Druzhba pipeline: The dark side of Russian oil | Business| Economy and finance news from a German perspective | DW | 21.05.2019
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Druzhba pipeline: The dark side of Russian oil

The oil pollution that has halted flows via the Druzhba ("Friendship") pipeline was deliberate, according to the Kremlin. But who might want to pull such a dirty trick? DW's Jo Harper has asked around.

There is always a market for a good cock-up theory. "This is a story about greed and small-time fraud colliding with incompetence and a lack of control over what goes in the pipe," Bloomberg oil strategist Julian Lee wrote.

This was in the week after several central European and Baltic countries had turned the tap off on Russian oil via the Druzhba ("Friendship") pipeline in late April.

But if a touch of conspiracy theory is your thing, others have since suggested ulterior motives may be at play. This is Russia, after all, and opacity breeds speculation.

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Pipeline still closed

Ukraine suspended pumping Russian crude oil via the pipeline to Europe this week after a request by Hungary's main oil company MOL. This means possible delays to plans to fully restore deliveries of Russian crude to Europe by late May or early June.

Large-scale contamination of Urals crude delivered through the system was first reported by Belarus on April 18, following which all the deliveries were halted.

The crude was found to contain high levels of organic chlorides, which can corrode equipment when heated.

The Druzhba runs via the Mozyr refinery in Belarus, after which it splits into two routes, the southern branch going via Ukraine to Slovakia and Hungary and the northern branch via Poland to Germany.

A long outage could force refineries in Eastern Europe and Germany to cut operations and prompt Moscow to reduce oil production. It could also lead to claims by Western oil buyers against Russian producers and pipeline monopoly Transneft.

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Dirty deeds and crude tactics

Nikolai Tokarev, head of Transneft, said the contamination had been deliberate and that a private firm in the Russian region of Samara, on the Volga river, was responsible. He didn't identify the company. What is known is that the contaminant came from a privately owned refinery called Nikolayeva in Samara.

"The company accumulates oil from small producers in the Ulyanovsk, Orenburg and Samara regions ... and is transferring it to the pipeline system," said Tokarev, a close ally of Russian President Vladimir Putin.

Russia's Investigative Committee has since then blamed what it called "black marketeers" working with a local company that had access to Transneft's system through feeder lines at Nikolayevka. It accuses them of stealing at least 1 million rubles ($15,400, €14,250) of pipeline-ready oil and replacing it with a similar volume of a liquid mixture made up of raw crude and organic chlorides.

The Russian media monitor Meduza has subsequently reported that the "node draining oil into the Russian state-owned pipeline system ended up not just under private ownership, but under the ownership of foreign citizens." These foreign citizens are Ilse Rosin and Eduard Rosin, who were transferred ownership of the node in November via a limited-liability company called Metapron GmbH registered in Germany, the news site reported.

Others are less convinced this is more than it appears.

"I have not seen any substance behind conspiracy theories," Vitaly Yermakov, a Senior Research Fellow at the Oxford Institute for Energy Studies, said. "The official version from the Russian investigators (note that the investigation is still in process) of the theft by the detained individuals appears plausible," he said.

Whodunnit?

Meduza reported that Transneft had allowed unknown companies to add petroleum to the Druzhba since the end of 2018 along one section of the pipeline owned previously by Absolut Bank, which split the property among multiple owners, four of whom landed in a pretrial detention center in the city of Samara on May 7.

According to Meduza, the suspects include Nefteperevalka CEO Svetlana Balabai and her deputy, Petroneft Aktiv ead manager Vladimir Zhogolev, plus Sergey Balandin, the deputy leader of the Samara-based transport company Magistral.

The Nikolayevka refinery was privately owned by a Russian oilman called Roman Trushev, a dual Russian-Maltese citizen. When the arrests were made, Trushev was conveniently out of the country for the May Holiday. He is rumored to be hiding in Germany. Trushev meanwhile has told the Russian newspaper Kommersant that the depot was too small to account for all the tainted crude.

Murkier and murkier

But these players are most likely small fry, some commentators believe.

Added by supply shortfalls in Iran and Libya and uncertainties in Venezuela, increased crude prices were inevitable. At a time of rising competition with US oil exports, there have been rumors of a possible sabotage scenario.

One points to the fact that the contamination came as Russia planned to increase its monthly Urals exports to five-year highs in May, before the expiry of a deal on output cuts agreed with OPEC.

The pipeline has a 1-million-barrels-per-day capacity, or 1% of total global crude demand and this has an impact on global prices. Brent crude prices jumped to a 6-month high at $75 a barrel because of the contamination.

Russia is the world's second-largest oil exporter after Saudi Arabia, and as a result of the crisis European purchases of oil fell by up to 10% — roughly 1 million barrels per day. Moscow is reportedly losing half a billion dollars a day in oil profits. 

Alexander Lukashenko (foreground) and Vladimir Putin

There is not much love lost between Alexander Lukashenko and Vladimir Putin

Minsk in a twist

So far Belarus has suffered most. Its economy is heavily dependent on oil from Russia, which it gets at a preferential price and processes in two refineries to gasoline, the country's main export and foreign currency producer. Minsk also earns from the oil that passes through the country in the form of transit fees.

Equipment in the Masyr refinery has reportedly been seriously damaged by the chlorine in the oil. At the end of April, Minsk estimated its losses at $100 million (€89.7 million) and this could be much higher.

On April 10, Russia's sanitary authority banned imports of apples and pears from Belarus, saying the fruits were coming from the EU and that Belarus was helping Europeans beat the Russian food embargo, introduced in 2014 in response to the EU's Ukraine-related sanctions.

The move was seen as part of a Russian pressure campaign for a closer union between the two countries, but a merger with Russia is unpopular in Belarus.

On April 11, the day after the apple ban, Alexander Lukashenko said the Belarusian part of the Druzhba pipeline should long have been closed for repairs.

"We didn't do it because we understood that it would hurt Russia," Lukashenko said. "But now," he continued, "all the good we do the Russian Federation is paid back with evil."

A week later, the contaminated  oil was found.

"In recent years, Belarusian oil refineries have complained of the deteriorating quality of Russian oil, but this 20-fold drop in oil quality standards is something new," Tatsiana Manyonak from online platform belrynok.by said.

The Belarusian State Concern for Oil and Chemistry (Belneftekhim) has for some time accused Moscow of not fulfilling its pledge to tackle the issue.

But some still plump for human error as the cause. "My bet is that the contaminations happened by mistake," says Phil Flynn, Senior Market Analyst at Price Futures Group in Chicago.

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