Contaminated oil in Druzhba pipeline to cost Russia estimated $435 million
Entry posted by Aleksei Afonin ·
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.