European refineries to reduce oil processing amid Druzhba pipeline contamination

WNM | May 15, 2019 at 7:09 PM

MOSCOW, May 15 (WNM staff/Newswires) - European refineries may reduce oil processing by 250,000 barrels per day in the second quarter of 2019. The damage for Russia's oil industry is not to be underestimated. 

European refineries may reduce oil processing by 250,000 barrels per day in the second quarter of 2019, which accounts for around 2% of the European petroleum products demand, following the suspension of supplies via the Druzhba crude pipeline due to its contamination with organic chlorides, the International Energy Agency said in the Oil Market Report on Wednesday.

“Overall, the impact on 2Q19 European refinery throughput from Druzhba issues is estimated at about 250 kb/d, under 2% of the continent’s product demand,” the report said.

Particularly, German plants may slash refining by 100,000 barrels per day in May-June, Polish — by 60,000 barrels per day in May-June and return to normal utilization rates in July. Hungarian, Czech and Slovakian plants may totally reduce refining by around 100,000 barrels per day in May-June and boost volumes in July.

The impact on Belarusian refineries is projected at 80,000 barrels per day in the April-July period.

One consequence of the contamination of the Druzhba pipeline could be a loss of customers’ confidence and a search for alternative supplies, the International Energy Agency noted.

“We are monitoring the impact of the contamination of Russian crude oil passing through the Druzhba pipeline system. The issue will be resolved in due course, eased by commercial and government stock draws by Russia’s customers. One consequence could be a loss of confidence in the quality of the crude flows and thus a search, where feasible, for alternative supplies that could intensify price pressures for heavy/medium sour crude oil,” the report said.

Supplies of clean oil end of May

Russia will fully resume export of clean crude through the Druzhbapipeline in late May-early June, Energy Minister Alexander Novak told reporters. “We plan it for in late May-early June. Exports will be fully resumed through the Druzhbapipeline. This will be high-quality oil,” the minister said.

Supplies of clean oil from Russia via the Druzhba pipeline to Slovakia and Hungary will be resumed on May 21-24, according to a statement issued by Transneft pipeline operator.

This plan was adopted on May 14 following the meeting of the working group on supplies under the International Association of Oil Transporters in Bratislava with the participation of Belarus, Hungary, Slovakia, Poland, Ukraine and Russia. The group discussed the issues related to the resumption of proper operation of the Druzhba pipeline.

“Under the plan, clean oil is to arrive at Budkovets line operation dispatcher station (Slovakia) on May 21-22, and at Fleneslite line operation dispatcher station (Hungary) — May 23-24,” the pipeline operator said noting that supplies of clean oil to the Mozyr Oil Refinery in Belarus have already resumed.

According to the statement, the parties also discussed options for normalizing the supply of good-quality crude via the northern branch of the Druzhba pipeline. In the near future, the supplies of good-quality crude will be resumed through one of the three strings of the pipeline’s northern stretch. This will make it possible to resume Russian oil supplies to the refineries of Poland and Germany.

The pipeline operator added that consultations with Belarus on the choice of the optimal solution to restore full-time operation of the Druzhba pipeline will continue in Moscow in the near future.

On May 16, Deputy Prime Minister Dmitry Kozak will meet with his Belarusian counterpart Igor Lyashenko, the parties may discuss the restoration of the Druzhba pipeline, as well as the interaction of Russia and Belarus in the energy sector in general.

Damage may exceed $100 mln.

Russia’s Energy Minister Alexander Novak does not expect the amount of damage from the oil contamination in the Druzhba pipeline to exceed $100 mln.

“Totally the situation requiring some compensations may be less than $100 mln for sure,” he told reporters on Wednesday, adding that the issue “largely (depends) on commercial talks.”

Western observers see the damage much higher: According to Forbes Magazine, the supply shortfall has added upward pressure to global oil prices and cost Russia billions of dollars in lost energy revenue. Novak noted that currently the work to clarify the total amount of damage following the contamination of the Druzhba oil pipeline is underway, adding that the work would be completed in the near future.

The New York Times sees the damage for Russia being significant:

The bills are due for millions of barrels of contaminated Russian oil that have been stuck for weeks in pipelines from Belarus to Germany - but no one wants to pay.

Western oil companies and European refiners that bought the oil a month ago, before discovering it was unusable, have so far refrained from freezing payments as they are keen to maintain good long-term relations with the world's second biggest oil exporter and avoid protracted legal battles in Russian courts.

Instead, several Western buyers have asked Russian producers if they can postpone payments for the tainted crude while buyers and sellers agree how to resolve the mess - and how to share the costs, four traders involved in Russian oil trading said.

For the buyers of an estimated 19 million barrels of contaminated crude stuck in the pipeline and loaded on tankers, it's a $1.2 billion question.

The buyers want Russian producers to give guarantees in the form of bank deposits that they will contribute to the clean-up, or delay payments due this week until the crisis is resolved, said a source at European refiner, who declined to be named."

There's around 0.8-0.9 million tonnes of dirty oil sitting in the pipelines between Belarus and Germany that no refiner wants to take," he said. "This oil needs to be evacuated somewhere to restart the pipeline. But it would be wrong for Russia to assume European refiners will bear all costs."

Bloomberg reports that "Russia’s efforts to resolve an unprecedented oil-contamination crisis suffered a setback as the nation loaded another tainted cargo from a port in the Baltic Sea, days after the government had said the port was clear".

Traders receiving Urals crude at the Ust-Luga terminal said some oil continues to exceed acceptable levels of organic chloride, the contaminant blamed for major disruption to the nation’s exports since last month, according to Bloomberg. The traders were not identified by Bloomberg because of confidentiality of the information.

Russia downplays situation

“I can say that no total estimates (of the damage) have been provided yet, the work to restore the operation of the whole pipeline system is underway. It largely depends on commercial agreements and relations, the terms of the supplies of oil, which had a higher content of chlorides compared with typical content. I think that it will be analyzed and calculated in the near future,” the minister said, adding that the damage is “not worth billions of dollars, and not even hundreds of millions of dollars” as reported by some media outlets.