New European Union sanctions targeting Nayara Energy, a major Indian refinery with significant Russian ties, are expected to have a limited impact on global oil markets, according to Rystad Energy.
This muted effect is attributed to India’s declining reliance on European product exports and its capacity to reroute refined products to domestic and alternative international destinations, the Norway-based energy intelligence company said in an emailed update.
“The flexibility to use India’s domestic market and alternative destinations for middle distillate disposal minimizes the ripple effect of these sanctions on a broader scale,” the company said.
The EU sanctions against Nayara include export bans on refined products derived from Russian crude, financial and shipping restrictions, and a dynamic price cap on Russian crude.
The European distillate market will isolate Nayara within a few months, following new measures.
The Indian government has strongly condemned these unilateral sanctions imposed by the EU on Nayara Energy, labeling them extraterritorial and inconsistent with international norms.
Reportedly, Nayara Energy and its Russian stakeholder Rosneft, which owns a 49.13% stake, are seeking legal options to challenge the sanctions and safeguard their commercial interests.
“The EU’s robust sanctions on Russia and the US call for tariffs on buyers of Russian oil are twin measures to place pressure on not only Russia, but China and India, with the goal of breaking apart their integrated markets,” Pankaj Srivastava, senior vice president, oil at Rystad Energy said.
China has better leverage in this scenario, so the focus has shifted to India’s Nayara refinery.
Reliance on Russia
India’s refining industry has grown heavily reliant on Russian crude oil due to its competitive pricing.
Russian crude now accounts for approximately 30-35% of the total refinery runs, underscoring the sector’s dependence on discounted Russian crude and middle distillates.
India’s primary public sector refiners are currently exempt from EU sanctions because they have no direct ties to Russian entities.
Nayara Energy is the focus of the EU’s action, identified as a Russian entity due to Rosneft’s nearly 49% equity stake.
Nayara operates the Vadinar refinery, which has a nameplate capacity of around 400,000 barrels per stream day (BPSD). This refinery is designed to maximize the production of middle distillates, such as large quantities of diesel and jet fuel.
Shift in strategy
Within six months, Nayara will likely face curtailed access to the EU market, necessitating a pivot in its product export strategy, Rystad said.
A multidirectional approach for product disposal should primarily focus on the domestic market, utilising its extensive network of 6,500 retail outlets, the agency added.
Additionally, redirection to alternative markets in the Middle East, Africa, and Southeast Asia will be crucial.
Reliance Industries Ltd (RIL), India’s other major private refiner, is closely monitoring the implications of the EU’s sanctions package as they evolve.
“Although not directly targeted, RIL remains concerned about the broader risk of secondary sanctions, which could affect its access to European markets if its exports are deemed to contain Russian-origin crude derivatives,” Rystad noted
Challenge
A key challenge for non-Russian entities such as Reliance and other producers is accurately defining and verifying the origin of their products, according to Rystad.
Sanctions forbid importing refined products from Russian crude, even when processed outside Russia.
However, tracing the crude’s origin in refined products is technically unclear.
Refineries can use a “blocked mode” to process Russian and non-Russian crudes separately, creating “clean” barrels unrelated to sanctioned feedstock.
“Reliance, with a massive refining capacity of approximately 1.2 million BPSD across its twin refineries at Jamnagar, has the flexibility to segregate crude sourcing and operate in blocked mode of operations,” Rystad said.
Implications
Following the implementation of EU sanctions on Nayara, the European market is anticipated to experience a reduction of approximately 230,000 barrels per stream day (bpsd) of middle distillate, according to Rystad.
This impact, occurring in the post-Dangote era, is not expected to significantly disrupt the product side of the market, even with potential implications for Reliance.
For navigating this situation, a crucial factor will be the domestic market and an alternative product disposal strategy.
Supply-side concerns are minimal due to the anticipated OPEC+ supply boost and the Indian government’s independent approach to sanctions, which ensures access to discounted Russian crude.
“Given the transition time available, multiple options on crude sourcing, and product disposal for India, the impact on the country will likely be limited,” Rystad Energy’s Srivastava said.
Russia, on the other hand, will face significant impacts contingent on peace negotiations.
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