How will Druzhba pipeline incident affect further decisions of European buyers?

Oil&Gas Materials 20 May 2019 15:41 (UTC +04:00)

Baku, Azerbaijan, May 20

By Leman Zeynalova – Trend:

A recent oil contamination incident in the Druzhba pipeline highlights the reliance of many central and eastern European (CEE) refineries on Russian crude oil and is likely to intensify their search to diversify their oil sources, Trend reports citing Fitch Ratings.

“We expect Fitch-rated refineries to see temporary cost increases during supply disruptions. Russian oil is the main feedstock for both Hungary's MOL Hungarian Oil and Gas Company and Poland's Polski Koncern Naftowy ORLEN S.A. (PKN) refineries, which normally source about two thirds of their supplies from the country, largely via Druzhba. The reduced oil supply from Russia is likely to push the refineries to switch to other sources, including seaborne crude, which could be costlier due to higher spreads and transportation expenses,” reads the analysis by Fitch.

Despite the incident, Fitch expects Russian crude oil to remain the major supplier to both Hungary and Poland, in the foreseeable future given the existing infrastructure. “Once the crisis is resolved, Urals is likely to again start trading with a discount, incentivising the continuation of sourcing Russian oil. Moreover, the discount may widen later in 2019 due to the International Maritime Organization's regulations on sulphur content in shipping fuel, which is likely to reduce demand for Urals that has high sulphur content.”

The overall risks that EU countries that depend on Russian oil may run out of crude supplies are currently low, as they must maintain emergency stocks of crude oil or petroleum products equal to at least 90 days of net imports, according to Fitch.

“These stocks are likely to sustain these countries through the current disruptions. Furthermore, countries like Poland, Hungary and Lithuania have access to alternative sources of crude supplies.

If the contamination had long-term reputational risks for Russia as a reliable source of crude oil, it may encourage the gradual diversification by European off-takers away from the country. Source diversification and a partial switching to seaborne crude may be positive for MOL and PKN in the long term. The companies would be more flexible to choose where to buy, depending on the prevailing pricing. The companies have already been gradually reducing their dependence on Russia from virtually full reliance a few years ago,” reads the analysis.

Druzhba is a major pipeline exporting oil from Russia to Europe for refining. Crude transits via the pipeline were virtually brought to a halt on 25 April when many off-takers stopped accepting oil due to heavy contamination with organic chlorides. Media reports indicate that disruptions continue to exist and will likely remain for a few more weeks on the northern line of the Druzhba pipeline, despite earlier indications from the Russian authorities that flows and quality of oil in the pipeline would be restored within two weeks. The time required to clean the pipeline is difficult to estimate, but lower shipments may continue even for the next few months.


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