BOFIT Viikkokatsaus / BOFIT Weekly 2019/21

On April 19, Belarus reported detecting a large quantity of organic chlorides in the crude oil moving through the Druzhba (Friendship) pipeline. Pipeline transmission from Russia was suspended for several days, and subsequent efforts to re-establish flow were sporadic. Many European customers turned to their own stores and suspended payment to Russia until disputes over damages are resolved.

As even small quantities of organic chlorides, which are used in oil drilling, can foul refinery processes, contaminated oil must be kept away from refinery equipment. In this case, the concentration of organic chlorides appears to be rather high. While the problem seems to have been traced to a small private oil refinery in the Samara region, details of the events leading to the contamination have yet to be released.

The fouled pipeline is a major artery for oil flows from Russia to Europe. Crude oil streams from various Russian oil fields are blended before they are placed in the pipeline, which starts in Tatarstan, 1,000 kilometres east of Moscow. A mix of crude oil from Urals, Siberian and Kazakh fields enter the pipeline to be pumped west to Belarus. From there the pipeline forks, with the northern fork crossing Poland to Germany, and the southern fork traversing Ukraine, Slovakia, Czech Republic, Hungary and Croatia. The pipeline is also linked to Russia’s Ust-Luga oil port on shores of the Gulf of Finland. About a third of all crude oil exported from Russia goes through the Druzhba pipeline. Oil going to customers in Western Europe can alternatively be shipped via Baltic and Black Sea ports. Even with these alternatives, Russia has had to lower output somewhat to accommodate the decreased flow of oil. Profitability of refineries in Central and Eastern Europe is dependent on oil coming through the pipeline, even if they can procure oil supplies via oil tanker or use their own stockpiles.

The contaminated oil has been found almost throughout the entire length of the pipeline. Estimates put the amount of spoiled oil at more than one million metric tons, a half-billion dollars in oil at current prices. The fouled oil may be salvaged by diluting it with untainted crude and selling it at a discount. As these measures apply to the entire length of the pipeline, oil will have to also be shipped by rail to the oil ports. At least some Chinese companies seem to be keen on purchasing the cheap oil. Despite these measures, cleaning of the pipeline, disposal of the tainted oil, identification of the culprits and recovery of damages could take months or years.