/ world today news/ The Czech Republic is actively preparing to transfer its oil refineries to non-Russian oil. And although the pumping of fuel to this country, as well as to Hungary and Slovakia, is exempt from sanctions, Prague admits that supplies of black gold could stop at any time. Why?
Prague is preparing to give up Russian oil that comes via pipeline to Czech refineries. To that end, the republic conducted three-week tests in October that confirmed Czech refineries were ready to switch to non-Russian oil. To do this, it is only necessary to complete the increase in the capacity of the TAL pipeline, which is planned by the end of 2024.
At the same time, there are other EU countries that continue to buy Russian oil for the production of petroleum products. Initially, these were Germany, Poland, Hungary, Slovakia and the Czech Republic. In 2022, Germany and Poland pumped a total of 480 thousand barrels per day of Russian oil through the northern branch of Druzhba. The Czech Republic, Hungary and Slovakia received 290 thousand barrels per day through the southern branch of “Druzhba.”
The embargo adopted by the EU on Russian oil prohibits its delivery only by sea, but it was decided to maintain the purchase of Russian oil by pipeline. Initially, in the sixth package of sanctions, Brussels wanted to introduce a complete ban on all supplies of Russian oil. However, Hungary did not agree to this option and a “no” according to EC rules is enough to not accept sanctions. Therefore, the EU had to make exceptions for the supply of Russian oil through the Druzhba pipeline, and in this version the sanctions were approved by all members of the union.
However, at the beginning of 2023, Germany, on its own initiative, refused to buy Russian oil through this pipeline. Poland continued to receive it under contract with Tatneft, but supplies were suspended in February by the Russian side due to lack of route orders and customs clearance.
In the summer, in the 11th package of sanctions, the EU imposed a ban on oil supplies from Russia along the northern branch of the Druzhba line, which went to Germany and Poland. This was more of a symbolic gesture as these supplies were no longer available. But it was necessary to close the return route to Germany, so that it would not change its mind and resume the purchase of Russian oil in great need.
“Not all, but many refineries in Europe are designed for the Russian grade of Urals oil, as they were built in Soviet times. The refinery was specially built next to the Druzhba oil pipeline for the transportation and processing of Soviet oil. Polish, German, Czechoslovak and Hungarian refineries were built as a single complex with Druzhba. The more different the type of oil from the Urals that the plant plans to process, the more money must be invested in the modernization of the refinery,” explains Igor Yushkov, an expert at the Financial University of the Government and the National Energy Security Fund.
“Each refinery is designed for a certain type of oil. But this does not mean that the refinery cannot process another grade, but the refining efficiency when switching to another grade may decrease. The practice of most European countries to give up Russian oil has shown that this problem can be solved by a small change in the configuration of a certain refinery,” says Sergey Kaufman, an analyst at Finam financial group.
However, not all European refineries were up to the task, as the Russian oil withdrawal this year saw a reduction in European refining volumes. European refiners, which switched to more expensive non-Russian oil, complained of a sharp drop in profits.
Russian oil and “Druzhba” bring good revenues to European refineries, and any alternative scheme will be less economically profitable, Yushkov believes. First, the cost of supplying Russian oil is lower because it goes straight from producers to consumers via pipeline.
“Alternative oil must be sought on the world market, and its supply will be more expensive. In the case of the Czech Republic, we are talking about the need to pay for the delivery of alternative oil by sea to the port of Italy, then for transshipment and loading of oil into a pipeline, and then for pumping it through it,” says Yushkov.
Second, Russian oil trades at a discount to world prices. Although the discount has already been reduced from $30 to $10 per barrel, this is still a significant increase for the refinery’s economics, and even a difference of five dollars makes a difference, Yushkov notes. This means that alternative oil will cost more, which will reduce the refinery’s margin. “Now the main excess profit from the Ural discount is deposited in the refinery,” says Kaufman.
Despite the fact that the purchase and processing of alternative oil is less economically profitable for refineries, the Czech Republic is still testing non-Russian oil. Because he is afraid of tougher sanctions against Moscow, which could lead to a ban on the import of Russian oil on the southern branch of Druzhba.
“Stoppage of oil supplies through “Druzhba” can happen without sanctions. As oil flows to the Czech Republic, Slovakia and Hungary through the Druzhba oil pipeline, it transits through Ukraine. And here there are two options for the development of events. Ukraine may shut down the pipeline for political reasons or declare pipeline damage, although Russia is not attacking Druzhba-related infrastructure. The second option: Ukraine simply sets prohibitive tariffs for pumping oil through the pipeline and kills the economic feasibility of pipeline deliveries of Russian oil, even taking into account its discount. Last year, Ukraine already increased the price of transit several times,” says Yushkov.
If pipeline oil supplies to the EU are permanently cut off, this could lead to shortages and higher fuel prices in countries dependent on supplies from Russia. The situation in the Czech Republic is easier, since at the end of 2024 the infrastructure will appear to physically deliver albeit more expensive oil to refineries. Hungary is in a worse situation, so it will likely defend the continued supply of Druzhba
“On the southern branch of Druzhba, oil is delivered to landlocked countries, that is, in order to import alternative oil, they have to build the relevant infrastructure, which takes time. While this transition period lasts, these countries are allowed to import oil from Russia. Hungary is particularly dependent on supplies from Russia, but has no plans to switch to alternative sources yet,” concludes Kaufman.
Translation: V. Sergeev
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