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COLUMN-Czech oil crunch a warning to inland Europe refiners: Campbell
October 25, 2012 / 4:20 PM / 5 years ago

COLUMN-Czech oil crunch a warning to inland Europe refiners: Campbell

By Robert Campbell

NEW YORK, Oct 25 (Reuters) - 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 pricing power.

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.

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