LUKOIL REDUCES OIL SUPPLIES TO GERMANY, AGAIN

Russia’s Lukoil has halted oil supplies to Germany through the Druzhba pipeline for the remainder of February and “until further notice.” This is the third interruption in Russian oil deliveries by pipeline to Germany in the space of 13 months. Russia’s pipeline monopoly Transneft halted deliveries to several EU member countries, including Germany, for three days in January 2007. Lukoil then singled out Germany for a 30% cut in deliveries during the month of August 2007 (see EDM, September 5, 2007).

On February 18, 2008, a Lukoil representative announced that the company was again stopping oil supplies by pipeline to Germany because “we do not agree with the price.” Lukoil argues that it is not in breach of contract, citing the absence of long-term contracts with its customers in Germany. The Russian company is prepared to resume deliveries in March in the pre-planned volume, but apparently at a higher price (Interfax, RIA-Novosti, February 18, 19).

Lukoil was due to have delivered 520,000 tons of crude oil to Germany through the Druzhba pipeline for the month of February. The German refineries directly affected by the stoppage are (as in the two previous incidents) those in Schwedt and Leuna. Their shareholding owners are Shell Deutschland, BP/Ruhr Oel, Italy’s ENI-Agip, and Total of France. The Schwedt refinery alone processes almost 11 million tons annually (900,000 monthly), amounting to 10% of Germany’s total oil-processing capacity, and almost fully depending on the Druzhba pipeline. The line reaches Germany from Russia via Belarus and Poland.

Initial reactions from these refineries and their shareholders seem remarkably subdued. All four majors are increasingly dependent on “access” to Russian oil and gas on Russian-defined terms (ENI in South Stream, Total in Shtokman) or Russian-dictated conditions (Shell in Sakhalin-2, BP at Kovykta). Shell recently went so far as to offer its stake in Germany’s largest refinery, the Karlsruhe-based MIRO, to Rosneft in a possible deal for “access” to Russian hydrocarbon deposits. Shell and BP/Ruhr Oel, partners in Schwedt and Leuna, also hold stakes of 32.5% and 24%, respectively, in MIRO (see EDM, September 18, 2007).

The Schwedt and Leuna refineries can maintain full-scale operations in the short term from existing feedstocks. But they would run low on feedstock by early March, unless Lukoil quickly resumes full-volume supplies at the higher price it seeks. The companies are again scrambling — as they had to do last August — to arrange deliveries by sea tankers through the German Baltic port of Rostock, from which pipeline links are available to Schwedt and Leuna. However, tanker-delivered oil is more expensive than pipeline-delivered oil and would again cut into the refining margins. Moreover, Rostock harbor’s oil downloading capacity of 9 million tons annually is being used almost fully, with very little spare capacity available on short notice.

Apart from the price issue, a host of obscure reasons are being cited as possible explanations for Lukoil’s supply stoppage. One possible reason is Lukoil’s chronic dispute with the oil trader Sunimex, headed by Russian businessman Sergei Kishilov. This company acts as general importer (coordinator in Russian parlance) of oil from various Russian producer companies to Germany and several Central European countries. Lukoil has long tried to squeeze Sunimex out of this business, most recently through the August 2007 delivery shortfall.

Transneft president Nikolai Tokarev publicly supports Lukoil’s goal to eliminate Sunimex from these transactions (Vedomosti, February 18; Reuters, February 19). For their part, importers of Russian oil in Germany prefer to deal with a single intermediary such as Sunimex, rather than having to deal individually with various Russian producer companies.

Lukoil’s move may also stem from the Russian government’s policy to redirect part of the oil flow away from the Druzhba pipeline and into the Baltic Pipeline System (BPS) which is being expanded. The goal is to maximize oil export by tankers through the Baltic Sea, correspondingly reducing the overland transit through Druzhba pipelines via Belarus, Poland, and Ukraine.

Lukoil may well also be seeking to intimidate German refineries’ owners into ceding share packages to it as a “guarantee” of stable supplies in the future. Similarly, the Russian state itself may be trying to signal that supplies have become too tight to suffice for all customers and only the favored ones can count on steady supplies from now on. For the most part these explanations are not mutually exclusive. But perhaps the most relevant fact remains that German refiners and commentators alike are again, as last August, reduced to guessing.

Germany imports some 22 million tons of Russian oil annually (1.8 million tons monthly) through the Druzhba pipeline. Of these, Lukoil delivers approximately 6 million tons annually (500,000 tons monthly), with Surgutneftegaz supplying much of the remainder. Overall, German dependence on Russian-delivered oil has increased to a risk-fraught level. Russian producers account for some 37% of Germany’s total oil imports of some 110 million tons annually. Another 9% is supplied by Kazakhstan and other countries through Russian pipelines.

(DPA, Handelsblatt, Financial Times Deutschland, February 18-20)