By Robert Campbell
NEW YORK Oct 25 Russia's decade of investment
in new oil export capacity is turning the table on inland
European refineries. Where once they were privileged customers
at the end of a dedicated export pipeline they are now fighting
at a disadvantage for crude.
The situation in the Czech Republic is an excellent example.
Local oil refiner Ceska Rafinerska
has been forced to shut down its Kralupy plant due to a
lack of crude oil.
The Kralupy refinery used to get the bulk of its oil from
the Druzhba (Friendship) pipeline, a Cold War-era system that
connects inland European refineries with Russian oil fields.
But the growth in Russian oil export capacity, such as the
new Ust-Luga port in the Baltic, as well as increased Russian
domestic oil refinery runs, are limiting the amount of crude oil
Russian producers send down Druzhba.
(For a related column, see: )
Or in other words, when prices offered at sea terminals are
more attractive than those on the pipeline, Russian producers
will opt to send more oil to the terminals.
Of course, the relative attractiveness of various sales
points has plenty to do with the cost of moving crude oil from
Russian fields to its destination, and this is something that
can be manipulated by Russian pipeline operators.
And that means the brutal economics of arbitrage now work
against inland refiners. To secure Russian crude they must now
pay a high enough price to be at least as attractive a
destination as sea-borne exports.
Unfavorable pipeline tariffs mean they must pay even more.
Making matters worse, particularly for the most isolated
refineries such as those in the Czech Republic, is a legacy of
underinvestment in alternative pipeline routes.
Kralupy was forced to shut down because it had simply
exhausted its allocation of pipeline capacity on the TAL line
that runs from the Adriatic Sea across the Alps, the only other
pipeline that is connected to the plant.
Not surprisingly, this situation has come as a stark
reminder of the energy security problems facing much of Central
Europe. A failure to diversify away from Russian supplies has
left inland refineries vulnerable to resurgent Russian crude oil
Here, some observers detect a Russian plan to take greater
control of Europe's downstream oil refining sector. Russian
firms are deliberately squeezing inland European refineries to
force them to sell out, they say.
Already Rosneft, a major Russian producer, has
indicated that it is looking into boosting shipments on Druzhba
to refineries it part owns in Germany that have been affected by
the bottlenecks on the TAL line.
Yet even if all the inland oil refineries in Europe were
owned by Russian oil producers, it is far from clear that this
situation would be resolved.
The fact is that Europe still has far too much refining
capacity, which is part of the reason why inland refiners cannot
afford to invest in new sources of supply.
What is really occurring here is a transition of the
overhaul of the European refining sector. While Russian export
options were limited, inland refineries had a profit cushion due
to relatively cheap crude prices, similar to the situation now
enjoyed by inland North American refineries.
Cheap crude, and local politics, shielded many inland
refineries from the market forces that forced other plants, more
exposed to world prices, to shut down.
Now with the proliferation of Russian export outlets, these
refineries have lost their advantage in crude oil pricing.
Combine that with a lack of alternatives to Russian oil
supplies and it is clear that inland European plants,
particularly those not aligned with an upstream oil producer,
are increasingly vulnerable.