Russian oil exports to Europe likely disrupted into May over quality problem

Flows of Russia’s key Urals crude exports to Europe via the Druzhba pipeline are likely to be disrupted well into May as deliveries remain suspended following a major crude contamination issue.

Problems with crude quality on the Druzhba pipeline began to emerge on Monday and spread over a number of countries as the contaminated oil made its way through the pipeline. Druzhba is one of the world’s biggest oil pipeline systems, supplying about 1 million b/d of Urals crude to refiners across some 4,000 km in Belarus, Poland, Germany, Slovakia, Hungary and the Czech Republic.

The Russian energy ministry initially said problems with the deteriorating quality of crude exported westward was technical and would be resolved in the near future.

Representatives from Russia, Belarus, Poland and Ukraine met Friday to discuss a resolution to the issue, which has halted some 1 million b/d of Ural’s exports, with Russian authorities saying they have developed a plan to combat the excess chlorides in the crude blend.

Following the meeting, Ukraine’s state-run pipeline operator Ukrtransnafta said Russian deliveries could resume in early May.

“Russia pledged to resume transit of high-quality oil from May 3, 2019. Thus, in the first ten days of May, stable operations via the southern section of Druzhba to European consumers may be restored,” the company said in a statement posted on its Facebook page.

Ukrtransnafta CEO Nikolai Gavrilenko added that infrastructure in Ukraine has not been damaged by contaminated oil, according to local media reports. Late Thursday, Ukraine halted shipments via the Ukrainian section of the pipeline. The move followed the previous suspension of Ural’s exports via Druzhba to Belarus and Poland.

So far, the suspension of exports via the pipeline system has not affected operations at the 10 European refineries which source crude from the route, with most refiners saying they have sufficient crude stocks at least into next week. Any further suspension to supplies, however, could force plants to seek alternative crudes, slow operations or seek the release of emergency oil stocks by local regulators.

The Druzhba shutdown has also impacted Urals exports out of Ust-Luga, Russia, sending values for cargoes from the terminal into sharp discounts to Urals cargoes loading out of the nearby uncontaminated Primorsk terminal.

DAMAGE CLAIMS
Analysts at S&P Global Platts Analytics see the incident as unlikely to spark a major change in consumers’ perception of Urals, as long as the Russian blend remains economically competitive on the global market, but said it may increase interest in expanding supply infrastructure.

“This is not likely to drive a long-term change in buying. But it could encourage some refiners with limited alternative choices to add the infrastructure to give them more feed flexibility,” Richard Joswick from Platts Analytics said.

Russia has opened a criminal investigation into the incident and costs are being calculated. Analysts at the Moscow-based Skolkovo Energy Center estimated that the halt of supplies via the 1 million b/d Druzhba pipeline may cost Russia up to $1 billion.

“Just one week of the halt and cleanup costs may cost up to $1 billion,” said Skolkovo’s Yekaterina Grushevenko. This calculation takes into account $100 million damage to Belarus’ Mozyr refinery, she said.

Russia’s Transneft said Friday that an initial investigation indicates that the contamination could have been deliberate.

“Now we can definitely say that the injection of organic chloride compounds was carried out through a metering station belonging to the private structure of Samaratransneftterminal, which receives oil and analyzes its quality from several small producers,” Transneft spokesman Igor Dyomin said. “At the moment, investigations are underway in the offices of several private organizations in Samara, to determine their involvement in the incident,” he added.

CZECH IMPACT
In Germany, PCK Raffinerie’s Schwedt plant has sufficient crude to continue operations as one of the refinery’s two crude distillation unit is shut for maintenance, a company spokesman said. Even though it does not currently need extra supply, the refinery has started preparations for importing seaborne volumes via the port of Rostock, he said.

Separately on Friday, the Czech Republic is prepared to release emergency oil reserves if necessary, according to the Administration of State Material Reserves chairman, Pavel Svagr.

“Unipetrol has stock for about seven days currently. Then it would have to shut down the Litvinov refinery, or take oil from the reserves. The Czech Republic has stocks in reserve for 83.7 days,” Svagr wrote on Twitter on Friday.

He added that no oil is currently flowing via Druzhba to the Czech Republic and that the administration is in close contact with the management of Polish and Slovak reserves.

Svagr said there is around 250,000 mt of contaminated crude in the system.

Poland late Wednesday suspended Urals crude flows via the northern Druzhba pipeline on concerns about the impact of the contaminated crude on refineries. Last weekend, local media reported that Belarus’ Mozyr refinery had been damaged by the contaminated crude.

Russia has not given an updated time frame for resuming supplies since deputy prime minister with responsibility for energy issues Dmitry Kozak said Thursday that he hopes Russia will supply “clean” Urals via Druzhba from Monday.

There have also been some delays to loading at Russia’s Baltic port of Ust-Luga as additional quality checks are carried out.
Source: Platts