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Germany, Poland suspend oil imports via Russian pipeline amid contamination worries

Key Points
  • The sudden suspension of imports from the Soviet-built Druzhba pipeline, which runs from Russia via Belarus to central Europe.
  • The incident will cause short-term disruptions to supply, potentially resulting in reduced activity at affected refineries, according to S&P Global Platts.
  • Energy market analysts said the incident represents an important supply risk, hence why oil prices were bubbling higher on Thursday.
Reconstruction works underway on the Mozyr - Brest section of the Druzhba pipeline [Friendship Pipeline], the world's longest oil pipeline running from European Russia to the eastern and western Europe.
Viktor Drachev | TASS via Getty Images

Several European nations have suspended oil imports from Russia after contaminated supplies were found in a major pipeline from the world's second-largest crude exporter.

The sudden suspension of imports from the Soviet-built Druzhba pipeline has disrupted supplies to European refineries. Germany, Poland and Belarus have all suspended shipments through the Druzhba line, and trading sources say the Czech Republic has also halted imports, according to S&P Global Platts.

The firm estimates that 700,000 barrels per day of Russian oil that usually transits through the Druzhba line has been suspended. At least five tankers containing the contaminated oil also sailed from the Baltic port of Ust Luga.

Druzhba pipeline, source: S&P Global Platts

 The incident will cause short-term disruptions to supply, potentially resulting in reduced activity at affected refineries, according to Chris Midgley, global head of analytics at S&P Global Platts. That should boost product prices and refinery margins in northwest Europe, but it's not likely to significantly tighten global oil supplies or disrupt production.

Russia currently plans to start pumping clean fuel through Druzhba on April 29.

The Druzhba pipeline can ship up to 1 million bpd, according to data sourced by Reuters — approximately 1% of global demand. The line supplies branches north to supply Poland and Germany and forks south to deliver Russian crude to the Czech Republic, Hungary and Slovakia.

German plants belonging to Total, Shell, Eni and Rosneft as well as refineries belonging to Poland's PKN Orlen and Grupa Lotos were all reportedly at risk. PKN Orlen is receiving seaborne shipments from Gdansk port, but capacity from Gdansk may be limited and cannot completely compensate for the disruption, according to S&P Global Platts.

"The first thing to note is that this incident involving contaminated Russian oil is rare occurrence," Stephen Brennock, oil analyst at PVM Oil Associates, told CNBC via email on Thursday.

In fact, Brennock said it is the "first time I have seen anything like it."

High-level Russian government officials were set to meet on Thursday to discuss how to resolve the contaminated crude.

Analysts said these talks were likely to address how to avoid legal procedures against state-owned oil export company Transneft.

"Russia has made it clear that it would seek to address the quality concerns related to chlorine levels over the coming days, probably by the end of this week. Given the crucial role of oil in its economy, Russia takes this issue very seriously," Agathe Demarais, global forecasting director at the Economist Intelligence Unit (EIU) told CNBC via email on Thursday.

Compensation

Energy market analysts said the incident represents an important supply risk, hence why oil prices were bubbling higher on Thursday, but it was unclear whether it would have a lasting impact.

International benchmark Brent crude traded at around $75.47 during morning deals, up over 1.2%, while U.S. West Texas Intermediate crude (WTI) stood at $66.20, around 0.5% higher.

"In the absence of a major bout of instability in major oil producers, and given that markets have also now priced the expiration of US sanctions waivers for countries that so far continued to import Iranian oil, oil prices are unlikely to move above $75 for a sustained period," Demarais said.

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What’s next for oil?

Problems concerning the quality of Russian oil flowing to northern and central Europe first arose last week, when oil flows via Ust Luga and the Druzhba pipeline were contaminated with high levels of organic chloride, a compound of chlorine combined with another element.

The material is often used to boost oil production but must then be separated from oil before shipment as it can destroy refining equipment.

Belarusian state news agency Belta reported its neighbor Poland had stopped accepting deliveries of Russian crude at 8:00 p.m. London time on Wednesday.

— Reuters contributed to this report.