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Analytics. Studies. Modelling.The Oil and Gas Market’s Independent Research Centre. FSU/CEE Insight: Russia Special Issue 17 | 2-May-19 Weekly Report Editorial Nightmare Supply Scenario for FSU/CEE Refiners A full halt on Druzhba flows has refiners along the line scrambling to find alternative crude supplies Outage to affect Poland and Germany much less than Belarus A prolonged Druzhba outage would put an estimated 600,000 b/d of refining capacity at risk s we write this, flows along crude imported via the Druzhba have also been affected. However, it one of the oldest, longest, and pipeline always remained the also means that flows to Russia’s A most important pieces of oil baseload crude in these refineries. biggest export terminal, the Baltic pipeline infrastructure in the world Hence the current outage is an port of Primorsk, have not been are severely disrupted. We are of extremely significant event, contaminated. course referring to Russia’s Druzhba particularly as it may take months (Friendship) pipeline, which remains rather than weeks for the pipeline to A note on the contamination. We the lifeline to several Eastern return to normal operations. understand that the strategy being European and FSU refineries. The employed by the Russians is to northern leg of the pipe supplies Flows stopped after it became blend the crude down to levels Belarus, Poland, and eastern evident that the crude flowing along where the organic chlorides are no Germany, while the southern leg the pipeline was contaminated by longer high enough to cause serves refineries in Hungary, organic chloride in concentrations of problems. This is however a massive Slovakia and the Czech Republic. up to 30 times the maximum logistical undertaking because it These countries have always been accepted standard. It was reported requires all of the contaminated aware of their dependence on that the contamination occurred crude still in the system—estimated Russian crude and many have somewhere along the pipeline leg by Transneft and reports from the successfully found new routes of between Samara and Unecha (see Belarussian state news agency, to be supply over the years. However, map). This is significant because it around 5 million tonnes (36.5 even when new supply routes means that flows along the BPS-2 million barrels)—to be pumped out became available, Russian Urals pipeline from Unecha to Ust Luga and transported to storage facilities Russian Crude Exports via the Druzhba and BPS Systems to Europe in Q1 2019 [b/d] Primorsk Legend: 800,000 b/d Schwedt Refinery and its Ust Luga 230,000 b/d capacity 600,000 b/d Russia Germany Delivery point and 460,000 b/d volumes Yaroslavl Schwedt 230,000 b/d NovoPolotsk Unecha 170,000 b/d Belarus Gdansk Samara Germany Poland 210,000 b/d Belarus 350,000 b/d 460,000 290,000 b/d Mozyr Source of contamination Leuna 330,000 b/d somewhere between 230,000 b/d Plock Samara and Unecha 330,000 b/d Czech Rep. Ukraine 70,000 b/d Litvinov Kralupy Slovakia 110,000 b/d 68,000 b/d 115,000 b/d Slovnaft 115,000 b/d Pipeline Legend: Hungary Pipeline - not contaminated 85,000 b/d Duna Pipeline - offline/contaminated 161,000 b/d 1 [email protected], www.jbcenergy.com FSU/CEE Insight: Russia Special Issue 17 | 2-May-19 European Imports of Russian Crude via the Druzhba Pipeline ['000 b/d] 2000 Ust Luga Germany Poland Czech Republic Slovakia Hungary 1800 1600 1400 1200 1000 800 600 400 200 Ust Luga volumes are seaborne and occasionally get arbed out of the NWE region Source: Argus Media 0 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 where it can be blended down. month but with the possibility of a access to seaborne crude can of Thereafter clean crude will 6-month extension (Interfax) — course tap the wider international presumably need to be inputted into something that hints at the scale of crude market. However, this may not the affected Druzhba system to the operation. even need to be the case as the blend down the remaining volumes capacity of Primorsk is actually 1.5 sticking to the pipes. This is why In the meantime the big question on million b/d, significantly higher than Transneft is already in talks with the everybody’s mind is how to deal recent exports. This indicates that, if Russian state owned railway with the sudden lack of Druzhba necessary, up to an additional operator, RZD, for the use of up to crude. Here each refinery has its 700,000 b/d of Russian crude could 5,000 rail cars, initially for one own supply dynamics. Those with potentially be exported out of Sources of Crude Imports in Selected CEE Countries [%] Poland Czech Republic Hungary 1 1 1 0.9 0.9 0.9 0.8 0.8 0.8 0.7 0.7 0.7 0.6 0.6 0.6 0.5 0.5 0.5 Other 0.4 North Sea 0.4 0.4 Kazakhstan 0.3 0.3 0.3 Iraq Saudi Arabia Other (primarily Algeria Other 0.2 0.2 0.2 Russia Caspian (KZ, AZ) Caspian (KZ, AZ) Russia 0.1 0.1 0.1 Iraq Source: Based on IEA data from MODs © OECD/IEA, www.iea.org/statistics, Licence: www.iea.org/t&c; as modified by JBC Energy Russia 0 0 0 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 2 [email protected], www.jbcenergy.com FSU/CEE Insight: Russia Special Issue 17 | 2-May-19 Primorsk, thereby more than making especially gasoline, react to this up for the loss of Ust Luga. situation as neighbouring countries might have to compensate for lower Moreover, both Polish refineries processing for a certain while. could shift more of their imports of Likewise, the Urals differential at Russian crude to seaborne Urals out Primorsk has reached the highest of Primorsk. Obviously the Gdansk level in at least 10 years at a 90 cent refinery could run fully on Russian premium to North Sea Dated (Argus seaborne crude while the 330,000 Media), highlighting ongoing supply b/d Plock refinery could receive its diversification efforts. crude via the 650,000 b/d southbound pipeline link between A longer-lasting impact could be Gdansk and Plock, leaving another that the Druzhba outage underlines 320,000 b/d for onward delivery to the importance of the JANAF the affected German refineries of pipeline network as a means of Schwedt and Leuna. The remaining supply diversification for the Czech 140,000 b/d required by the German Republic, Slovakia, and Hungary. refineries could come from the The system of pipelines runs from 140,000 b/d Rostock to Schwedt the port of Omisalj on the Adriatic pipeline. From this perspective, up through Croatia, and Hungary Germany and Poland could reroute and in theory onwards to Bratislava their supplies without too much of a and into the Czech Republic, where headache. For neighbouring Belarus, it could be used to supply both the however, there are few options, all Litvinov and Kralupy refineries. In of which rely on very high freight fact, Unipetrol already reached an costs. We therefore expect agreement this year with Janaf to Belarussian run rates, which had enhance business opportunities, but averaged around 340,000 b/d in flows are only due to start once 2018, to decline substantially for as transportation agreements with long as the outage persists. Hungary and Slovakia are signed. ¤ Refiners along the Southern Druzhba leg are also highly dependent on Russian crude, particularly Slovakia which relies on the Druzhba for over 95% of its supplies. Hungary is a little more diversified with Druzhba imports amounting to around 70% of crude input. For the Czech Republic, the 70,000 b/d of Russian crude that it runs will be very hard to replace as it has already largely maxed out supplies via the fully-subscribed Transalpine (TAL) pipeline route. This means that the refinery could be forced to run at substantially lower levels. The same goes for the 115,000 b/d Slovakian refinery, while Hungary could replace some of the missing barrels from the Adriatic (JANAF) route as it already imports around 50,000 b/d of Iraqi crude. This would put the volumes at risk from the outage of the Southern leg at a maximum of 270,000 b/d. To conclude, if the Druzhba outage persists, we could be looking at reduced runs for refineries along the northern route by up to 340,000 b/d (i.e. Belarus), as well as another 270,000 b/d from the south, bringing total volumes at risk to just over 600,000 b/d. Such an outage would tighten refined product markets in the affected areas, i.e. Belarus and Russia (which has tolling agreements with Belarus) as well as CEE. We have seen product prices, 3 [email protected], www.jbcenergy.com FSU/CEE Insight: Russia Special Issue 17 | 2-May-19 Feature Article Russia Turns to the Arctic Ocean The NSR to play an increasingly bigger role in Russia’s energy strategy Gazprom Neft is negotiating with Novatek on Arctic cooperation Rosneft is yet to find a way to ramp up Arctic supply t the beginning of last month Although under current Russian Neptune fields. The two latter fields a UN subcommittee officially legislation only Gazprom and are currently being developed and A recognised that a part of the Rosneft are allowed to hold licences are scheduled to commence subsea area beneath the Arctic for offshore field developments in commercial production by the Ocean is a geological continuation the country’s Arctic, so far only middle of the next decade (company of Russia’s continental shelf.
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