COUNTRY IS SHIPPING ROUGHLY 1M BARRELS A DAY LESS THAN NORMAL
The technical challenge of handling millions of barrels of tainted crude has been compounded by fights over who will pay the cost.
For almost four weeks, the tanker Mendeleev Prospect has been anchored idly off the Polish port of Gdansk unable to discharge a $50 million cargo (Dh183 million) of crude oil.
After any normal voyage, the tanker would quickly deliver its 700,000 barrels of Russian crude into a refinery for processing into gasoline, diesel and other petroleum products. But the Mendeleev Prospect is in limbo, the victim of Russia’s unprecedented contaminated crude crisis that’s been spreading chaos though the European oil market for a month.
Back in April, unusually high levels of the chemicals known as organic chlorides were discovered in the Russian crude flowing through the giant Druzhba pipeline, built in the 1960s to carry crude from the USSR to allied countries in Eastern Europe. The chlorides can severely damage oil refineries and on April 24 Russia’s state pipeline operator, Transneft, halted shipments. Moscow pledged to resolve the issue right away; four weeks later, the flow of Russian oil into Europe is little more than a trickle.
Druzhba usually supplies up to 1.5 million barrels a day of Russia’s benchmark Urals blend into central Europe. The crude goes directly to refineries through two separate pipeline spurs and via tankers from the UST-Luga export terminal in the Baltic.
Despite repeated pledges from Russian authorities to resume shipments in days, the crisis is proving bigger, longer and costlier than almost anyone expected and a solution could still be weeks away.
In Germany, one of the continent’s biggest refineries — the Leuna plant owned by French oil giant Total SA — has shut down. Poland has been forced to tap the emergency petroleum reserves. And as far west as Rotterdam, Europe’s petroleum hub, some refineries have been forced to run at lower rates.
The technical challenge of handling millions of barrels of
■ Number of barrels of oil supplied through Druzhba every day Russia’s daily oil output (in bpd) so far this month As the weeks pass, the price tag soars. Speaking privately, more than a dozen oil traders and refining executives in London, Geneva and Moscow said the cost may reach $1 billion. The estimates are based on the volume of oil contaminated and the $10-to-$20-abarrel discounts refiners are asking to take the tainted barrels. The traders and executives spoke on condition of anonymity to avoid upsetting their commercial relationship with Russia.
“The Druzhba pipeline issue should cap Russian supply for the time being,” said Ed Morse, head of commodities research at Citigroup Inc. in New York. tainted crude has been compounded by fights over who will pay the cost of the crisis.
“So far the resumption of flows along Druzhba has been progressing very slowly,” Vienna-based consultant JBC Energy GmbH told clients. “Negotiations and payment arrangements here could well take some time, delaying the full resumption of flows.”
Then there’s the mystery of what’s happening to Russia’s crude oil while Druzhba is shut. According to official data, output has barely dropped over the last four weeks, falling from 11.23 million barrels a day in April to 11.15 million barrels a day so far in May. But the country is shipping roughly one million barrels a day less than normal, about a tenth of its output.
That’s led oil traders to puzzle on how Russia’s been able to maintain production, asking whether Russia has the millions of barrels of empty storage needed to hoard the crude that hasn’t flowed through Druzhba for four weeks.
Spokesmen for Transneft and Rosneft declined to comment.
Although Moscow has yet to give its own estimate, Western traders also believe the problem will prove larger and take longer to resolve than many predict. Russian oil officials talk about 20 million barrels contaminated, but oil traders and refining executives believe the real number may be closer to 40 million.
Short supply
The contamination comes at a time when the global oil market is already short of supply of crude of similar quality to Urals. The combined impact of US sanctions on Iran and Venezuela, Opec+ production cuts, and lower-than-expected output in Mexico has reduced worldwide shipments of denser crude with high sulphur content. Premiums in the physical market for medium-heavy crude have surged to multiyear highs as a result.
“This a significant unplanned outage that is having spillover effects,” said Harry Tchilinguirian, head commodity strategist at BNP Paribas. “What you end up with is a further reduction in the availability of medium quality crude oil.”