Contaminated Ural crudes disrupt Russian exports

May 10 2019


Reports surfaced a couple of weeks ago that Russian Urals crude flowing through the Druzhba pipeline was contaminated with organic chloride.

As a result, refiners in Germany, Poland, Belarus, Hungary, the Czech Republic and Slovakia all stopped accepting Russian Urals crude supplies.

 

Official numbers were not released, but analysts estimated that at least 35 mill barrels of oil have been contaminated, Poten & Partners said in a comment.

 

Landlocked, domestic refiners In Poland, Hungary and the Czech Republic have no alternative source of crude oil supply and tapped into their countries’ strategic petroleum reserves. In other countries, refiners scrambled to secure replacement barrels.

 

Urals is a medium-heavy crude with a relatively high sulfur content. Sanctions on Iran and Venezuela, as well as lower output from Mexico, had already reduced worldwide availability of these types of crudes and oil prices have traded up as a result.

 

Non-contaminated cargoes of Urals exported from the Baltic tanker terminal at Primorsk are in short supply and now command a significant premium.

 

According to Russian officials, the contamination happened in the Volga region of Samara, which is about 1,000 km east of Moscow. The Druzhba system is one of the world’s biggest pipeline networks. It supplies about 1 mill barrels per day of Urals crude to 10 European refineries, some of which run exclusively on this crude.

Urals crude also flows via this pipeline network to the export terminal at Ust-Luga, also in the Baltic.

 

Over the last five years, seaborne exports from Ust-Luga have gradually increased from an average of 530,000 barrels per day in 2014 to 770,000 barrels per day in 2017. They are mostly exported to Europe with the Netherlands, Sweden, Lithuania, Poland, Germany and France being the largest receivers, Poten said.

 

In 2018 and 2019 year-to-date, export volumes have dropped, as Russia participated in the OPEC+ production cuts.

 

Before the contamination problems came to light, an estimated seven to 10 Aframax cargoes were already loaded at Ust-Luga and these cargoes were being marketed at a steep discount. As of last week, buyers were staying away from Ust-Luga cargoes, Poten claimed.

 

One way to handle the contaminated cargoes is for traders or refiners to buy the heavily discounted crude and put it in storage, where it can be diluted with uncontaminated oil and eventually processed. How feasible this is will depend on the level of contamination.

 

The contamination level will be different for each cargo. Organic chloride is a chemical compound that is generally not naturally present in oil but can end up in the crude stream when additives, cleaning solutions or chemicals for oil recovery are used.

 

At high temperatures, chlorides can form hydrochloric acid, which can readily corrode equipment throughout the refining process. As a result, refineries typically do not accept crude oil that contains more than 5 ppm of organic chloride. Reportedly, Transneft (the Russian pipeline monopoly) allows no more than 10 ppm in the crude flowing to their system. However, the levels of organic chloride in the contaminated crude have been between 80 ppm and 330 ppm.

 

Russian officials said that Ust-Luga should have received ‘clean oil’ by 5th and 7th May and this should help restart seaborne exports from the Baltic port fairly quickly.

 

Cleaning out the Druzhba pipeline is more complicated and will take longer to resolve, especially since Poland and Germany do not have sufficient storage space to keep the oil until it can be diluted.

 

The implications for the tanker market are hard to gauge. Since the Atlantic Aframax market was well supplied, the impact on rates was fairly muted. Tanker rates have increased somewhat, but there has not been a rate spike.

 

If this situation lasts longer than expected, this situation may change, as refiners will run out of inventory and need to source alternative (longer haul) supplies or (in the case of landlocked facilities) will start to cut runs, leading to more clean product imports and higher product tanker rates, Poten concluded.

 



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