- Who is responsible for the halt of Russia’s biggest oil pipeline?
- Who will bear the losses incurred from this huge debacle?
Druzhba, a Russian word for ‘friendship’ became infamous lately when Belarus raised a red flag on the oil coming through Druzhba pipeline, which was contaminated with high levels of organic chloride. In effect, the oil supply to all allied countries was halted instantly.
In the 1960s, the then USSR constructed one of the world’s longest pipeline network to transport oil from Russia to Europe. The pipeline runs through Belarus, where it splits into two parts; northern and southern. The northern part continues via Belarus and Poland to Germany, while the southern covers Ukraine, Slovakia, Czech Republic and Hungary. This 5,500 km long oil pipeline network was named ‘The Druzhba Pipeline’ or ‘The friendship pipeline’ signifying the relationship between USSR and the allied countries. Following the disintegration of USSR, Russia continued the Druzhba legacy. The pipeline currently has a capacity of 1.2-1.4 million barrels a day. The Russian part of it is operated by the state-owned company Transneft, while in Belarus, this is operated by Gomeltransneft Druzhba. It is the heart of the Transneft as 80% of the company’s exports happen through the pipeline.
However, since 19th April 2019, it is in news for all the wrong reasons. On this very day, Belarus oil refinery complained that the oil flowing through Druzhba is contaminated with organochloride. This is a chemical used to extract oil from old and exhausted wells as it improves their yield. However, once extracted, the chemicals must be removed from the oil before it enters a pipeline. This is because under high temperatures these chemicals get converted into hydrochloric acid, which severely corrodes refining equipment. Apart from refining units, these chemicals are dangerous for humans as well when exposed to high temperatures the compound creates a poisonous chlorine gas.
Quality checks at Belarus refinery detected 30 times more organochloride than the prescribed levels. The contaminated oil contained 150-330 parts per million (ppm) of organochloride vs the maximum 10 ppm allowed by Transneft. Ensuing the development quality checks were conducted in Poland, Germany and Ukraine as well, where the oil was found equally contaminated. Consequently, by 25th April 2019, the transmission of oil through Druzhba was halted by all the allied countries. It was estimated that $2.7 billion worth of contaminated oil was stuck in the pipeline.
This oil flow suspension from the Druzhba pipeline created a shortfall for refineries in the allied countries. In order to minimise the impact, these refineries started the use of oil from their strategic reserves, however, these reserves are only supposed to cover the short-term supply disturbances. But the cleaning is expected to take months. Moreover, until now, countries like Poland, Hungary and the Czech Republic have used about eight million barrels of the oil from their reserves. Simultaneously, Russia, as well as the impacted countries, began with the oil cleaning process. Furthermore, some of these nations stored the oil in tankers to dilute it with clean oil for reduction of the chemical content, while others (Germany and Poland) began the reverse flow of oil to send the tainted oil back to Russia.
The additional demand by European refineries to blend the contaminated oil and to keep their equipment running pushed oil prices above $72 for the first time this year, however, its impact on prices was fleeting.
Amid all this, Transneft; the Russian producer and the sole pipeline owner released a statement that a private player in the Samara region is responsible for the contamination. Assuming the initial estimate of 5 million tonnes of adulterated oil and 330 ppm of organochloride in the system is correct, it is really hard for the industry and analysts to believe that a small player could execute this adulteration and escape all the checks without anyone noticing the malpractice. Hence, it raises several questions on the quality checks that Transneft has put in place. It seems that the auto-pilot process of Transneft eventually collapsed. Though Transneft confirmed that it will investigate further into the debacle, Russian President Vladimir Putin also assured that if Transneft does not go far enough in its probe, the government will carry out a wider investigation.
Nonetheless, as per recent reports, Belarus, Germany and Poland have started receiving clean oil from Druzhba. Thus, on the basis of this, Russian officials claimed that the crisis is over now. They are surely ignoring the dozens of tankers parked on ports in Russia and the allied countries filled with the adulterated oil. The contaminated oil in these tankers is estimated to be ~1 million tonnes, which is worth around $500 million, with no takers yet. No buyer from Europe to China is willing to buy the contaminated oil even at a discount of $10-15 per barrel.
As of now the flow of clean oil has resumed, however, the fiasco is far from over yet. Additionally, cleaning the entire system and getting rid of tainted oil will take several months.
Further, after a considerable amount of deliberations, Russia has agreed to bear all the related expenses (Belarus might partially share the burden). The total costs include the cost of cleaning oil, the cost of cleaning pipeline, the cost of fixing corroded refining equipment and the demurrage charges for tankers with dirty oil stuck on ports. Hence, the total cost will run into millions of dollars.
Apart from the time and the financial loss, the incident has caused a big dent in the history of Druzhba and Russia, as the nation until now was considered as a reliable exporter of oil. Though from the overall industry standpoint, this can be treated as a one-off an event, however, for Russia, this has resulted in a huge financial and a reputational loss. The whole situation and the impact are too big to be trivialized anytime sooner. Although, the most important question still remains. How did this happen? Is this a case of pure negligence or was it a deliberate attempt?