May 16, 2019 / 3:48 PM / 7 days ago

Russia's Transneft to compensate buyers for dirty oil, but they must prove loss

LONDON/MOSCOW (Reuters) - Russia’s state pipeline monopoly Transneft will compensate all parties for losses incurred from contaminated oil, but they must prove the damage, a government official said on Thursday, as the first European refinery declared force majeure.

Russia’s oil export flows have been disrupted since April when high levels of organic chloride were found in crude pumped via the Druzhba pipeline to the Baltic port of Ust-Luga and other European countries.

The Druzhba pipeline splits in Belarus into a northern spur to Poland and Germany and a southern leg via Ukraine to Slovakia, Hungary and the Czech Republic. Only Hungary has resumed test flows to see if its refinery equipment can withstand the contaminated oil.

Druzhba can pump 1 million barrels of oil per day (bpd) or the equivalent of 1 percent of global oil demand.

Transneft has repeatedly said that oil firms which use chloride to boost oil output were to blame for contamination, but on Thursday, Russia said Transneft would foot the bill.

“Of course - and sadly - Transneft,” Russian Deputy Prime Minister Dmitry Kozak told reporters when asked who would pay after a meeting with his Belarusian counterpart Igor Lyashenko in Moscow. Transneft head Nikolai Tokarev also attended the meeting.

Ukraine and Belarus both said they will ask Transneft for compensation. Stoppage of oil flows not only affects refineries but also budget revenues from a loss of transit fees.

Kozak said on Thursday that Russia had not yet calculated the cost of the damage and it would take three to four weeks to do so.

“This is not a judicial dispute, we will find a compromise,” Kozak said. “Everyone who can prove real losses will, of course, be compensated.”

He said Poland, Ukraine, Hungary and Slovakia were currently waiting and had not yet issued demands for compensation.

According to traders, while Druzhba remains shut, Russia is losing $80 million a day. For the buyers of an estimated 19 million barrels of contaminated crude which is stuck in the pipeline and loaded on tankers, it’s a $1.2 billion question.

FIRST VICTIM

According to the International Energy Agency, the impact on European refinery throughput in the second quarter of 2019 from the contaminated crude is seen at roughly 250,000 barrels per day, under 2% of the continent’s product demand.

Some countries, including the Czech Republic, have had to use strategic oil reserves to make up for lost Russian barrels, while Poland has increased seaborne oil imports.

Total’s 230,000 barrel-per-day Leuna refinery in Germany, which usually receives Urals crude via Druzhba, declared force majeure on refined product shipments on Thursday as a result of the contamination.

Total had no immediate comment.

Industry monitor Genscape said it detected abnormal emissions at the plant and decreased furnace stack activity on the 112,000 bpd vacuum distillation unit. “Activity from all other monitored units has remained at operational levels,” Genscape said on Thursday.

Kozak said it will take 22 days to clean one branch of Druzhba and seven days for the other, without specifying which was which. He added that the prime ministers of Russia and Belarus were due to meet next week to discuss the issue.

Reporting by Ron Bousso, Dmitry Zhdannikov, Julia Payne, Shadia Nasralla and Ahmad Ghaddar; Writing by Katya Golubkova; Editing by Keith Weir, Alexandra Hudson and Kirsten Donovan

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