Russia’s dirty oil crisis is worse than almost anyone predicted
Bloomberg / London
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.
The length and scope of the crisis has given it a political dimension. On Thursday, Polish Prime Minister Mateusz Morawiecki decided to get personally involved in finding a solution, but said talks were “very difficult, very tough.”
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 PJSC, 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 1.5mn barrels a day of Russia’s benchmark Urals blend into central Europe — more than the total production of Opec member Libya. 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 tainted crude has been compounded by fights over who will pay the cost of the crisis. An emergency summit in Warsaw on Thursday made some progress, but didn’t nail down a solution.
“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 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 11.23mn barrels a day in April to 11.15mn barrels a day so far in May.
But the country is shipping roughly 1mn 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.
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 $1bn. The estimates are based on the volume of oil contaminated and the $10-to-$20-a-barrel 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 in New York.
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 20mn barrels contaminated, but oil traders and refining executives believe the real number may be closer to 40mn.
The larger the amount, the bigger the problem: the polluted crude will need to be blended very slowly to bring the chloride levels down to acceptable levels, on a 1-dirty-to-10-clean barrels ratio most likely. That process may well take months, not weeks. So far, refiners in Poland have experimented with blending and struggled.
“The Russian crude can only be blended down over time, a process requiring hundreds of millions of barrels of clean crude,” said Amrita Sen, chief oil analyst at consultant Energy Aspects in London. The second problem lies with who’s responsible for the crisis – and the cost of clearing it up. The pipelines are run by Transneft, headed by Nikolay Tokarev, a former KGB pal of Vladimir Putin. Much of the oil is supplied by state oil company Rosneft PSJC, run by the Kremlin power-broker Igor Sechin.
Russian oil officials have pinpointed the contamination to a small, privately-owned terminal in the Samara region, about 1,000 kilometres (620 miles) from Moscow. Who owned the oil and why it was polluted remain a mystery.
The contamination with organic chloride, which is very unusual, 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 multi-year highs as a result. “This is a significant unplanned outage that is having spill-over 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.”
Russian officials and European oil executives are groping toward a solution. After Thursday’s Warsaw meeting, Transneft said uncontaminated barrels can flow into Poland by June 10 if interested parties implement a restart plan yesterday. But PERN SA, its Polish counterpart, said claims for compensation from oil refiners must first be acknowledged if the deadline is to be met.
To be sure, the situation is slowly improving. Russia is resorting to Soviet-style mobilisation, marshalling thousands of rail cars to move crude from the north of the country into a terminal in the Black Sea where the polluted crude could be slowly blended with clean flows.
The southern branch of the Druzhba pipeline, which goes into the Czech Republic and Hungary has started to pump, although at rates about half their normal level of 300,000 barrels a day. Clean crude arrived on Thursday in Slovakia and it’s expected to reach Hungary by Monday.
Ust-Luga is also receiving clean oil, but shipments remain patchy. The big problem is, however, the key northern branch of Druzhba going into Belarus, Poland and Germany, which remains closed, depriving the region of at least 700,000 barrels a day. So far, every plan to re-start the pipeline has failed. As an alternative, refiners in the region are getting oil via the Baltic ports of Gdansk in Poland or Rostock in Germany.
Until a proper solution is found, a crisis that started in a remote village in southern Russia will keep reverberating through the continent’s oil market – and the costs will rise and rise.
STOCKHOLM – Earlier this month, a bleak global assessment of the shocking state of life on Earth made headlines worldwide. According to the report by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), about 12% of all known animal and plant species are now threatened with extinction. Worse still, humanity is destroying entire habitats, and with them the web of life that supports societies and economies. Unsurprisingly, the findings were greeted with despair.
As IPBES scientific contributors and co-authors of the report, we face this news every day. It is impossible not to react emotionally to the scale of destruction humans are inflicting on the natural world. Yet the report also goes to great lengths – although this has been less widely reported – to identify ways to reverse this alarming trend. To succeed, however, humans need to undertake four major transformations.
First, we must substantially change our legal, economic, and technological systems. It is true, as the report emphasizes, that protected areas and legislation have prevented the extinction of many species, such as the panda. And further conservation steps are clearly needed. But humans need to make far more fundamental changes.
The IPBES report therefore explores numerous possible economic development paths for the world to 2050, and identifies ways to protect nature while increasing human prosperity. The measures it proposes are not the usual suspects, such as reducing deforestation or curtailing the exploitation of species; instead, they address the causes of these problems.
Here, the report concludes that sustaining Earth’s living systems requires us to redefine what a good quality of life means. Societies need to get away from the idea that a good and meaningful life is possible only through ever-increasing material consumption. This is clearly absurd. Wellbeing has been stagnating in many developed countries, even as consumption continues to increase.
Solutions could instead build upon new social and political narratives showing that happiness goes hand in hand with lowering total consumption and cutting waste. Reducing gender and wealth inequalities also improves a society’s wellbeing, as Nordic countries have shown. And, as IPBES recognizes, indigenous and local knowledge can reveal other ways of managing ecosystems sustainably.
Undertaking such shifts will not be easy. The world must urgently adopt a new economic paradigm that goes beyond a singular focus on GDP. This is beginning to happen. New Zealand, for example, has announced its first “wellbeing budget,” while China is continuing to develop measures of “green GDP.”
Second, the world must transform its food system. The way we currently produce and consume food is a major cause of ecological destruction. Yet feeding a growing global population a healthy diet without damaging the Earth is not only possible, but will also improve people’s quality of life. The IPBES report highlights several sustainable agricultural practices, such as integrated pest and nutrient management, organic farming, soil and water conservation, and measures to improve animal welfare.
One of the IPBES report’s development paths to 2050 is in line with the findings of the separate EAT-Lancet Commission reporton sustainable food systems. That report, released earlier this year, concluded that the world could feed ten billion people a healthy diet – with less meat and dairy products, and more nuts and vegetables – without needing to use more land.
But these actions on their own will not be enough. One-third of all food produced never makes it to the plate. We support calls for food waste to be slashed by 50% by 2030, and, encouragingly, countries including France, Germany, and Italy have taken steps to prevent supermarkets from discarding unsold food.
Third, we must treat the world’s oceans far better. Industrial fishing now extends to 55% of the world’s ocean area, and just 3% is free from human pressure. The ocean is increasingly used as a dumping ground for sewage, plastic, excess fertilizers, and other toxic pollutants. But research shows that managing the oceans sustainably can increase fish stocks and economic value. And the UN aims to reach agreement next year on new international regulations to protect the oceans.
Finally, the world must think carefully about the best ways to tackle climate change. The timber and agriculture industries – in particular the production of soy, palm oil, and beef – are causing rapid deforestation, with devastating consequences for the stability of the Amazon rainforest, the world’s climate, and many species. But attempts to combat global warming through large-scale planting of bioenergy crops, along with reforestation and afforestation, could greatly harm biodiversity and fragile ecosystems. Well-planned measures, on the other hand, could enhance biodiversity, improve soil quality, and capture and store carbon dioxide.
Protecting the living world calls for systemic changes that go beyond narrowly focused policies on biodiversity or climate. Fighting poverty and inequality are essential parts of the solution, too. But these transformative steps will happen only if we start treating the situation like the crisis it is, as Swedish climate activist and student Greta Thunberg has urged.
In recent weeks, both the UK and Irish parliaments have declared climate and nature emergencies, and we urge other countries to do the same. In 2020, a “superyear” for international environmental policy – with major summits on biodiversity, climate, and the oceans – the UN should mark its 75th anniversary by declaring an emergency for the planet to accelerate action to ensure long-term sustainability.