Has the G7 price cap worked?

Good morning and welcome to Energy Source, coming to you from London.

Today is the first anniversary of the G7’s price cap policy, introduced 12 months ago in an attempt to keep Russian crude on the international market, while undermining the Kremlin’s ability to finance its war in Ukraine.

The policy was ambitious: an attempt to re-engineer the oil market and damage Russia without pushing global crude prices higher. Many oil industry veterans said it was doomed to fail.

A year later, I assess whether it worked and what G7 members, still committed to weakening Moscow, should do next.

Before we get to that, let me also draw your attention to the eye-catching spat between Venture Global, BP and Shell. It is getting personal.

In today’s FT, Mike Sabel, chief executive of the US liquefied natural gas exporter, tells our reporters that the European energy majors are seeking to undermine his company because they cannot handle the competition. “We are a catastrophe for them,” he says in a combative, must-read interview.

Thanks for reading. — Tom

The G7’s price cap conundrum

The first thing to remember about the price cap is that arguably it would not exist had the EU not surprised US policymakers last year with a plan to ban companies in the bloc from any involvement in the shipment of Russian oil. Europe provides the majority of the world’s shipping and insurance services and so such a ban risked moving millions of barrels of Russian oil off the market at a time when the west was already wrestling with soaring energy prices.

Under the price cap policy — conceived in June 2022 and enforced last December — countries outside of the G7, such as India and China, could continue to import Russian oil but they would have to pay less than $60 per barrel if they wanted to use G7-registered ships, trading or insurance services to move the crude.

The idea was to allow Russian barrels to keep flowing to new buyers but use Europe’s maritime dominance to force Moscow to accept lower prices.

Has it worked?

In the first three to six months, the price cap and the related ban on imports into the EU precipitated a steep drop in Russian crude prices as producers were forced to ship their oil over longer distances to a smaller pool of buyers, mainly in India and China, which suddenly had increased bargaining power.

As a result, between December and June, Urals crude — Russia’s main export blend — was generally selling at between $40 and $50 per barrel, representing a $30-$40 per barrel discount to global benchmarks, pricing data shows.

Since then, the average export price Russia collects for its crude has climbed to more than $80 per barrel in September and October, according to the Kyiv School of Economics, which has been studying evasion of the price cap.

“For the first half of the year energy sanctions in general but also the EU embargo have had a noticeable impact on Russian macro stability,” says Benjamin Hilgenstock, an economist at the KSE. “Now we’re facing a situation where energy sanctions aren’t that effective anymore and where the longstanding issues with price cap violations are really mattering for how this looks going forward.”

In October, KSE estimates that 99 per cent of seaborne exports of Russian crude were sold at prices above $60 per barrel. Of those shipments, 71 per cent involved vessels and service providers outside of G7 countries, up from only 20 per cent in April 2022.

The growth in the non-G7 share of the Russian oil trade reflects Moscow’s successful development of a network of traders, vessels and insurance providers in places like the United Arab Emirates and Hong Kong to ship its oil after western companies pulled back.

However, the remaining 29 per cent of Russian crude exports in October still moved on vessels owned or insured by entities registered in G7 countries.

In order to comply with the rules, those G7 companies, many of which are based in the EU, must receive a written record from the buyer attesting that the crude has been sold under the price cap. However, the companies are not required to investigate whether the pricing assurances they receive are trustworthy, and policing of the attestations has been lax.

“What this means is someone is providing falsified pricing information on the attestations otherwise it is hard to square these two numbers,” Hilgenstock says.

How to improve it?

Despite the resumption of Russian crude exports above $60 a barrel, the US argues that the first year of the price cap has still been successful. US officials claim it has kept Russian crude on the market, temporarily reduced the price Moscow can sell at and increased costs by forcing the Kremlin to invest in an independent fleet, and ship further to new buyers.

However, for the price cap to remain relevant in 2024, changes will need to be made.

The KSE has made three recommendations for how the G7 could seek to force greater compliance with the policy.

1. Increase policing of the attestation process, for example, by requiring G7 service providers to obtain copies of original sales contracts to support the attestation letter provided by the customer.

2. Require vessels passing through geographical “choke points” like the Danish straits to have adequate insurance from reputable providers.

3. Impose secondary sanctions on non-G7 countries and companies violating the price cap.

What will change?

The US also recognises that the policy and its enforcement needs to be tightened.

“I think we understood from the beginning of the price cap exercise, that over time, the enforcement aspect of this was going to be particularly important to the success of the policy,” Geoffrey Pyatt, US assistant secretary of state for energy resources, told the Financial Times in an interview last week.

Pyatt said the US was “looking for ways to make the shadow fleet less effective” and did not rule out measures to force western insurers to demand more information from shippers.

Washington imposed targeted sanctions in October on two companies — one registered in Turkey and the other in the United Arab Emirates — for violating the price cap in its first enforcement action linked to the rules.

Those measures, although being “a drop in the bucket”, have led to a further reduction in G7 involvement in the Russian crude trade, says Ben Cahill, a senior fellow at US-based Center for Strategic and International Studies, who has been studying the west’s energy sanctions on Moscow. “It does send a ripple effect through the market,” he adds, noting that European vessel owners and insurers that were relying on dubious attestations may have decided it was not worth the risk.

Russia has been very successful at building its so-called shadow fleet, however it may not have enough vessels and service providers to also handle the 30 per cent of oil exports — according to the KSE data — still linked to G7-registered companies.

“It may be that Russia runs out of options and it doesn’t have enough people willing to play in that grey and black market to move all of its crude and products and so I think it’s a smart move for G7 policymakers to use the leverage that they have and to go after those companies that are domiciled in the west,” Cahill says.

Other options include putting more pressure on ports and buyers in Asia receiving Russia crude cargoes.

However, as in 2022, the US will be hamstrung again by its need to avoid restricting Russian oil exports in any way that pushes up global prices, particularly in the run-up to President Joe Biden’s re-election bid in November, adds Cahill.

“There are clearly a lot of ways that the price cap mechanism could be tightened up and enforced better but it is not fundamentally going to change the nature of Russian crude and products flows,” he says. “Some of these are just durable changes in the market and they are going to be hard to reverse.”

Power Points

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and David Sheppard, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.