By Dmitry Zhdannikov
LONDON (Reuters) – Russia halted oil flows along the Druzhba pipeline to Eastern Europe and Germany last week because of contaminated crude, contributing to a rise in global oil prices to a six-month high and leaving refiners in Europe scrambling to find supplies.
For a map of the Russian oil pipeline, click on: https://tmsnrt.rs/2DytnnM
Below are details about the problem and action being taken.
At least 5 million tonnes of oil, or about 36.7 million barrels, have been contaminated by organic chloride, the chemical compound used to boost oil extraction by cleaning wells and accelerating the flow of crude.
The compound must be removed before oil is sent to customers because it can destroy refining equipment and, at high temperatures, generates poisonous chlorine gas.
Russian pipeline monopoly Transneft said the contamination happened in the Volga region of Samara and blamed unnamed “fraudsters”. President Vladimir Putin said Transneft lacked a proper mechanism to prevent contamination.
WHAT IS THEIMPACT?
The Druzhba pipeline, which can pump 1 million barrels per day (bpd), the equivalent of 1 percent of global oil demand, was build in Soviet times and serves refiners in Germany, Poland, the Czech Republic, Slovakia, Hungary, Ukraine and Belarus.
All the importing nations stopped taking Russian oil via the pipeline since April 25.
Belarus, where the pipeline splits into northern and southern spurs, began receiving clean oil this week but most pipelines in the country and further along the network remain contaminated.
Belarus said it might take months to resume normal operations.
In Germany, the main refiners served by Druzhba are Schwedt, co-owned by Rosneft , Royal Dutch Shell and Eni, and Total’s Leuna.
The two refineries bought a tanker of oil each via the Polish port of Gdansk and so far have sufficient on-site inventories to keep operating.
Industry sources say the plants are seeking alternative supplies and have yet to cut refining runs.
Hungary said it would release 400,000 tonnes of oil from its emergency reserves to supply a refinery owned by MOL.
The Czech oil refinery at Litvinov, owned by PKN Orlen unit Unipetrol, started receiving oil from state emergency reserves on May 2.
Poland’s Lotos said it would tap strategic reserves, while its bigger rival PKN Orlen has said it had no plans to do so.
Besides the Druzhba pipeline, oil sent to one of Russia’s top Baltic Sea ports, Ust-Luga, was also contaminated.
At least 10 tankers with a combined 1 million tonnes of oil, which would normally be worth more than $500 million (£384.8 million) at current prices, had already sailed from Ust-Luga before the problems came to light.
Trading house Vitol refused to take a cargo from Ust-Luga last week, forcing the port to shut for 24 hours.
Ust-Luga reopened for crude loading on April 26 but, as of April 29, levels of chloride were still high. Russian officials and traders say Ust Luga should receive clean oil by May 5-7.
Transneft allows no more than 10 parts per million (ppm) of organic chlorides. Levels in the Druzhba line and Ust-Luga have been between 80 ppm and 330 ppm.
Russian oil company Surgutneftegaz repeatedly failed to award two prompt Urals May cargoes from Ust-Luga at a tender this week even after offering discounts for chloride contamination.
In the neighbouring port of Primorsk, Russian Urals crude prices jumped to their highest since the late 1990s as refiners rushed to replace lost supplies.
HOWCANTHIS BE FIXED?
Buyers who have received contaminated oil now need to store it somewhere and dilute it with cleaner crude to lower the chloride levels, an operation that could cost millions of dollars for each large crude tanker, oil trading sources say.
Oil at Ust-Luga could gradually be loaded onto ships mixed with better-quality crude.
But cleaning out the Druzhba pipeline is not so simple.
Germany and Poland lack sufficient storage tanks to keep the oil until it can be diluted. That means they would need to reverse the flow of the pipeline and pump tainted crude back to Russia or to Poland’s Gdansk port, where it can be evacuated.
Transneft has said that contaminated oil from Belarus could be transported by railway to Russia’s Black Sea port of Novorossiisk, where it would be diluted.
This would take several months because the railway cannot take more than 300,000 tonnes a month, traders say.
(Reporting by Dmitry Zhdannikov; Editing by Edmund Blair and David Goodman)