The contamination of Russian oil will cause Druzhba exports to fall in May-June and possibly beyond. Normally, the Spring maintenance season leads to a spike in Russia’s overall crude exports, but the disruption is preventing that spike in April-May. April’s 5.4 million b/d of overall exports were a little higher than in the first quarter average, and we tentatively expect Russia to maintain exports at that level in May. To compensate for lower Druzhba flows, we believe Russia will increase seaborne exports, especially from the Black Sea.
Latest Developments & What Next
The market became aware of contaminated Russian crude exports when crude, apparently contaminated in Samara, reached the Mozyr refinery in Belarus, upon which authorities in that country alerted European refineries. Since it takes roughly 10 days for crude to flow the 1,500 km from Samara to Mozyr (see map), the contamination must have occurred on or before April 10th. The contamination affected crude flowing from Samara in three export directions highlighted in red on the map: via Mozyr in Belarus to the Druzhba pipeline; Novorossiysk on the Black Sea; and via Unecha to Ust-Luga in the Baltic (Unecha-Ust-Luga, or the Baltic Pipeline System 2). It appears oil from Surgut that bypasses Samara is uncontaminated. These latter flows directly impact the quality of oil delivered to Belarus’s Novopolotsk refinery and exported from Primorsk (Baltic Pipeline System 1).
On the following page and in CIS Watch Crude Outlook being published later today, we examine the consequences for Russian crude deliveries via Druzhba and from the Baltic and Black seas.
It is unclear whether contaminated oil affected Belarus’s Novopolotsk refinery, but Naftan has confirmed that the flow of uncontaminated oil via the Sugut line enables the refinery to run at a reduced rate. If Novopolotsk refinery receives oil from both Surgut and Samara, from the latter via the Unecha-Novopolotsk link depicted on the map, indeed the contamination of the latter flow would indeed result in reduced deliveries of uncontaminated crude, explaining the need to to run at a reduced rate. Given the latest developments, we believe Belarusian crude demand will fall to an average 200,000 b/d in the May-July period.
Russia exports 440,000 b/d of crude to Germany and 300,000 to Poland via the northern leg of Druzhba. It exports another 200,000 b/d to Czech Republic, Hungary and Slovakia via the southern leg. Normally, Russian exports via Druzhba are quite steady at 1 million b/d, but those exports fell to an average 750,000 b/d in April.
There are already reports indicating uncontaminated oil has reached Belarus. Beside restoring the flow of uncontaminated oil, one logistical challenge is what to do with the contaminated oil. As part of the solution, contaminated oil reaching Mozyr will be off-loaded there and returned to Russia by rail. There is also the question of whether repairs to any of the pipeline will be required before restoring regular flows. Based on what we know about current developments, we tentatively estimate less oil will flow through the Druzhba pipeline in May, maybe 500,000 b/d. A the full recovery to 1 million b/d could take several months.
Potential Spike in Seaborne Exports from Novorossiysk?
Lately, Russia has exported 560,000 b/d of crude from Novorossiysk. Contaminated oil from Samara reached Novorossiysk. According to Transneft, however, it has ample tanks to blend the crude and reduce the organic chloride to acceptable levels. When one considers that crude exports from Novorossiysk at one time exceeded 1 million b/d, there should be spare storage capacity to allow for some blending to mitigate the contamination. Furthermore, it would be logical for Transneft to compensate for constraints to export flows through Druzhba and from the Baltic by allocating more crude for export from Novorossiysk.
While our analysis offers some of the logistical options Transneft could pursue to reallocate exports, there are challenges associated with adjusting the allocation of crude across Russia’s vast pipeline system. Consequently, Russia is likely to cut production above and beyond its OPEC+ pledge in May and June. Additionally, bottlenecks are likely to hold some crude back from export, resulting in stock builds.