for energy, while allowing Western consumers to continue receiving supplies. Read more
Below are some of the most frequently asked questions about the price cap and the challenges it may face.
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HAS IT BEEN DONE BEFORE?
A somewhat similar mechanism was set up as part of the UN’s oil-for-food program in 1995 to allow Iraq to sell oil in exchange for food and medicine.
The program, introduced by the administration of US President Bill Clinton, was aimed at meeting the humanitarian needs of ordinary Iraqis, while preventing Saddam Hussein’s government from strengthening its military capabilities.
Oil buyers paid money into an escrow account managed by BNP Paribas. The money was used to pay military reparations to Kuwait, and UN operations in Iraq and Iraq were allowed to buy regulated items by all other means.
The program suffers from widespread corruption and abuse.
While the United Nations was united in opposing Saddam Hussein’s government, the body was divided over Russia’s invasion of Ukraine, which Russia calls a “special military operation.”
China, India and Pakistan are among 35 countries that have refused to condemn Russia. China and India have become the biggest buyers of sharply reduced Russian oil as Europe cuts imports.
WHAT IS THE PURPOSE OF THE BUYER CARTEL?
Western officials say they want to encourage Russian oil sales at levels slightly above production costs to ensure that Russia’s profits are cut as long as it maintains production.
Today, Russia is receiving more revenue than before the invasion began on February 24, as global price rises offset the impact of sanctions. Read more
Tamas Varga of the oil broker PVM said the idea of limiting the price was proof that the outright bans on Russian oil had been counterproductive as Russian revenues had risen.
But creating a cartel of buyers to starve Russia for petrodollars while easing inflationary pressures on oil prices is a challenge.
“The big unknown is Vladimir Putin’s reaction,” Varga said.
If Russian President Vladimir Putin decides to reduce oil or gas exports, the plan will backfire and lead to higher prices: “This is a nightmare scenario for both Europe and Russia.”
WHAT LEVEL FOR THE CAP?
With Brent reference prices of $ 110- $ 120 per barrel, Russian oil is selling at big discounts of $ 30- $ 40 per barrel, and Chinese and Indian buyers are grabbing it.
“The G-7 wants to reduce Russia’s oil revenues, and that means a price cap well below what buyers are currently paying. Some activists have called for a very aggressive reduction, citing Russia’s low production costs and arguing that it will continue to sell oil at any price above that level, “said Richard Malinson of Energy Aspects.
Production costs in Russia are $ 3-4 a barrel, and Russian companies could probably make a profit, even if oil prices were $ 25-30 a barrel.
CAN THE CAP WORK THROUGH DELIVERY INSURANCE?
The imposition of a price cap on Russian oil sales could be done through shipping insurance, said Louise Dixon of Rystad and Mallinson.
The International Group of Protection and Compensation Clubs in London covers about 95% of the world’s oil supply fleet.
Buyers of Russian oil may be offered an exemption from the ban on European shipping insurance, which takes effect in early December if they pay at or below the price cap.
However, there are many obstacles.
“The most obvious thing is that Russia may not agree to sell at these prices, especially if the ceiling is very low and close to production costs,” Dixon said.
“In fact, Putin has already shown his readiness to suspend natural gas supplies to EU countries that have refused to comply with payment requests.”
The next hurdle will be China, which can accept Russian insurance, Dixon said.
The state-controlled Russian National Reinsurance Company (RNRC) has become a major reinsurer of Russian ships. Read more
WILL CHINA AND INDIA COOPERATE?
India has provided a safety certificate for dozens of ships, allowing the export of Russian oil. Read more
“Russia and some buyers are already finding alternatives in European insurance markets, using a combination of local insurers and state guarantees. So this mechanism will not require full participation in the price ceiling,” Malinson said.
In addition, European insurers may be reluctant to take responsibility for monitoring the price cap and could choose to avoid covering such deals, even if failures are available, he said.
The EU will also have to amend the sanctions it adopted at the end of May, which will require unanimous support.
“Given the difficult negotiations in May, some countries are worried about not reopening the issue and giving Hungary and others another opportunity to push for concessions,” Malinson said.
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Reporting by the London Energy team; Edited by Barbara Lewis
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