Central European refiners squeezed as Russian supplies dwindle

Thu Nov 8, 2012 10:31am EST

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* Flows through Druzhba oil pipeline at half of capacity

* Alternative TAL route congested

* Czechs refiners hit, also affecting Poland, Germany

By Jan Korselt and Julia Payne

PRAGUE/LONDON, Nov 8 (Reuters) - Central European countries face the prospect of refinery disruptions and higher energy bills as Russia diverts oil exports to Asia and alternative import routes become expensive and congested.

Russian flows through the Druzhba pipeline, which has historically accounted for the bulk of central Europe's oil, are running at only half of capacity after Moscow built new direct routes and ports to supply north European and Asian markets over the past decade.

"It is true that currently we are getting into some critical situations ... Representatives of the refineries may have underestimated the situation," said Jaroslav Pantucek, the chief executive of Czech pipeline operator Mero.

Dwindling Russian deliveries serve as a worrying reminder of supply wars between the world's largest energy producer and its neighbours such as Ukraine. Moscow says its latest supply decisions, however, are not politically motivated and that it simply seeks to use the most economical export routes.

The pipeline bottleneck is tightening oil supplies ahead of winter, leading to price rises for consumers as far as Germany.

The Czechs and some German refiners earlier this year relied on the Transalpine pipeline (TAL), which runs from the Adriatic port of Trieste to Germany and the Czech Republic and had available capacity.

But TAL no longer has that capacity after one of its shareholders, Germany's Miro refinery, switched from a more expensive French route to become almost entirely reliant on TAL. Another German refinery, Ingolstadt, also restarted and has begun taking capacity.

"The Czechs can ask for more in the case TAL has free capacity, which didn't exist in October," TAL's operations manager, Karl Gassner said. "In November ... there is no room for extra. Maybe there is some in December," he said, adding that allocations would not rise in 2013.

The Czechs have already been forced to bring forward maintenance work at the 68,000 barrel per day (bpd) Kralupy refinery due to short supplies.

The Czech economy can ill afford higher energy bills. It has been in recession since late 2011, the worst performance in central Europe.

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Russian oil supplies via Druzhba to Europe dropped this year to multi-year lows of around 900,000 bpd after Moscow launched the Ust-Luga port in the Baltic and began ramping up exports to Asia.

"If I had a refinery on Druzhba, I would sell it now," Alexey Kornienkov, head of strategic planning and business development at Russian oil firm Gazprom Neft, said last month.

While Russian pipeline operator Transneft said it would look to increase exports to the Czech Republic in November, limited flows will persist amid congestion of alternative pipelines and routes such as TAL.

"The supply bottleneck highlights the vulnerability of many Central European refineries in terms of supply security and the big implications of lower crude flows via the Druzhba pipeline," said David Wech from Vienna-based JBC Energy consultancy.

The Czech Republic sits on the same spur of Druzhba that delivers to Slovakia and Hungary, known as the southern leg.

The northern leg supplies Poland and Germany, which had imported up to 1 million bpd during peak years last decade but now often get as little as 600,000 bpd.

Russian oil exports to Poland via Druzhba have fallen by a quarter in recent years, and industry sources say Polish refiners are increasingly concerned about a repeat of the Czech scenario and a sharp drop in supplies.

Worries arise not only from the fact that Russia is diversifying export routes but also from fears that a recent purchase by state major Rosneft of BP's Russian venture TNK-BP will further cut deliveries.

"The news sent the Poles fretting as they know perfectly well that Druzhba has never been high on Rosneft's preferred routes list," said a Russian oil industry executive.

TNK-BP is set to supply around 40 percent of Russian deliveries to Poland via Druzhba in the fourth quarter, more than any other producer. It remains to be seen how shipments will change when Rosneft closes the purchase of TNK-BP next year.

"In Poland we have two supply routes - via the Druzhba pipeline and through the Gdansk-based seaport Naftoport. So far we haven't have any problems with crude oil supplies," PKN Orlen's press office said.

"PKN Orlen is analysing the possibilities of buying many kinds of crude from various geographical directions."

Both Poland and Germany have already been forced to import large amounts of oil this year from the sea to compensate for lower deliveries via Druzhba.

"There have been months when both countries had to import over 10 tankers a month of Russian oil," a major supplier to Poland said.

Germany's largest refinery, the 310,000 bpd Miro plant in Karlsruhe, had to reduce production due to lack of crude last month, even though it had priority to TAL capacity, traders said.

Wech from JBC said he believe the situation for Miro was not as bad as for central European refiners.

"The disruption could turn out to be a short-term phenomenon or at least limited to peak demand periods as demand from German refiners is particularly strong at the moment," he said.

With Russia due to open a second pipeline to Asia in the next month, competition for its resources will increase. Further straining the picture is Russia's booming domestic demand and broadly stable production.

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