My Kyiv Kanal24: Ukraine’s drones hit Russian refineries hard. USA apparently blocks hits on oil ports. Why?

Dear colleagues and friends — there are two key energy aspects in this detailed interview with Nataliia Lutsenko of Channel 24, an all-news TV channel from Kyiv: (1) Ukraine’s attritional war on Russia’s domestic oil sector and (2) whether Ukrainian long-range drone capacities will be called upon (viz., permitted by the USA) to accomplish what the new US policy of ending Russian oil exports seeks to accomplish through secondary tariffs. Elaborating:

(1) Domestic Russian oil refining capacities: I explained that, If Ukraine can sustain these new drone attacks at a faster rate than Russia can repair them, this will be a major blow to the supply of diesel fuel required by the Russian war economy, especially to war industries, railways (i.e., to locomotive fuel), for harvesting of crops this fall, and to supply the war front and occupied Ukraine. The last time this was tried on a large scale, roughly two years ago, Ukraine caused significant hardships to Russian refining, but ultimately it did not achieve sustained damage at a rate necessary to collapse Russia’s immense national refining capacity. However, as I pointed out to Nataliia, Ukraine’s drone production and sophistication is now greater, and chances of success therefore better. We should know in some weeks or perhaps a few months if Ukraine can now overwhelm Russia’s repair capacities.

Already, fuel prices have spiked in Russia, with Moscow deciding to insure refiners receive a special subsidy they would otherwise not get due to high prices they are charging for fuel, to address difficulties with the renewed drone war. (Russian Refiners Hit Rough Patch, Hope for State Support, E.I., 20August25, [paywall].)

(2) Russian oil export capacities: Why does Ukraine’s war on the Russian oil sector not include destruction of Russia’s three westward facing oil ports, the terminals it uses to export the overwhelming bulk of its oil exports? These are Ust-Luga and Primorsk in the Baltic, and Novorossiya on the Black Sea. Why has the oil export capacities of these ports essentially never been hit?

The revenues from these seaborne oil exports — some 90% of which were shipped to India and China in the past year– are the single largest source of revenues available to the Russian state to pursue its war. Ukraine’s military can clearly hit these distant ports as, for example, it has just hit the vast natural-gas processing facilities in Ust-Luga, near St. Petersburg, owned by the private Russian gas firm Novatek — but apparently not, according to reports, Ust-Luga’s big oil-export facilities — on the night of 24 August.

(For background, see video from Ukraine TV Kanal 13, where the Ukrainian veteran energy expert, Mykhialo Goncher, explains the attacks on Russia’s Druzhba pipeline, and the necessity to “smash” Russia’s three westward facing oil-export ports, as have I. See also, Reuters )

However, apparently, it still has not attempted to hit and destroy the specifically oil-export infrastructure of these ports: the oil storage tanks, pipelines, pumps and especially not the actual oil-loading terminal itself, or any of the oil tankers arriving in port to offtake Russian oil.

For axysa comprehensive data view of the continued export of Russian oil via sea under the failed “oil-price cap” scheme, I recommend this S&P Global “Interactive: Seaborne trade in Russian oil under the G7 price cap.“

I have been raising this for over two years now: Why is it Ukraine does not seem to be permitted to hit the seaborne-oil export infrastructure at Russian ports?

One can only assume that the oil-export-infrastructure of these three ports has not been destroyed out of deference to Americans, both under the Biden administration and still, now under the Trump administration. Why?

I can identify two separate, but related, issues driving this hesitation on the part of the USA

First,. There has always that there was fear that, if Russian export capacity was taken offline, then there would be a world shortage of oil, as Russia is one of the world’s three global oil superpowers. This would cause a protracted spike in prices and create significant domestic problems for what was initially the USA Biden administration seeking to prevent Donald Trump from being elected in 2024, and now for the Trump administration where President Trump insists on maintaining as low as possible an oil price as to hopefully help prevent any increase in inflation which his tariff policies might cause due to higher domestic prices of imported goods in parallel with shortages of imported goods subject to high tariffs. So, each administration had its own logic for keeping Russian oil online, and only trying to cap its price.

My response to this has consistently been, even back in late-2022 when this price cap policy was proposed as an alternative to sanctions taking Russian oil offline, that there is plenty of oil being held offline by OPEC and OPEC+ member states (other than Russia) to replace Russian oil if it is taken offline in a steady but deliberate manner, with clear signals given to the global market that this process is underway and will not be interrupted. Beyond this, there are significant reserves which are either under- or un-developed which would be incentivized to be developed – such as USA shale, but also especially in Latin America and elsewhere, including NATO states. Plus, issues with Venezuela’s and Iran’s huge capacities might be resolved in an expedited manner via diplomatic and/or forceful means to significantly increase oil supplies. Plus market demand has been relatively soft for a long time and there seems no major uptick in Chinese macroeconomic indicators on the near-term horizon.

However, now the Trump administration is so frustrated with attempting to get Putin to agree to peace talks on a serious basis that they have begun to abandon the failed oil-price cap policy of both their and the Biden administrations.

Second, It is also likely because if Ukraine smashed the oil export facilities of these three ports, this could permanently damage or destroy much of the Russian oil sector – and there would be no easy way of reestablishing production. As I have explained repeatedly elsewhere, Trump has a strategic vision of ending the Ukraine was in a manner such that Putin is pulled away from the orbit of China and brought back into the Western economic and political orbit in some manner. Trump especially sees offers of huge minerals, energy (oil and gas – e.g., see the Exxon talks with Russia on returning to Sakhalon-fields, even now) and USA investment deals in Russia as, ultimately, inducements for Putin to exit the Ukraine war in a manner palatable to the USA and its allies PLUS to bring his state closer to the west, depriving China, seen as the key, peer competitor and potential enemy of the USA and its allies.

Whether this is a possible or a delusional expectation and strategy is one question, but the reality is that it seems to be the consistent aim of the Trump administration. So, in this scenario, the Trump administration might indeed work hard to take Russian oil offline, such as it is doing by persisting with the 25% “secondary tariffs” on India in retaliation for its continued purchases of Russian oil, but to allow the Ukrainians to destroy the oil exporting infrastructure of Russia might be a step too far for Trump for the present as it would greatly complicate his enticements to Putin of a special place in the global oil order post-war, alongside the USA and the Saudis, in a sort of global oil market triple entente.

In summary, there is no logical technical-military reason for the Ukrainian military to not target and smash the oil-export infrastructure of Russia’s three main seaborne-oil export terminals – it can clearly reach all three with its drones. Thus, I must conclude that the absence of such strikes which would utterly and likely semi-permanently destroy Russia as a major oil exporter, is out of deference to the USA, to the wishes of the Trump administration not to physically destroy, at least not yet, the Russian oil sector.

Aside: It has, just last week, however, hit the Druzhba oil pipeline system, apparently interrupting overland oil exports to Hungary and Slovakia, two recalcitrant EU states that insist on continuing to purchase Russian oil in opposition to the solidarity of other EU states with Ukraine (e.g., Reuters, Bloomberg, and a video report of an interview with the Ukrainian energy-expert, Michael Goncher, describing how the 18 August hits on two Druzhba pumping stations that might also effect oil flows to the ports of Ust-Luga and Primorsk on the Baltic Sea, as the pipeline also branches off to supply these ports. In this interview, Michael also calls, as I do, for the “smashing” of the three Russian oil export terminals. The third one is Novorossiya on the Black Sea.)

In summary: The USA has now clearly begun to change its policy of oil-price cap adopted in 2022. That policy has explicitly not aimed to restrain the export of Russian oil but to instead impose a price cap limiting on how much Russia can sell it for, and this has failed to meaningfully hurt Russian oil profits and influence its war making resolve. Trump has now, finally, clearly transitioned from what I have called his Plan A – attempting to cajole and entice Putin with economic deals to end the war, to a Plan B which involves coercion to force Putin to negotiate seriously.

This is the reason it has put an additional 25% tariffs on India, to coerce it to stop buying Russian oil. These tariffs – a new form of secondary sanctions the Trump administration has adopted – promise to make it unprofitable for India to keep taking Russian oil. Indeed, this tariffs pressure is having an effect on Indian refiners’ buying decisions (e.g., the industry journal, Energy Intelligence, reported 14 August that “Indian Refiners Taking A Hit from Russian Crude Restrictions,” [paywall] and 25 August wrote that “China Buys Russian Urals Crude as Indian Refiners Step Back,” [paywall]), although the government of Modi remains indignant in its pronouncements.

The next step in escalating this coercion on the oil front, beyond secondary tariffs on India and China (and perhaps Turkey), would be to begin to allow the Ukrainians to actually destroy Putin’s seaborne oil-export infrastructure of the three Russian westward facing oil-port terminals. This has not yet begun, but the huge hit of the evening of 24 August of Ukrainian drones on Novatek’s gas-processing facilities at the Ust-Luga port near St. Petersburg proves, once again, that the oil-export infrastructure of this and the other two ports could certainly also be smashes if the Ukrainian military is freed up (permitted) to to so by the Trump administration.

The interviewer, Nataly, asked me several other questions about the war as well. These are into the second half.

As always, comments and critiques are of great usefulness in further developing my analysis. – Tom O’D. (27th- to early 28th August 25)