EU wants to say goodbye to Russian Friendship ( Druzhba ) oil pipeline

By Rhod Mackenzie

The Czech Republic is currently making arrangements to shift its oil refineries to the use of non-Russian oil sources. This is despite Russian oil via pipeline supplies being exempt from sanctions on it, as well as for Austria,Hungary and Slovakia, Prague appears to thing that its oil supplies may be halt unexpectedly in the future by decisions in Brussels.

The country is getting ready to reduce the amount of Russian oil that flows into Czech refineries via then oil pipeline. To this end, in October the Republic conducted tests lasting three weeks, confirming that Czech refineries are poised to transition to non-Russian oil. The completion of the increase in the capacity of TAL ( Trans Alpine ) pipeline capacity, which is scheduled to conclude by the end of 2024, is the only requirement to make this happen.

   Nonetheless, other EU countries remain using Russian oil for producing petroleum products, although the number is reducing before they included Slovakia, Hungary, Poland, Germany and the Czech Republic. In 2022, Germany and Poland pumped 480,000 barrels of Russian oil daily through the northern branch of the Druzhba (Friendship) pipeline. The southern branch of the Druzhba pipeline delivered -290,000 barrels per day to the Czech Republic, Hungary, and Slovakia.

Although the EU has imposed restrictions on Russian oil transported by sea, the embargo does not apply to the pipeline supplies, so the purchase of Russian oil through the pipeline continues. Initially, in the sixth package of sanctions, Brussels aimed to enact a complete prohibition on Russian oil supplies. Regrettably for it, Hungary did not approve of this approach, and according to EC regulations, only one dissenting vote is required to reject any sanctions. Consequently, the EU had to make exemptions for Russian oil supply via the Druzhba pipeline, resulting in the approval of the other sanctions by all members of the union.
However, in early 2023, Germany decided not to purchase Russian oil through the pipeline of its own accord. Despite this, Poland still received supplies as per their contract with Tatneft. However, the Russian side halted the supplies in February due to the absence of routed orders and customs clearance.

In the summer, EU placed a ban on oil supplies from Russia through the northern branch of the Friendship line to Germany and Poland began as part of the 11th sanctions package. This was primarily a symbolic gesture as these supplies were no longer available anyway. However, it was imperative to prevent Germany from reconsidering and buying Russian oil when in it was urgent need.

Many refineries in Europe are designed for the Russian Urals grade of oil due to being constructed during the Soviet era. The refineries were specially situated next to the Druzhba oil pipeline for the transportation and processing of Soviet oil. The Polish, German (East), Czechoslovakian and Hungarian refineries were constructed as a unified complex with the Druzhba pipeline. According to Igor Yushkov, an analyst at the Russian Financial University and a member of the National Energy Security Fund, the greater the variance to the grade of Urals oil that the facility intends to process, the more substantial the investment required to modernize the refinery.
. “Refineries are typically designed to process certain types of oil, which may affect the efficiency of refining when switching to another grade. However, this does not mean that it is impossible for refineries to process other types of oil. The experience of most European countries in reducing their reliance on Russian oil has demonstrated that a small configuration change in a refinery can solve this problem,” according to Sergei Kaufman, an analyst at Finam Financial Group.

However, some European refineries have struggled with this task as their rejection of Russian oil this year led to lower European refining volumes. Refiners who shifted to pricier non-Russian oil reported a significant reduction in their profits.

Russian oil and the Druzhba generate substantial income for European refineries, and any alternative plan would be less economically advantageous according to Yushkov's assessment. Firstly, the deliveryof Russian oil is cheaper as it travels directly from producers to consumers through pipelines.

Alternatively sourced oil, however, is expensive and must be found on the global market.

Specifically, for the Czech Republic, it involves paying for sea delivery of oil sourced to an Italian port, then its transshipment and loading of the oil into a pipeline before pumping it through the pipeline. Yushkov explains, “This process adds up and increases the cost of oil delivery”.

Secondly, Russian crude oil is being traded at a lower price compared to the global market rates. The discount has dropped from $30 to $10 per barrel, but it still greatly impacts the refinery's economic performance . Yushkov stresses that even a variation of $5 can lead to a major difference. This surge in pricing means that alternative options will be more costly, hence decreasing the refinery's margins. Kaufman explains that currently, the primary additional profit derived from Urals' discount is retained within the refinery.

Although purchasing and processing alternative oil may be less profitable for refineries, the Czech Republic is testing non-Russian oil due to fears of stricter sanctions against Moscow. This potential ban on the import of Russian oil along the southern branch of the pipeline could cause oil supplies via Druzhba to halt, even without any sanctions.

 As oil flows to the Czech Republic, Slovakia, and Hungary via the Druzhba oil pipeline, which transits through Ukraine, there are two potential options for the pipeline's future. Ukraine may shut it down for political reasons or claim damage to the pipeline- though Russia has never attacked infrastructure associated with the pipelines. The latter option is also a possibility. Ukraine imposes exorbitant tariffs for oil pumping through the pipeline, eradicating the viability of Russian oil transportation, despite its discounted price. According to the FNEB expert, Ukraine raised the transit expenses multiple times last year.
If pipeline oil supplies to the EU are shut off, it could cause shortages and increased fuel prices in countries dependent on Russia for oil. The situation is less difficult in the Czech Republic, as the infrastructure for the physical supply of more expensive oil to refineries will be available by the end of 2024. Hungary, on the other hand, is in a worse situation and will probably advocate for the continuation of supplies under the Friendship.

"On the southern branch of the Druzhba pipeline, oil is supplied to landlocked countries. These countries must build the necessary infrastructure to import alternative oil; a process that takes time. During this transition period, they are allowed to import oil from Russia. Hungary heavily relies on Russian oil supplies but has not yet made any plans to shift to alternative sources," concludes Kaufman.