It has been a week and a half now since excess organic chloride levels were detected in Urals crude supplies exported from Russia via the Druzhba pipeline. Later it was confirmed that contaminated oil was supplied to the Baltic port of Ust-Luga as well. It seems now increasingly likely that it will take Russia
several weeks to restore normal operations via Druzhba and Ust-Luga, so the Central-Eastern European refineries which heavily rely on Urals need to take immediate steps to ensure uninterrupted operations. This is an update on our previous flash alerts on this topic (see 24 April & 25 April).
Fig 1: Central-Eastern Europe Crude Oil Infrastructure
Europe’s dependency on Russian oil is here to stay :
For historical and political reasons, Central-Eastern Europe has always relied largely on Russian crude, with the Druzhba pipeline as the key piece of infrastructure recently pumping some 1 mmb/d of oil via Belarus to Poland and Germany and via Ukraine to Hungary, Slovakia and the Czech Republic.
Fig 2: Druzhba Exports to Europe 2017/2018
Among these countries, Slovakia is most dependent on Urals supply, with 100% of its deliveries coming via the Druzhba pipeline. Even Poland, which in recent years has made efforts to diversify away from both Russian oil and gas, still sources about 80% of its crude from Russia. Hungary and the Czech Republic – depending on alternative sources – process more or less 50% Russian crude. Germany is the least dependent in the region with approximately 35% of its crude coming from Russia, most of it via Druzhba but some of it seaborne via Russia’s Baltic ports.
Fig 3: Central & Eastern European Refiners’ Dependency on Russian Crud
The reasons for persisting dependency on Russian crude in the region despite an existing will to diversify away are complex with geographical, technological and commercial condiserations. However, all of the European refineries supplied from Druzhba have alternative routes available. Below is a table for alternative pipelines or accessible ports. Yet, it may not be so easy to turn to alternative supply routes at such short notice for all of them (see below).
Fig 4: Refineries connected to Druzhba pipeline and their alternative crude import facilities
For those refiners who have no infrastructure that would allow a quick access to other crudes other than contaminated Urals, drawing down stocks is essentially the only short-term solution. EU member states are required to hold 90 days’ supply of combined crude and product stocks. These strategic stocks can be tapped in a supply emergency, in addition to commercial working stocks.
The below chart shows the impacted EU member states’ current strategic crude reserves by country and the corresponding days’ supply (excluding Germany, who by far has the largest strategic crude reserves with over 100 mmb that would be sufficient to supply its two impacted refineries in theory for over 200 days!).
Fig 5: Central & Eastern Europe – Strategic Crude Reserve
In the following sections, we assess the strategies the impacted refiners have chosen and other. opportunities they might have to deal with the current disruption to Russian Urals supplies.
Slovakia – the most vulnerable one :
Slovakia, as mentioned above, processes essentially only Russian crude, making it the most vulnerable country to supply disruptions from Russia. Although Slovakia can technically import crude from the Med via the Adria pipeline via Hungary, we do not see it as an immediate solution to the problem given the time it could take to source crude and have it delivered on site.
Slovakia has a long-term supply contract that covers 100% of the 110 kb/d Bratislava refinery’s demand, therefore accessing the spot market in the Med would mean 1) unplanned expenses for the refinery and 2) and could come potentially with practical difficulties too, given that the country has never imported crude from the Adria pipeline via Hungary. In addition 3) even if all obstacles are overcome, it could take a considerable time to purchase suitable crude cargoes (the Bratislava refinery is geared towards processing medium heavy sour crude like Urals) and deliver them to the plant.
As for strategic crude stocks, Slovakia has enough to supply the Bratislava refinery for about 40 days, though these stocks are partly stored in the neighbouring Czech Republic which could take an additional 2-3 days to deliver to the plant.
To summarise, we think the Bratislava refinery can draw down crude stocks in Slovakia and then from the Czech Republic in the coming weeks. However, should the issue persist longer than that, the refinery would potentially need to reduce runs. This may prove difficult as the refinery completed a planned maintenance turnaround in March, during which its commercial product stocks were probably drawn down.
Czech Republic – Litvinov refinery asks for access to strategic crude reserves :
The Czech Republic has two refineries, 86 kb/d Kralupy and 109 kb/d Litvinov, both of which are supplied partially via Druzhba. Both of them have access to the TAL pipeline and regularly import non- Russian crude from the Med. However, Unipetrol has asked the government to provide access and a loan to tap into the country’s strategic crude reserves to ensure that the Litvinov refinery can continue running at normal rates. The Litvinov refinery reportedly had commercial crude stocks enough for about 7 days supply in late April.
The state currently holds 7.3 mmb of strategic crude reserves in Nelahozeves right next to the two refineries, which is enough to supply both refineries for about 40 days.
Hungary – state releases a substantial 60% of strategic crude reserve :
Hungary has only one refinery, the 163 kb/d Danube (Szazhalombatta) plant owned by MOL. The refinery has substantially reduced processing Urals, which in recent years has taken up “only” about 60% of the plant’s crude diet. The refinery’s alternative supply route is the Adria pipeline via Croatia.
The plant has commercial crude stocks enough to cover for about 35 days; also, MOL has said it will increase crude imports via the Adria pipeline in the coming weeks to make up for the loss of Urals barrels. Therefore the Danube refinery should be little impacted by the Druzhba supply disruptions. However, the government has made available about 3 mmb or 60% of its strategic crude stocks
available, a substantial proportion considering that the refinery is not in need of tapping into emergency reserves for at least a month and a half. FGE believes the government may have made this statement with the intention to prevent a “panic” situation arising in the domestic fuel markets.
Poland – Gdansk refinery already drawing down strategic reserves :
Poland has two refineries, the 356 kb/d Plock and 211 Gdansk plants, which are connected to the Druzhba pipeline. The Plock refinery operated by PKN Orlen, although it is not a port refinery, has direct access to all crudes in the Baltic/North Sea area via the Plock oil terminal and also has an existing supply contract with Saudi Arabia.
The Gdansk refinery operated by Grupa Lotos has already started processing crude from strategic stocks. Poland currently has about 15 mmb of strategic crude stocks corresponding to about 25 days’ supply, most of which is located in the salt caverns near Gora. The government released 500 kt of the strategic crude stocks on 26th of April and further 300 kt on 30th of April. It also helps that Grupa Lotos in recent years managed to increase the share of non-Russian crude to 40%, most of which comes from the US and Canada.
Germany – the least impacted country :
Of all the countries affected, Germany is the one which should feel the impact of the Urals problem the least. Out of the country’s 14 refineries, only two are supplied via Druzhba: the Schwedt and Leuna refineries, 240 kb/d each, both of which have access to the international crude markets via Rostock. In addition, Germany also gets about 50-100 kb/d of seaborne Urals, so altogether the country runs about
35% Russian crude in all of its refineries.
The Schwedt refinery has just finished a full maintenance turnaround; it has stated that it has commercial crude stocks for 10 days’ supply. While the Urals disruption persists, the refinery plans to import cruvia Rostock. Reportedly, a Urals cargo from Primorsk is expected to arrive on 3rd May at Rostock, intended for the Schwedt refinery.
What are the options to get rid of the contaminated oil ? :
To summarise, all impacted refineries have sufficient crude stocks – either commercial or strategic – and alternative supply routes to ensure uninterrupted crude processing for at least the next month or so. The real question is therefore – is this enough time for Russia’s Transneft to restore clean Urals supply via the Druzhba pipeline and send it all the way to Germany and the Czech Republic?
The main difficulty appears to be the removal of the contaminated oil that is already in the pipeline system. FGE estimates its volume at 15 mmb, now stored in oil depots along the pipeline as the impacted refiners have all suspended taking Urals. In order to get clean oil to the refineries, this contaminated oil has to be removed from the depots. What are possible ways of doing it?
Refiners could drip feed it while blending it with other crudes in order to dilute the contamination levels. However, limited storage facility could be an issue as pipeline-fed refineries typically have less storage available than their sea-fed counterparts. Reportedly the organic chloride levels were 15-30 times above the upper limit of 10ppm (but is typically less than 3 ppm).This implies that it needs to be blended with approx. 15-30 times more clean/uncontaminated crude. That could mean a total of 300-500 mmb crude if the clean crude does not contain chloride at all! If the clean crude to be blended in with contaminated Urals contains any organic chloride, this figure will be even higher.
Fig 6: –“Clean” Crude Volume Required to Dilute Contaminated Ur
Alternatively, the contaminated oil, which is currently in storage depots along the pipeline system could be transport back to Russia and diluted there. For this the crude either needs to be transported via rail or via pipeline. For now the rail option seems to the more likely. However, rail capacity is very limited and access to it could also depend on location. Until about 20 years ago Russia moved about ~150 kb/d of crude via rail to the Baltic ports, and this system is also
connected to Belarus. However, this route has not been in use for many years, which could mean technical complications as well as a guaranteed slow speed given the fairly small capacity. In addition, most of the contaminated oil has actually been pumped further away to Poland, Germany, Slovakia, Czech Republic and Hungary, for whom even access to rail infrastructure is questionable.
Belarus has suggested that the contaminated oil theoretically could be pumped back to Russia by reversing the pipeline flow. The Druzhba pipeline is designed for East to West direction only, and it has never been reversed. However, assuming that it is technically feasible, reversing the flow will come at great costs, too. This means that oil flow to Europe via the Druzhba will need to be halted completely for
the duration of the operation. With normal flows, we estimate it takes up to 20 days for Russian crude from Samara (where the contamination originated) to reach German refineries. With reverse flow it is expected to take substantially more.
Whichever of these options will be chosen by Transneft and the impacted states to get rid of the contaminated oil, it is increasingly likely that this problem will not be solved in the next couple of weeks, it could – just as Belarus oil officials have warned – take even months, which is beyond the horizon that some impacted refineries could draw down stocks. After that point, refiners would need to cut runs and release product stocks to continue supplying their domestic markets. Though of course, the impacted countries also have similar volumes of strategic products stocks, in additional to the crude stocks detailed above (the split tends to be about 50:50).
And let us not forget, getting the crude back to Russia still does not mean that the job is finished. What will Russia do with the contaminated oil? Its domestic refineries would be just as reluctant and as likely to see difficulties in processing and/or blending it as their European counterparts. It would most likely end up in storage and then get gradually blended with clean Urals. This way, to fully get rid of the contaminated oil even over a year may be required.
However the various players in this game play the game, it will be expensive !
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