Dirty oil scandal to cost Russia $5 billion at least

The crisis surrounding the Druzhba oil pipeline, which was contaminated with organochlorine compounds at the end of April, is turning out to be more serious than even the most pessimistic predictions. The resumption of oil transit to Poland and Germany, initially promised within a week, and later by 21 May, has once again been delayed.

The new date is 9 or 10 July, said a source familiar with the outcome of the negotiations between the Russian oil transport company Transneft and the Polish companies PERN, Orlen and Lotos.

According to the Polish companies, the deadline is more than a month away. The discharge of all the pipelines will only be completed by 1 July, PERN said in a statement. Additional time will be required to remove the substandard oil from the pipes.

Initially it was presumed that the dirty oil would remain at the refineries that had purchased it, where it would be mixed with high quality oil and refined. However, this plan failed. The Leuna refinery in Germany began the process, but was forced to halt all operations due to a malfunction.

Attempts to dilute the oil have also failed. In Poland, 200 tons of the Russian oil were mixed with pure oil, but the result was even more dirty oil – around one million tons, an informed source told the Vedomosti news agency.

Now, the plan is to pump the dangerous mixture back to Russia. This is scheduled to start on Monday, said Belarusian Prime Minister Syarhey Rumas after meeting with his Russian colleague Dmitry Medvedev.

For the first time, the Druzhba pipeline, which was built in the 1960s to supply Soviet oil to countries under the Warsaw Pact, will have to be used in reverse. Russia will take back around 1.2 million tons of substandard oil, announced Russian Vice Prime Minister Dmitry Kozak, who oversees the energy industry.

“Appropriate containers have been produced, and there is an understanding of where we will put it,” he noted.

The downtime on the Druzhba pipeline alone, which has gone on for a month already, the longest in its history, will cost Russia at least $5 billion in lost export earnings by the end of the year, estimates Dmitry Dolgin, chief economist for Russia and LNG at ING.

Given the current account surplus of roughly $100 billion, the situation is “not so critical”, he notes. The effect will also be partially mitigated by alternative shipments.

The long-term risks, however, are far more dangerous. The chief danger is the metal corrosion that could be caused by the dichloroethane that ended up in the oil, observes Ralph Besler, an expert from the German Ministry for Economic Affairs and energy. The greatest risk arises when the compound meets water – it starts to decay and to give off chlorides, which cause corrosion.

“Classic metal pitting begins – the destruction of its surface. And it doesn’t stop, even if standard quality oil starts to flow again,” the German expert explained. Water is always present in oil, and chlorides will accumulate in batches where there is a particularly large amount of it.

A month of downtime for a pipeline full of chloride-contaminated oil cannot be called a critical period, Besler believes: the corrosion of the inner walls of regular steel pipes will accelerate slightly, but no more than that.

A critical situation will arise when oil with a high chloride concentration enters an oil refinery, where the temperature of several processes is significantly in excess of 100 degrees Celsius, which speeds up chemical reactions.

The incident has affected one third of Russia’s oil experts that are performed by Transneft, observe analysts from S&P: 1.6 million out of 4.37 million barrels per hour.

When it comes to paying compensation, which Poland and Belarus have already demanded, the company has $4.46 billion in cash and short-term financial investments. However, one third of this amount is de facto reserved for repaying short-term debt that is due within the next 12 months ($1.5 billion). “However, being an organization linked to the government, Transneft has good access to funding from the major Russian banks,” S&P notes.

  Russia, Druzhba pipeline, Belarus, Poland, Europe