The oil from Kazakhstan that Germans are pumping via Poland may be actually physically from Russia. This is a challenge from the point of view of the Western sanctions on Russia, so it is better to close the northern thread of the Friendship Oil Pipeline – writes Wojciech Jakóbik, editor-in-chief at BiznesAlert.pl.
German media have reported on facts that BiznesAlert.pl had been writing about since last year. Handelsblatt admitted that the oil from Kazakhstan imported by the Germans through the northern strand of the Friendship Pipeline may be physically Russian. The government admitted in a commentary for the newspaper that there is a REBCO blend in the Friendship, so it needs to be pumped further to physically receive supplies from other directions, such as Kazakhstan. KazTransOil has submitted a request to Russia’s Transneft for the supply of 1.2 million tons of Kazakh KEBCO oil through the Friendship Pipeline, presumably to deliver it to Germany, which had promised that at the end of 2022 it would stop buying Russian oil. However, the truth may be more complex. Germany abandoned the contracts with the Russians because they did not contain a take-or-pay clause or because they ended on their own, unlike the PKN Orlen contract with Tatneft. That deal was declared void by the Poles after the Russians themselves decided to stop deliveries at the end of February.
However, Germany decided to continue to use Russia’s transmission infrastructure. This means it is allowing the pipe operator – Russia’s Transneft – to rake in, as KazTransOil must pay it for the transmission, but then adds this cost to the oil price for which Germany pays. Thus, there is no direct transaction, but the Russians do receive more money. The Kazakh blend itself, called KEBCO, has similar chemical characteristics to the Russian REBCO. Germany cannot count on the fact that the Polish operator PERN, as part of the quality check will conclude that the oil transmitted via the Friendship is from Kazakhstan. According to what the German government told Handelsblatt, REBCO is still physically in the Friendship Pipeline, and small KEBCO tranches of tens of thousands of tons are mixed with it. PERN can only check if the mixture meets the GOST quality standard, which has been difficult since the 2019 contaminated oil crisis, when the Russians began to pour oil below the standards, putting at risk the transmission infrastructure, which had to be shut down for 49 days.
The fact that Germany does not consult these decisions with Poland adversely affects their cooperation and reduces the transparency of the process. Physically, deliveries from Kazakhstan have to mix with REBCO, and there is a possibility that KEBCO arrives to Germany only virtually through Poland, and physically it is still Russian oil, in accordance with the practice of virtual reverse known from the gas market in Ukraine. Kyiv receives gas under contracts in the European Union by retaining part of the Russian gas on its territory. This is a practice permitted by law, but it involves Russians who should be isolated by sanctions. Unofficially, you can hear in Warsaw that the oil tested in Friendship in Poland was described as coming “from the oil fields of Kazakhstan” and having the characteristics of Russian REBCO, so it may not be physically KEBCO.
The contaminated oil crisis is now seen as Russia testing the West’s ability to respond to an oil supply crisis. The Poles have not yet received compensation from the Russians. This is another argument against Germans using the Friendship. The Russians have their hand on the tap and can turn it off, and it will be difficult to recover the lost money later. In addition, this allows the Russians to release REBCO from European pipelines, making it possible to export KEBCO via oil ports, optimizing the use of transmission infrastructure. This means Germany and Kazakhstan are offering Moscow a gift of reduced losses. Therefore, if there is a possibility that the Russian REBCO does arrive as part of deliveries settled as Kazakh oil to the Schwedt Refinery in Germany, a concern arises that the sanctions imposed by the West on Russia for illegally invading Ukraine are being infringed on. There is no embargo on supplies via the Friendship, but there are on financial transactions. The introduction of an embargo on supplies through the northern thread of the Friendship Oil Pipeline would clear the situation. Poland and the Baltic states, which are gettng their oil from Poland, are demanding it as part of the eleventh package of sanctions. However, this is a challenge for the Germans, who would thus close the door to returning to cooperation with Rosneft in the event of the end of the war in Ukraine. It needs to be underlined though, that EC guidelines give a way to mix Russian oil with non-Russian equivalent to stay in line with sanctions regime.
But they do have an alternative to working with Russia. Germany can use the Naftoport in Gdańsk. It should be recalled that another East German refinery, Leuna, successfully receives non-Russian oil through Gdańsk and does not use Russian oil thanks to the Total-PERN futures contract. Schwedt had previously received oil from the Naftoport for Shell starting in 2023. There is a possibility of imports by ENI, but the Poles blocked Rosneft Deutschland from collecting oil under Western sanctions, regardless of the fact that it is under the control of the Board of Trustees of the German government. Forward contracts with Schwedt shareholders from the West will allow deliveries through the Naftoport. It is worth recalling that until the construction of the second line of the oil pipeline from the port of Rostock to Schwedt, supplies through Gdańsk will be a source of energy security in East Germany.
An agreement between Polish and German ministries offers Germans the possibility to use the Naftoport provided import windows are available. In turn, the deal grants Poles access to railway infrastructure in case it becomes necessary to import oil and fules that way. In practice, Poles offer access to 100-200 thousand tons of the Naftoport capacity per month. They had such an opportunity, but with a provision that it would be more crowded after the renovation of the Płock refinery in the summer of 2023 and the completion of deliveries from Transneft in February 2023. Paradoxically, therefore, the Germans had better access to the Naftoport due to the fact that the Poles continued contracts with the Russians in 2023. It is time for a new formula in which it is best to exclude Russians as proxies in deals on the Friendship oil pipeline, as it is neither safe nor advisable.