Global Energy - October Commentary

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The Russian invasion of Ukraine in February 2022 marked a profound shift for the country’s oil industry, reshaping global oil market flows. Here, three and half years on, we consider how war in Ukraine has impacted Russia’s oil and refined product flows, and how Ukraine in 2025 has ramped up its efforts to disrupt the Russia’s oil markets.

Leading into the war in Ukraine in 2022, Russia was the world’s second-largest crude oil producer and supplied around 11m b/day, equating to around 11% of global output. Of the production of 11m b/day, around 8.3m b/day was exported and 3.7m b/day consumed domestically. The export pattern typically included c.4m b/day being sent to Europe, c.1.5m b/day to China and 0.5m b/day to the US.

In the immediate aftermath of the invasion, the prospects for Russian oil were hotly debated. The International Energy Agency (IEA) took somewhat of a maximalist view, estimating a 3m b/day decline in Russian oil production, driven mainly by a fall in exports. The reality was quite different. While the US formally stopped taking Russian product from April 2022, and the EU followed up with an embargo on product in early 2023, overall Russian oil production dipped by only around 1m b/day. Instead, we saw a major reorganisation of global oil flows, with China and India, in particular, absorbing much of the diverted Russian supply.

Monthly imports of Russian fossil fuels, 2021-25 (tonnes)

Sources: CERA, The Times; September 2025

Indeed, India’s imports of Russian oil and refined products are up over tenfold since the start of 2022, while China’s imports have more than doubled. The chart above includes natural gas, which the EU continues to import from Russia, whereas oil imports into the EU are now restricted to Hungary and Slovakia, which insist that they cannot switch away from the Druzhba pipeline which feeds them.

Russian export revenues down sharply

Russian exports of crude oil and refined products in August 2025 were around 7.3m b/day, roughly flat since the start of the year but down by around 1m b/day since the start of 2022.

Russian oil & product exports 2021-25: volumes (m b/day) & export revenues ($bn)

Source: IEA; September 2025

Russia’s export revenues have fallen much further and remain near 5-year lows, reducing tax revenues and exacerbating Russia’s economic slowdown. Export revenues of $21-23bn per month enjoyed at the start of 2022 have fallen to around $13-25bn per month, the decline driven in part by lower volumes, but also by lower oil prices and the price cap imposed by the EU.

More broadly, Russia’s finance ministry has revised down 2025 tax revenue expectations by almost 25%. As the budget deficit has widened to RUB 4.9 trillion ($61.1 bn) in July 2025, Russia has further drawn on its National Wealth Fund, which has fallen by two-thirds since March 2022.

In early September, the crude price cap for UK, Swiss and EU companies transporting Russian crude and providing services fell from $60/bbl to $47.60/bbl. This adjustment, which comes into effect in January 2026, will further widen Russia’s fiscal deficit.

The pressure on the Russian finance ministry to divert funds into their war machine is putting an increasing burden on the country’s oil & gas sector, which is seeing a slowdown in investment. According to the IEA, Russian oil and gas upstream capital investments were down 6% in 2024, the lowest since 2015. This year, lower oil prices (amplified by appreciation of the Ruble), continued sanctions on technology and exports, high interest rates and labour scarcities have combined to slow projects further. While Rosneft and Lukoil, for example, reported (local currency) capital expenditure increases in 1H 2025 of 11% and 18% respectively, in practice the increases barely cover inflationary pressures.

Ukraine takes matters into its own hands

Since May, we have seen an intensification of attacks by Ukraine on Russian energy infrastructure. Recent attacks in August targeted 13 refining facilities and 3 port facilities, while drone strikes in September targeted Russia’s most important oil export hub in the Baltic Sea. It appears, therefore that we have seen a strategic shift in Ukraine’s approach to targeting Russian energy infrastructure, with potentially greater impact than Western sanctions have achieved. Indeed, Ukrainian President Zelenskyy has stated that “the most effective sanctions – the ones that work the fastest – are strikes on Russian oil plants, terminals and depots”.

One notable aspect of the recent Baltic Sea strike at Primorsk was an apparent attempt to limit Russia’s ability to sell its oil abroad, whereas previous attacks created more disruption to Russia’s domestic fuel supply. With Primorsk, which has export capacity of 1.2m b/day, now out of action, Russia faces a significant challenge in rerouting its oil flows.

Russian ports and their oil/product export volume (m b/day)

Source: JP Morgan; September 2025

The attack on export facilities in Primorsk coincides with an escalation of attacks by Ukraine on refining facilities across the western part of Russia. Unlike earlier incidents in 2023 and 2024, recent refinery attacks appear to have caused significant structural damage, resulting in partial or complete shutdowns at several facilities. By late September, JP Morgan estimate that Russian refining output had dropped to below 5m b/day, its lowest level since April 2022, and down by around 0.6m b/day since early August. The timing of these outages is also significant: domestic diesel dXemand in Russia is highest in the autumn as harvest season intensifies the farming sector’s need for fuel.

Conclusion

The West has, so far, failed to alter the structure of Russia’s oil sector, with Russia remaining a leading producer. In part, this is by design: Western governments are reluctant to create a repeat of the 2022 commodity price spikes that were so inflation-inducing. But Russia has been forced into a costly reorientation of its markets, whilst sanctions have constrained investment and technology transfer, raising questions about the long-term sustainability of production capacity.

In the shorter term, Russia faces a new dual challenge: export routes becoming increasingly susceptible to disruption, and refining capacity being hampered by ongoing drone strikes. Understandably then, Ukraine is prepared to create more significant disruption to global oil markets than their Western allies.

Valuation of the Guinness Global Energy portfolio

A brief update on the valuation of the portfolio at the end of September. Return on capital employed (ROCE) for the Guinness Global Energy portfolio in 2025 (assuming an average Brent oil price of $70/bl) will be around 9%, we think, a little below mid-cycle ROCE, which we peg at around 11%. However, current valuation implies that the ROCE of our companies will stay at about 4% on a long-term basis. If ROCE remains at around 9-10% and the market were to pay for it sustainably, it would imply an increase in the equity valuation of around 25%:

Sources: Bloomberg, Guinness Global Investors, inc. estimates; September 2025

The current level of ROCE is being supported by robust free cash generation. Assuming an average Brent oil price of $70/bl in 2025, we estimate the average free cashflow yield of our portfolio, after capital expenditure, to be around 7.6% and note that the 2025 estimated gross dividend yield of the portfolio currently sits at around 4.3% (rising to 4.5% in 2026). Fixed dividends in the portfolio have generally been growing and have ample room to run further, given the high free cashflow yield. At our long-term oil price assumption of $80/bl, the average free cashflow yield rises to over 10%.

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