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EU earmarks Eur2 billion to cut ties with Russia’s Druzhba oil export pipeline

The EU has proposed investments of up to Eur2 billion to cut the bloc’s reliance on Russian crude imports via the Druzhba pipeline as part of plans to rapidly reduce its dependency on Moscow’s oil and gas in the wake of the war in Ukraine.
Presenting its REPowerEU plan to end the trade bloc’s dependence on Russian fossil fuels and boost renewable energy, the European Commission said it plans to mobilize close to Eur300 billion ($316 billion) in loans and grants to improve energy infrastructure and facilities to meet immediate security of supply needs for oil and gas.

Of the total, the commission said it expects to require Eur1.5 billion-2 billion in funding to upgrade oil infrastructure in those member countries most reliant on the Druzhba pipeline “in view of stopping the shipment of Russian oil.”

Europe is heavily dependent on Russian oil and was importing about 2.7 million b/d of crude and another 1.5 million b/d products, mostly diesel, before the Feb. 24 invasion. Russia’s Druzhba pipeline was moving about 1 million b/d of its Urals export crude grade from Russian fields to central Europe before the war.

“The stop of supply from the Druzhba pipeline … will increase pressure on alternative supply routes, namely ports such as Gdansk, Rostock, Trieste or Omisalj, and alternative pipeline infrastructure, currently not prepared to handle such additional pressure, that serves the same regions,” the commission said in the REPowerEU proposal. “Very limited and targeted investments to ensure the security of oil is needed. Projects building on and expanding the capacity of the existing infrastructure and tackling existing bottlenecks — namely in the Transalpine (TAL), Adria or SPSE oil pipelines — are key to ensure viable alternatives to the most affected member states.”

In the wake of the invasion of Ukraine, Russia’s key export grade Urals has been trading at significant discounts to other crudes as most regional buyers are boycotting the crude. Platts assessed Urals at $80.89/b and Dated Brent at $116.51/b May 17, data from S&P Global Commodity Insights showed. Urals was assessed at $90.72/b and Dated Brent at $100.48/b Feb. 23, the day before Russia invaded Ukraine.

Refining links

Landlocked Hungary and Slovakia are the EU members most dependent on Russian crude supplies via the Druzhba pipeline and are seeking multiyear deadline extensions under the EU’s proposal to ban Russian oil imports by the end of 2022.

Russian Urals crude is delivered via the Druzhba pipeline to Hungary’s sole refinery, MOL’s 165,000 b/d Duna plant. Although Hungary could import some alternative crude supplies via the Adria pipeline from the Croatian coast, converting Duna to process alternative crudes would require more time and expense, Hungary insists.

Slovakia has said that it could meet some of its crude oil needs through increased use of the Adria pipeline, which is also known as JANAF, but that a ban on Russian oil imports would present significant problems to the country’s main refiner, Slovnaft.

“The establishment of alternative supply routes must also be accompanied by targeted investments in the reconfiguration and upgrading of petroleum product refineries, as replacing Urals crude oil by alternative oil grades entails technological changes,” the EC said in its REPower proposal.

Germany is already looking to supply its second refinery fed by Druzhba — Schwedt, majority-owned by Russia’s Rosneft — via its Rostock port on the Baltic Sea.

In Poland, Grupa Lotos’ Plock refinery also receives crude from the Druzhba pipeline, and the company has said it continues to honor the existing supply contracts in force until the end of 2022.

With the EU planning to ban Russia’s crude imports within six months, European refiners will have to look for alternative supplies, though many have already started diversifying their sources.

According to S&P Global, the proposal envisions phasing out EU crude imports of 2.3 million b/d within six months, excluding a possible extension for 200,000 b/d to Hungary and Slovakia.

Gas links

The proposals would direct the majority of the new funding to boost the EU’s existing renewable energy drive it calls Fit for 55 and includes plans to raise the 2030 target for the share of renewables in final energy consumption from 40% to 45% in an amendment to the Renewable Energy Directive.

Of the total Eur300 billion in new funding, the proposals also earmark Eur10 billion in LNG and gas infrastructure investments to allow for sufficient imports to replace Russian gas.

Russia has already halted gas supplies to Poland and Bulgaria, with Finland expected to lose access to Russian gas later this week, due to changes in the payment framework.

The EC also said an administrative price cap on gas could be necessary at EU level in response to a full supply disruption.

“If introduced, this cap should be limited to the duration of the EU emergency and should not compromise the EU’s ability to attract alternative sources of pipeline gas and LNG supplies, and to reduce demand,” it said.
The EC also said temporary “circuit breakers” and emergency liquidity measures to support the effective functioning of commodity markets could be used.

The EU has been working with international partners to diversify supplies for several months, dating back to before Russia’s invasion of Ukraine.

As part of its response, it also created an EU Energy Platform to enable voluntary common purchases of gas, LNG and hydrogen by pooling demand, optimizing infrastructure use and coordinating outreach to suppliers.
Source: Platts

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