Moscow, Russia, May 13, 2019.
As the situation with the quality of oil transported from Russia to Europe via the Druzhba oil pipeline is gradually improved, financial issues have come to the fore. Or, more precisely, the amount this accident will cost Russia has become of great concern.
On May 11, 2019, President of Belarus A. Lukashenko reported that Belarus had lost an enormous amount of money; in particular, it had not received any profit, currency earnings, or transit. A. Lukashenko said the estimated loss of hundreds of millions of dollars was not far from the truth. Vedomosti cites the possible amount of losses on May 13, 2019, as being in the range of $271.3 million to $435.3 million.
The main components of the damage are the loss of transit profits, the loss of oil refining profits, the cost of cleaning, and, possibly, the replacement and repair of damaged equipment.
Loss of Oil Transit Profits
In 2018, the transit fee for 1 ton of Russian oil via Belarus in the direction of Poland, Germany, and Ukraine was US $0.84/100 km. The length of the Druzhba oil pipeline in the territory of Belarus is 1900 km (i.e., the payment for the entire route is US $15.96/ton). Different sources have discussed different oil transit volumes for 2018: the volume is about 48.9 million tons according to Transneft and 58.8 million tons according to Gomeltransneft Druzhba. That is, Gomeltransneft Druzhba’s profits could amount to $780.4 million to $938.5 million for transit in 2018. If the tariff and the volume of transit remain the same, Gomeltransneft Druzhba’s lost profits for 14 days could range from $29 million to $35 million.
The Russian Ministry of Energy expects the situation with the quality of oil in the Druzhba pipeline to normalize in the 2nd half of May 2019. In this case, normalization entails cleaning one run of the pipeline in each of the main export destinations. As a result, the pipeline throughput capacity will decrease. According to Gomeltransneft Druzhba estimates, the throughput capacity of the Druzhba pipeline may be reduced to 40 million tons/year after the accident. As a result, the company will transit 8.9 million to 18.8 million fewer tons of oil in 2019 than in 2018 (equal to a loss of $142 million to $300 million).
Loss of Oil Refining Profits
The poor quality of oil has forced the Mozyr Oil Refinery and the Naftan Oil Refinery to reduce their production of oil products. According to Belneftekhim, on May 11, 2019, the Mozyr Oil Refinery started to refine oil the quality of which meets the standard. By that time, Naftan was still suffering from a reduced load because the oil transit via the uncontaminated Surgut–Polotsk pipeline is insufficient for the optimal load of the plant. The damage amounted to US $100 million of lost profits.
Losses Due to Equipment Damage
The Mozyr Oil Refinery almost immediately claimed that equipment had been damaged. The management of the company said the equipment was damaged due to the high content of organochlorine — which has a high corrosive activity — in the incoming oil. Failures of a number of heat-exchange tubes of the HK-105 air cooler consisting of 6 sections were revealed at unit LK6U No. 2 (the primary distillation unit) of section C-100 on April 20, 2019. According to experts’ estimates, such tubes cost 3.5 million rubles each (a total of US $323 thousand). An independent expert investigation with the involvement of the Belarusian and Russian parties is necessary for an objective assessment of the damage to the equipment.
Is the Damage Recoverable?
The amount is staggering, and the issue of compensation will require serious discussion. However, not everything is as critical as it seems at first glance. Interfax, citing its sources, said that most of Belarus’s losses from contaminated oil in the Druzhba pipeline at this stage are not irrecoverable. The lost transit and under-utilization of the refinery will be rectified as the delivery schedule gets caught up with by the end of 2019. Possible damage to the refinery equipment would be the most serious damage, but it will take time to assess the situation.
Moreover, the issue of the poisonous oil which is still on the territory of Belarus remains unresolved.
On April 19, 2019, Belneftekhim complained about a deterioration in the quality of the Russian Urals supplied to Belarusian refineries via the Druzhba oil pipeline. Almost immediately, it became clear that this referred to the pollution of oil with organochlorine, which is a chlorine compound released during distillation. The polluted oil has damaged the equipment of the Mozyr Oil Refinery in Belarus. Belarus had to stop the export of light oil products to Poland, Ukraine, and the Baltic countries; Europe had to stop importing oil from the Druzhba. Oil contamination in the Druzhba pipeline, which accounts for up to 8% of the EU’s annual imports, has reached the level of interstate relations between Russia and Belarus and has raised the price of oil throughout the world. As of April 13, the main channel for oil export from Russia to Poland and Germany is still completely paralyzed, but the first success of cleaning the Ukraine-Hungary minor southern string has been achieved.
What is the Druzhba?
The Druzhba oil pipeline, built in the 1960s with the support of the Volga region oil fields, was one of the main integration projects of the USSR with the countries of the Council for Mutual Economic Assistance. The Druzhba remains an important supplier of oil to Europe; refineries in Belarus, Poland, Hungary, Slovakia, Germany, and the Czech Republic still depend heavily on this pipeline. The Druzhba transits about 65 million tons of oil per year, which is a quarter of Russia’s total exports. About one-third of this oil is refined in Belarus, and almost all the remainder is received by the EU.
Minsk, Belarus. March 22, 2019
Gazprom is planning to maintain its gas supply to Europe at the level of 200 billion cubic meters (BCM) of gas per year in 2019, A. Kruglov, Gazprom board deputy chairman, told reporters on March 22, 2019.
Gazprom reached volumes of export supplies above 200 BCM of gas per year for the first time in 2018 and now intends to at least maintain this level.
On February 26, 2019, on Investor Day in Hong Kong, Ye. Burmistrova, director of Gazprom Export, stated confidently that Gazprom could maintain exports to Europe at 200 BCM/year for a number of years to come. It is interesting that A. Kruglov assumed that gas exports to non-CIS countries could grow by about 20%, to more than 242 BCM/year by 2025, taking into account the achievement of the planned volumes of gas supplies to China at 38 BCM/year via the Power of Siberia-1 gas pipeline.
The key issue is the gas supply situation in 2019, as the new export gas pipelines Nord Stream 2, the Turk Stream, and Power of Siberia-1 are to be launched at the end of 2019. In this connection, reaching a level of more than 200 BCM/year in 2020 is not a problem, but one cannot be sure about Gazprom’s ability to reach this level in 2019, especially with the warm weather in Europe leading to a reduction in gas demand.
In the period from January 1 to March 15, 2019, Gazprom has reduced its gas supply to non-CIS countries by 8.2% when compared to the gas supply volumes for these 2.5 months in 2018, to 40.8 BCM.
In 2018, Gazprom increased gas exports to non-CIS countries by 3.8% compared with its 2017 exports, to 201.8 BCM. The company was planning to increase this to 204.5BCM/year (the maximum annual contract volume for all export contracts to non-CIS countries), but the export volumes were lower than expected. Gazprom increased its gas production by 5.7% in 2018 when compared to 2017, to 497.6 BCM.
In 2019, the Russian gas giant is planning to produce 495.1 BCM of gas, which is a 0.5% decrease from 2018. This is traditional for Gazprom, which usually adheres to a conservative and self-restrained approach when making production forecasts at the beginning of each year. During the year, the forecast for production volumes may be adjusted depending on the market situation.
Russia’s Gazprombank leaves Venezuela. Rosneft still stays.
Moscow, Russia. March 15, 2019
Gazprombank is minimizing risks in Venezuela. The bank has sold a 17% stake in GPB Global Resources which, in turn, owns 40% of Petrozamora, a joint venture with PDVSA, Reuters stated on March 14. The bank has confirmed the fact of leaving the joint venture without specifying any details.
Petrozamora was founded in 2012 to develop oil fields in Venezuela. In 2013, Gazprombank, GPB, Petrozamora, and PDVSA agreed to allocate up to $1 billion for the development of the joint venture. Now, Gazprombank does not have any investment projects in Venezuela.
Rosneft has become the only Russian company with large assets there, Kommersant noted. According to Reuters, the Russian giant oil company has lost about $9 billion on its investments in Venezuela since 2010. Rosneft is running five projects in Venezuela while producing a small share of its total oil production. The crisis in Venezuela involves the risk that the country will not be able to pay its debts.
Back in 2011, more than 66% of the Neftegaz.Ru survey respondents approved the participation of Russian companies in the development of the Orinoco fields. However, right now, this heavy and highly viscous oil that the fields have produced remains unsold, as buyers have become hesitant toward purchasing sanctioned oil. Over 8 billion barrels of crude oil are now stored in offshore oil tankers, as the onshore oil terminals are full. If the situation is not improved, we can expect Russian companies in Venezuela to report serious problems.
Moreover, these problems are already there. The excess of Venezuela’s oil supply has slowed down work on the Orinoco Belt, including projects for modernizing production facilities – projects which Rosneft is conducting in a joint venture with PDVSA. Rosneft has a share in five joint ventures: PetroVictoria, Petromiranda, Petromonagas, Boqueron, and Petroperija. The international rating agency Moody’s said the US sanctions against PDVSA would limit the financial and operational flexibility of Rosneft’s joint ventures in Venezuela since PDVSA owns more than 50% of each one of them.
As is known, Washington has posed large-scale sanctions against PDVSA designed to limit the export of Venezuelan oil and to force President Nicholas Maduro to resign. Russia is among the countries that continue to support Maduro. Over the past few years, the Russian Federation has become Venezuela’s last resort in terms of lenders. According to Reuters estimates, the Russian government and state-owned Rosneft have lent Venezuela at least $17 billion since 2006. Dmitry Peskov, Spokesman for the Russian President, said on March 1 that no negotiations on new financial support for Venezuela were being conducted at the presidential level, but Russia continued to maintain contacts with its partners in Venezuela.
“We are interested in continuing cooperation with Venezuela — especially as a number of our companies are running fairly large projects there. We hope that these projects have good potential, that they will have the potential for expansion, and of course, we wish the Venezuelan partners to cope with the difficulties they are facing, both political and economic ones, as soon as possible,” Peskov told reporters.