Russia's new oil pipe to cut supply to Central Europe

Russia plans to build a link that will deliver at least 1 million barrels of oil a day for export by tanker from the port of Primorsk on the Baltic Sea. The pipeline will also reduce supplies of Urals, Russia's major export blend of oil, to refiners in Lithuania, Poland, Ukraine and the Czech Republic, said PVM's Managing Director Johannes Benigni. The 1,000-kilometer (625-mile) pipeline will run from Unecha, near the Russia-Belarus border, to Primorsk. It will cut deliveries of Urals from Russia through the Druzhba inland pipeline to Europe, forcing central Europe's refiners to buy more expensive oil from elsewhere, PVM said. “The reduction of supplies through the Druzhba line will wipe out the price advantage of lower pipeline tariffs compared to seaborne barrels,” Benigni said today in an e-mailed statement. “Thanks to cheap crude supplies, refiners along the pipeline enjoy healthier margins than their counterparts who depend on supplies from sea.”

Central European refineries will have to pay between 50 cents and $4 a barrel more for seaborne oil deliveries, according to PVM's report, published today. Higher operating costs may cut refiners' market value and make them targets for acquisition by OAO Rosneft or OAO Lukoil, Russia's largest oil producers, which have plans to add processing capacity. “Costly oil could be a disaster for refiners in Hungary and Slovakia and refinery margins in these countries could easily turn sour,” Benigni said. Hungary's Mol Nyrt, Eastern Europe's largest oil refiner by market value, and other regional refiners are the biggest purchasers of Urals oil through the Druzhba pipeline, which crosses Belarus and Ukraine. Druzhba pipeline oil shipments fell 23% to 1.2 million barrels a day in June from the same month last year, according to Russia's Energy Ministry. Russia has cut supplies through the link to Lithuania after a leak was reported last year.

Russia has had a “transport jam” since the collapse of the Soviet Union, First Deputy Prime Minister Sergei Ivanov said on July 8, cited in a report posted on OAO Transneft's Web site. Primorsk will be able to load as much as 130 million tons a year (2.6 million barrels a day) of crude and oil products, according to Ivanov. Transneft, Russia's state-owned oil pipeline monopoly, will build the new link, or the second phase of the so-called Baltic Oil Pipeline System. It will cost as much as $2.5 billion in investment and will take 18 months to complete, PVM said.

European refiners usually buy Urals at a discount to Brent oil, which is pumped in the North Sea. Brent crude oil for July settlement gained 79 cents at $77.19 a barrel on the ICE Futures exchange at 1:35 p.m. in London. Urals traded in the Baltic Sea rose $1.17 at $75.10 a barrel yesterday. Restricted supplies through Druzhba may encourage the reversal of a pipeline planned to ship oil from Bratislava in Slovakia to Austria's Schwechat refinery, according to PVM. OMV AG, central Europe's biggest oil company, and Russia's OAO Yukos Oil Co. in 2003 agreed to invest €28 million ($39 million) to build the 72,000 barrel-a-day link to supply crude from Druzhba to Schwechat refinery. Transpetrol AS, a Slovak pipeline company in which Yukos owns a 49% stake, had planned to build the 60-kilometer stretch. “Changing circumstances might force operators to reverse the flow of oil” to Bratislava, PVM said. Yukos has sought to sell a 49% stake in Transpetrol. (bloomberg.com)