OIL REFINERIES
A Toxic Friendship
June 2019
Russia has had to halt exports of crude oil to Europe via its Druzhba pipeline—which transports crude oil from Russia to Western Europe—after an organochloride contamination incident in late April. The contamination sent crude prices to a six-month high, reaching US$75 a barrel.

It was estimated that approximately 5 million tons of Russian crude—or about 36.7 million barrels—bound for Europe were contaminated by the chemical compound, used to boost oil extraction by cleaning wells and accelerating the flow of crude. When this chemical is found in large quantities, it can damage pipelines and other refinery equipment. Transneft, which operates the pipeline, stated that the contamination happened in the Volga region of Samara and blamed unidentified offenders. President Vladimir Putin blamed Transneft for its lack of proper systems to prevent such contamination amid disagreements between the two parties over who should pay to clean up for the contamination of the pipeline. Russian First Deputy Prime Minister said that Transneft should not expect the authorities to pay for the crisis, while the pipeline operator defended itself by saying it was not at fault for the contamination.

 

 

This has been a hard blow for Russia’s economy, with the country losing approximately US$500m for every day the pipeline flow remains suspended. However, Russia is not the only victim of this contamination. European customers are still awaiting compensation for Russia’s worst supply disruption to date. French multinational Total, and Italian multinational Eni, have both stopped payments for the contaminated oil and said they would only resume payments once compensation is agreed. However, oil sold via the Druzhba pipeline is governed by Russian law which requires payment to be made regardless of the quality; companies can later file a claim for damages, which can take months or even year to process.

Belarus President also said that it would seek compensation from the Russian government following the pipeline oil contamination which resulted in enormous damage for the small Slavic country.

Total has declared force majeure on the production of jet fuel at its German Leuna refinery, citing a shortfall in crude supply following the contamination. The refinery had to cut runs by about 30 percent and is now receiving clean oil from Poland. Meanwhile, Hungary said it would use 400kt of oil from its emergency reserves to help supply a refinery owned by MOL. Unipetrol has asked the Czech government to loan oil from its emergency reserves, to minimize production disruption for the refiner.

The Druzhba pipeline contamination further discredits Russia as a reliable and dependable fossil fuel supplier, with many European countries wanting to lessen their dependence on Russia’s oil and gas exports. Poland, which receives most of its gas supplies from Russia, has recently signed long term purchase agreements with the US, Qatar and Norway in a bid to reduce its Russian gas imports. Russia’s Gazprom recorded an 8.4% year-on-year drop from its exports of natural gas outside of the former Soviet Union in the first four months of 2019.

More recently, Ukraine filed a complaint to the European Commission claiming that Gazprom was abusing its dominance in the European gas market with its latest development: the Nord Stream 2 gas pipeline, which would add another 55bn cubic metre of capacity through Europe. Ukraine would require that Gazprom makes gas available to European clients on Ukraine’s eastern and western borders, at a price equal to the price offered to Nord Stream 2 gas customers, in order to mitigate the unfair competition issue.