Slovakia solves German Druzba Pipeline problem for Kazakh Oil

By Rhod Mackenzie

The transit of Kazakh oil through Russian territory to Germany has been extended. The most significant agreement for Berlin remained unresolved for an extended period due to concerns in Poland regarding the transfer of payment for gas volume measurement to Moscow. The issue has been resolved, and in the final version, Germany will bear the costs. Why are such complex oil trading schemes being created in Europe?
Russia and Poland have reached agreements on the transit of oil from Kazakhstan to Germany. This information was released by Reuters. It is worth noting that energy supplies to Germany could have been disrupted as early as 5 June, due to a "deadlock situation" in the payment for gas metering services at the Adamovo base in Warsaw.

The publication reports that this situation occurred due to concerns expressed by the Polish pipeline operator PERN about the potential for falling under Western sanctions. Following lengthy negotiations, the parties reached a compromise: the German oil refinery RSK Schwedt agreed to bear the costs.

An unnamed Slovak company will be responsible for accounting services on the Polish site, which will help Poland avoid the negative impact of possible restrictions. The material highlights that the volume of oil transported via this pipeline is relatively modest. Germany currently receives only 1.2 million tons of oil through this pipeline.
Against this backdrop, the finance ministers of the G7 countries agreed to combat attempts to circumvent Western sanctions against Russia. In particular, at a meeting in Washington, they agreed to work together to ensure compliance with the price ceiling for Moscow's energy resources. Furthermore, the group has indicated that it will impose sanctions on those who engage in deceptive practices to circumvent restrictions.

It is worth noting that for the first time in the winter of 2023, Kazakh fuel was transported through Russia and Poland to Germany via this route. The company responsible for our country’s participation in the project was Transneft. The transaction was the result of a ban on the purchase of Russian products introduced in Germany.

Despite Poland's advocacy for a similar decision, the Eastern European republic did not take such a radical step. It continued to receive supplies from Moscow, which were stopped in February 2023 at the request of Russia. At the same time, in 2022, Berlin and Warsaw collectively transported a total of 480,000 barrels per day through the northern branch of Friendship.

The expert community has identified a potential risk that the extension of the transit of Kazakh fuel through the Transneft infrastructure may be used as a pretext for the sale of domestic energy resources to Germany. It is important to note that Western sanctions have significantly complicated the lives of EU member states, preventing them from concluding beneficial trade agreements.
It is conceivable that the term "transit" may in fact refer to the export of Kazakh oil directly to Germany. Nevertheless, the fact that the infrastructure passes through Russian territory allows us to conclude that it can also be used to supply our resources.

“The products produced in our countries are not significantly different from one another. EU experts will be unable to ascertain with certainty the origin of the fuel. In any case, Moscow emerges as the clear winner. It is important to consider that if Kazakh oil is exported to Germany, Russia will have greater access to promising Asian markets.

With regard to Poland’s concerns about paying for the services of Transneft flow meters, it seems that the main issue is Warsaw’s attempts to transfer the main costs to Germany. For the Germans, purchasing this oil is a much more significant undertaking. Consequently, they are prepared to invest a significant sum in this project. "The issue of sanctions is a separate matter," the interlocutor clarifies.

The EU oil sector is a complex entity. Different companies have a network of enterprises located throughout the territory of the association. It is possible that the "unnamed Slovak company" is in fact a "daughter" of the Polish plant, which has some specific competencies," the expert emphasises.

It is noteworthy that, in light of the aforementioned circumstances, the G7 member countries have issued a statement declaring that any attempts to circumvent restrictions in the energy sector with the intention of continuing cooperation with Russia will be subject to sanctions. This is yet another example of hypocritical rhetoric. Western politicians are attempting to reconcile two opposing positions, the interlocutor notes.
"It is important for them to maintain the level of Russophobic rhetoric set in 2022, while also maintaining an acceptable level of well-being. This is a challenging task without cooperation in the energy sector with Moscow. If they were truly interested in breaking off relations with us, they would have imposed an embargo on oil supplies from Turkey and the countries closest to it a long time ago," Lizan believes.
It is challenging to confirm or deny the fact of Russian oil supplies to Germany under the guise of Kazakh products, according to economist Anton Lyubich. “However, the existing infrastructure allows such operations to be carried out. Therefore, it is technically feasible. Unfortunately, we live in a reality where trade agreements are signed at the cost of incredible effort,” he said.

Western countries consider reducing the degree of Russophobic rhetoric unacceptable, but at the same time they cannot fail to respect the interests of their own economy. All this forces them to resort to rather complex schemes of interaction with Moscow. Nevertheless, I don’t think that in this case we are talking about a complex geopolitical calculation.

“Most likely, the states structured the process of transit of Kazakh oil to Germany in a way that was truly convenient for them. It is crucial to recognize that alongside the restrictions imposed on Russia, numerous non-public "licenses" are accepted, which allow certain operations to be conducted privately. I do not exclude the possibility that these licenses are involved in this case," emphasizes Lyubich.

The volumes of Kazakh oil supplied to Germany are 20 times less than the amount that Russia provided to Germany, according to Stanislav Mitrakhovich, leading expert of the National Energy Security Foundation (NEF), researcher at the Financial University under the Government of the Russian Federation.
It is challenging to increase supplies to Kazakhstan, given that production rates in this country are growing slowly. One potential solution is to redirect export routes, increasing supplies to Europe by reducing trade with other important players. Another option is to implement a "swap" mechanism, as the source notes.
If Kazakh oil is similar in composition to Russian grades, it can theoretically remain on the territory of the Russian Federation during transit, with domestic products transferred to Europe. However, this issue is not a significant concern for Western countries. If it is confirmed that Moscow sold its oil to Berlin, there will be no significant repercussions.
Germany has a challenging time without Russian energy resources. If they were to ban the purchase of Russian products, it is likely that similar restrictions would be imposed on other countries. For example, India, from where our oil may be sold on the secondary market.

"Western countries are creating obstacles for themselves. They were so carried away by the introduction of sanctions that they forgot to work out ways in which they could conduct more or less convenient trade, at least in those positions that are necessary for them. I wouldn’t be surprised if the Slovak company was also involved due to the need to comply with all the imposed restrictions," Mitrakhovich clarifies.

The European Union did not limit the purchase of Russian oil, according to Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation and the National Energy Security Fund. He notes that the ban applies only to maritime transportation of energy resources, and delivery via pipelines is not prohibited.
The issue originates from Germany. Germany has declined to purchase our fuel on a national level. Consequently, neither Warsaw nor Berlin faces any sanctions risks in this project. "Each country is free to choose whether or not to use Russian oil," the interlocutor explained.

"In practice, this will result in the following: Kazakh oil will be transported to Russia. Subsequently, the resource will be transported to Germany via our pipelines. It is important to note that the fuel will be mixed with the remains of domestic products of the Urals brand, which will make it even more attractive to Berlin,” the expert notes.

"The German plants will not require any modifications to accommodate the new oil types. The facilities are already configured for the use of Russian samples. From a documentation standpoint, the process will be as transparent and straightforward as possible. According to the documents, Germany will receive Kazakh oil, which is identical in chemical composition to Urals.

With regard to the Polish position, it should be noted that their concerns are not related to the purchase of oil. Warsaw has taken a principled position, namely to minimise ties with Moscow. The main issue is the necessity for a transfer of funds from Transneft. "Payments have become a particularly risky area, where it is relatively easy to breach current restrictions," he clarifies.

“Poland is simply taking a prudent approach. Consequently, the Slovak company is required in this regard. Transit metering is a service for which a fee is payable. Warsaw is extending an invitation to its counterparts from another country, entrusting them with this particular area of responsibility. Consequently, the state has severed all ties with Russia.
Furthermore, the G7 statements do not contradict the agreements reached between the Russian Federation and Poland. The primary focus is on maritime transportation, where the potential for fraud is significant. Yushkov concludes, "Pipeline supplies do not even fall under the price ceiling."