March 2022
Oil prices surged to the highest since 2014 this month, partly fuelled by Russia’s invasion of Ukraine. Any scenario in which westbound flows from the world’s second-largest crude exporter slump would have a significant impact on what is an already tight oil market.

The reality, though, is that Europe and Russia’s mutual oil-market dependence would make any major disruption in exports surprising and economically destructive for both Moscow and Europe if tensions were ever to result in a significant reduction in westbound crude.

About 2.3Mbpd of Russian crude or about US$75bn a year at current spot prices, heads west each day through a network of pipelines to export terminals on the Baltic and Black Seas, as well as pouring directly into refineries in central and eastern Europe. Flows of refined products -- mostly diesel, fuel oil and naphtha -- supplement that revenue.

Europe's exposure to Russian oil supply risks in the wake of the attack has pressured prices for Moscow's key medium sour crude export grade Urals. In January 2022, the Brent – Urals Siberia price differential was US$3.6/bbl, by February the price differential had surged to US$15.7/bbl reflecting the commencement of hostilities between Russia and Ukraine.

Russia's military movements into Ukraine and subsequent sanctions levied by the US and other nations have most European refiners stepping away from buying Urals and CPC Blend crude, despite higher refinery margins due to the lower Ural crude price.


Crude Exports – Germany Gets Most

The Druzhba, or 'friendship', pipeline system exports around 1.2Mbpd of crude from Russian fields to Europe, mostly to refineries in Germany, Poland, Hungary, Slovakia, and Czech Republic. So far, the biggest supply threat to European refineries has focused on Russian crude flows through the conflict zone in Ukraine.

Ukraine moves Russian oil to Slovakia, Hungary, and the Czech Republic through the southern branch of the Druzhba pipeline. The country's transit of Russian crude for export to the EU was 94Mbbl in 2021, down from 97Mbbl in 2020, while oil transit to Belarus remained unchanged at about 6.3Mbpd.

Crude shipments via the southern branch of the Druzhba pipeline network included around 104kbpd to the 124kbpd capacity Bratislava refinery in Slovakia; 68kbpd to the 165kbpd capacity Duna refinery in Hungary; and about 68kbpd to the 110kbpd capacity Litvinov refinery in the Czech Republic.

The northern branch of the Druzhba route via Belarus provides Urals crude to refineries in Germany and Poland. In Germany, the 250kbpd capacity PCK refinery at Schwedt receives about 220kbpd and Total's 259kbpd capacity Leuna refinery receives about 240kbpd via Durzhba, although they could also get alternative supplies via the Baltic Sea ports.

In Poland, Polski Koncern Naftowy Orlen’s (PKN's) 325kbpd capacity Plock refinery also processes crude delivered via Druzhba, it receives about 323kbpd which accounts for almost 100% of its feedstock, but has been diversifying its sources of supply, buying crude from Norway, Angola, Nigeria, Saudi Arabia, and the US.



Germany Most Exposed

But wider repercussions from a conflict, such as swinging US and EU financial sanctions or Russian reprisals, could affect more of Russia's oil exports to European refineries. Existing commercial ties between Russia and its biggest European customers also complicate how the political conflagration would play out and impact refineries.

In Germany, Europe's biggest refiner and most exposed to Russian crude, Russian state oil giant Rosneft is already the second-biggest refiner in terms of capacity behind Shell after its November 2021 acquisition of Shell's minority stake in the PCK Schwedt refinery. Rosneft now holds a 91.67% stake in Germany’s PCK Schwedt refinery. Already responsible for around 25% of crude imports into Germany, Rosneft has been growing its downstream footprint in the country over the last decade and is poised to become Germany's biggest refiner by 2025 when it completes the expansion of one of its sites.


Seaborne Export Options

Even if pipeline flows to Europe are disrupted, alternative export capacity exists with seaborne shipments from Black Sea and Baltic ports.

  • In the Czech Republic, although Unipetrol's Litvinov refinery relies on crude supplies from the Druzhba pipeline, its Kralupy facility is supplied mainly by the TAL-IKL pipeline which ships crude delivered by tankers to the Italian port of Trieste.
  • Hungary's Duna and Slovakia's Slovnaft refineries, both owned by Hungary's MOL, process crude predominantly delivered via Druzhba. However, they can also be supplied with seaborne crude via the Janaf pipeline which ships crude from the Croatian terminal of Omisalj.
  • Poland's 210kbpd Gdansk refinery also relies in Urals imports via Druzhba, though thanks to its location on the Baltic Sea it can also get crude deliveries by tankers.

Urals, which ships through Ukraine, could see disruptions to pipeline exports in the event of a conflict but Urals loadings via ports such as Novorossiisk, Primorsk, and Ust-Luga should remain unaffected.


Sanctions Impact

The ramifications of tough new sanctions hitting Russian oil supplies to Europe are unknown. However, when Russia seized Crimea in 2014, crude flows into Europe were largely unaffected by the retaliatory US sanctions on Moscow at the time.

It is unlikely that Russia will voluntarily cease exports of crude oil to European refineries, given the lack of a major disruption in 2014. Russia’s desire to remain a dependable supplier, its economy’s dependance on exported crude oil revenue, and the fact that such a move could unite the US and Europe are strong influencing factors.

Still, recent threats from the Biden administration that the US will impose more and tougher financial penalties and sanctions in response to the Russian invasion are a concern.

A "worst-case scenario" threatens supply of about 830kbpd of Ural's crude flowing via the northern Druzhba pipeline through Belarus to Germany and Poland and 400kbpd via the southern Druzhba pipeline flowing through Ukraine to Slovakia, Hungary, and the Czech Republic.