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.
