(Updates with latest developments)
May 28 (Reuters) - Russia has partially resumed oil flows along the Druzhba pipeline, which runs to Eastern Europe and Germany, following contamination last month that buoyed global prices and left refiners in Europe scrambling for supply.
Oil at the port of Ust-Luga was also contaminated.
For a map of the Russian oil pipeline, click on: tmsnrt.rs/2DytnnM
Below are details of the problem and action being taken.
At least 5 million tonnes of oil, or about 36.7 million barrels, have been contaminated by organic chloride, a chemical compound used to boost oil extraction by cleaning wells and accelerating the flow of crude.
The compound must be removed before oil is sent to customers because it can destroy refining equipment.
Pipeline monopoly Transneft said the contamination happened in the Volga region of Samara and blamed unidentified “fraudsters”. Russian President Vladimir Putin said Transneft lacked the proper mechanism to prevent contamination.
Transneft allows no more than 10 parts per million (ppm) of organic chloride, while levels in the Druzhba line and Ust-Luga have fluctuated between 80 and 330 ppm.
WHAT IS THE IMPACT?
Supplies along the Druzhba pipeline, which can pump 1 million barrels per day (bpd) or the equivalent of 1% of global oil demand, have been suspended since April 25. Every day of pipeline stoppage is costing Russia $80 million in lost revenue.
Druzhba was built in Soviet times and serves refiners in Germany, Poland, the Czech Republic, Slovakia, Hungary, Ukraine and Belarus.
As of May 28, the northern arm of Druzhba serving Poland and Germany was still shut. Flows via the southern leg to Ukraine, the Czech Republic and Slovakia have been partially restored. Hungary is yet to receive clean oil. Poland is expected to get clean flows by mid-June.
Russian oil output from May 1 to May 26 fell to 11.126 million barrels per day (bpd), below the 11.18 billion bpd level set as part of the global oil deal between OPEC and its allies.
Oil exports via Transneft pipelines, including Druzhba, dropped 6% during May 1-26 from the average level seen in April, according to the industry sources. Russia is scheduled to disclose production and exports data for May on June 2.
WHAT HAVE BUYERS DONE?
France’s Total and Eni have suspended payments for the contaminated oil and said they will only pay when compensation is agreed.
Trading companies Vitol and Unipec are sending around 700,000 tonnes (5.1 million barrels) of contaminated oil to Asia in an attempt to place the barrels rejected by buyers in Europe.
Kazakhstan plans to seek compensation from Russia as its oil transit via Russia has also been contaminated.
WHAT HAVE REFINERS DONE?
Hungary’s MOL had agreed to store 100,000 tonnes of contaminated crude.
Total had earlier suspended operations at some units of the 230,000 barrel-per-day Leuna refinery in Germany for technical checks.
Poland has released 800,000 tonnes of mandatory oil reserves to Lotos and PKN Orlen refineries. It said it saw no risk to products supplies to consumers so far .
Hungary has released 400,000 tonnes of oil from emergency reserves to supply a refinery owned by MOL. It said that was sufficient for supplying the country’s refineries for two months if needed.
Czech refiner Unipetrol has also started to drawn the second batch of an emergency crude oil loan from state reserves.
HOW CAN THIS BE FIXED?
Buyers who have received contaminated oil now need to store it somewhere and dilute it with cleaner crude to lower the chloride levels, an operation that could cost millions of dollars for each large tanker.
Oil from Ust-Luga tankers could gradually be loaded into storage tanks in Europe or Asia or through ship-to-ship operations to be mixed with better-quality crude.
But cleaning out the Druzhba pipeline is more complicated.
Germany and Poland lack sufficient storage to keep the oil until it can be diluted.
Transneft has said contaminated oil from Belarus could be transported by rail to the Russian Black Sea port of Novorossiisk, where it would be diluted.
This would take several months because the railway cannot take more than 300,000 tonnes per month, traders say.
Traders said the first rail cars with dirty oil had arrived at Novorossiisk in early May, leading to a deterioration of crude quality at the port although it remained within permitted levels.
So far, Russia has managed to remove around 2 million tonnes from the pipeline system, using rail, storage tanks and ships, restoring, at least partially, clean flows to the Ust-Luga port and some European countries.
Russia has agreed to ship back another around 1 million tonnes of tainted oil from Belarus back to Russia, of which it has already pumped back some 80,000 tonnes using reverse flows.
Another around 1 million tonnes of tainted oil stuck in Poland and Germany are to be dealt by these two countries, four industry sources told Reuters after Russia-Belarus reverse flow plan was agreed.
The finance ministry will also find a way to return oil export tax paid on oil which was meant for export to Europe but instead was stuck in Belarus after being contaminated and is set to be returned to Russia.
But tax on oil stuck in Poland and Germany, if it remains there and is not shipped back to Russia, will not be returned, a high-ranked finance ministry official said.
The presidents of Russia, Kazakhstan and Belarus meet on Tuesday and Wednesday in Kazakhstan for regular talks and the oil contamination issue is expected to be discussed. (Additional reporting by Vladimir Soldatkin and Katya Golubkova; Editing by Emelia Sithole-Matarise and Jason Neely)
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