As Russia is in the process of removing contaminated oil from the Druzhba export pipeline, the real cost of damage to European refiners, time to remove tainted oil and restore exports as well as the effect on Russia’s status as an energy supplier, remains unclear.
“It’s really hard to tell what impact is going to have,” Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp in Moscow, told New Europe on 23 May. “There is not enough information at this point to say what the consequences are going to be in the long run,” he added.
According to Reuters, the crisis has escalated since Belarus told oil refiners and pipeline operators in Europe nearly four weeks ago that the crude heading down the 5,500-kilometre Druzhba pipeline was heavily contaminated with organic chloride, which is used to clean oil wells and accelerate the flow of crude.
Russia had to stop exports via the Druzhba pipeline to Poland and Germany at the northern branch of the line and to Ukraine, Hungary, Slovakia, and the Czech Republic in the south.
Russia is using rail, storage tanks and ships to remove contaminated oil from an export pipeline and has so far extracted around 2 million tonnes of the tainted oil – or over a third of volumes hit, Reuters reported on 24 May.
A total of around 5 million tonnes could have been contaminated by organic chloride and up to six months are needed to fully restore the flows, according to the Belarusian operator of a section of the Druzhba pipeline. Russia, Belarus, and Ukraine still have the lion’s share of contaminated crude in their pipeline systems – or up to 2 million tonnes, with another roughly 1 million stuck in Poland and Germany, Reuters quoted traders and industry sources as saying.
Until tainted oil is removed from the pipeline inside Russia and Belarus normal flows or clean oil to export markets cannot resume.
“Technologically, I think eventually all this contaminated oil will have to be diluted and over time it will be diluted with good and eventually all this bad oil in storage will be mixed with good oil until the concentration goes down below the acceptable threshold. So technologically that’s doable, it’s just probably a very long process depending obviously on the concentration of the contaminant,” Kokin said.
Asked if the oil contamination would affect Russia’s reputation, Kokin said, “It seems like something that was completely unexpected and unprecedented and something that just never happened before. It feels that nobody was ready for this. Russian companies weren’t ready and obviously the Europeans weren’t ready for this but hopefully it won’t repeat itself in the future.”
Reliance on Russian energy
However, Justin Urquhart Stewart, director at Seven Investment Management in London, said relying heavily on Russia for energy supplies is a risky proposition.
“Frankly, our politicians should have realised that the very day they started signing contracts with Russia,” Urquhart Stewart told New Europe in an interview on 22 May. “It was always going to be a risk and I think that now if you look over the examples of the last few years of constraints in the reliability of consistent delivery in the pipelines whether it’s issues with Ukraine and now, in terms of the caliber and quality of the product, Germany especially needs be extremely concerned about how dependent it is upon Russian oil and they should be seeking urgently at least for political reasons have the ability to stand independently of Russia,” Urquhart Stewart said.
On 15 May, Interfax quoted Russian Energy Minister Alexander Novak as saying that it would take a month to estimate the total cost of damage from contaminated oil in the Druzhba pipeline.
Kokin told New Europe that it’s too early to access the damage to European refineries. “Eventually it will be accessed the amount of damage and probably will be measured in terms of the cost of repairing those refineries and bringing them back to normal shape. It will take time. It won’t be clear overnight,” Kokin said.
The real cost of Russia’s dirty oil
Urquhart Stewart asked, “Who’s actually going to pay for it?” “If it is substandard quality product then you should be refusing payment on future deliveries until the previous loss has actually been either sorted out or compensation has been made for. This is straightforward contractual law and that’s where politics can get in the way,” the London-based expert argued. “It’s not just the claims for poor quality goods. It’s also the associated damages with this in terms of the delay, reputation and the further quality down the line in terms of further cleaning of the product,” he added.
Western buyers of Russian oil were taken by surprise and left in the dark by a lack of communication from Russian pipeline monopoly Transneft about how long the crisis would take to resolve, Urquhart Stewart said. “At that time, they were too concerned about giving assured delivery rather than necessarily questioning the caliber and quality of it so I think this story is going run a lot longer,” he argued.
Kokin said who is going to pay depends on the contractual relationship between the Russian exporters, Transneft and the European offtakers. “It’s hard to tell who is going to pay but someone definitely is going to pay. I don’t think that those Russian companies that are supposed to pay that they will try to wiggle out of this. I don’t think so. I think they will do what’s required because major relationships are at stake,” the Moscow-based expert said.
Urquhart Stewart said Russia’s worst oil supply disruption comes at a time when many European politicians are warning against increasing reliance on Russia for energy supplies.
“The damage relating to it is it going to significantly affect other supplies as well because that means it will have to be replaced by somebody else, therefore you’re going to find a constriction in supply and now if you are now going to be also seeing further concerns over political issues with Russia, it’s going to further add aggravation at a time of great sensitivity to the diplomatic issues between them,” he said. “But now it’s the time actually to be extremely firm with the caliber of this because you do not wish to be associated to poor quality goods. You must be rejecting that quality and making sure that you have further assurances for the future. Otherwise, you will be seen as been politically very weak indeed like Germany may well seem to be in the moment,” Urquhart Stewart argued.
Russian President Vladimir Putin has publicly scolded the boss of pipeline operator Transneft over the contamination scandal, Reuters reported on 1 May.
But Urquhart Stewart said the issue is restoring the quality of oil. “That’s lovely headlines but in terms of what is actually been done, it’s not so much the people, as far as the companies are concerned, they want to know that they will be properly reimbursed for it. The fact a few unfortunate souls are gonna lose their jobs, well that’s the least of the issues. Frankly, that will be all about Putin trying to appear big and butch and trying to assert himself. No, no, it all needs to come back to the caliber and quality of product being produced. Are they reliable enough to produce quality products or are they are actually just in a position where they cannot be relied upon to produce good quality stuff and therefore source alternative supplies?” he asked, adding: “Russia does not need that now.”
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