Global Insight Perspective
The European fallout over Russia's halting of oil supplies through the Druzhba pipeline began yesterday with political leaders criticising the lack of forewarning on the cuts.
While European refiners in affected countries appeared to be coping well with the disruption, Russia is unlikely to get away lightly with the move. European leaders and policymakers are again putting the spotlight on Russia and questioning its reliability as the key energy supplier to the region.
German chancellor and European Union (EU) president Angela Merkel will travel to Moscow later this month for talks with Russian president Vladimir Putin on cooperation between the two regions, and energy security is likely to feature strongly. However, aside from seeking political assurances, Europe is struggling to find options to alleviate concerns over its vulnerability to supply disruptions from the former Soviet republic.
The suspension of Russian oil deliveries to Europe through the Druzhba pipeline continues today, with indications that Russia may be digging its heels in over its dispute with Belarus (see Belarus-Russia: 10 January 2007: Talks Fail to Produce Druzhba Pipeline Restart; Russia May Cut Oil Production). The pipeline closure, initiated on Monday, has seen up to 1.2 million barrels of oil per day cut from Europe's import balance, amounting to 12.5% of the region's total crude consumption (see Europe: 9 January 2007:"Friendship" in Name Only: Belarus Dispute Hits Russian Oil Exports to Europe). The Druzhba pipeline runs from Russia to Belarus, where it splits in two, with the northern branch running through Poland and Germany, and the southern branch running through Ukraine, Slovakia, Hungary, and the Czech Republic.
Refiners Activate Contingency Measures
The International Energy Agency (IEA) immediately moved to quell concerns over the cut, saying there would be no immediate impact on any of the refineries in the countries involved as they all operate with working stockpiles. EU refineries are obliged to hold 66 days' worth of crude reserves, with the IEA also requiring member governments to hold oil stocks equivalent to 90 days use. Most refineries also have the option of seeking out crude supplies from alternative routes.
Initial statements from oil refiners indicated these contingency measures were proving sufficient. In Germany, Total said its refineries were continuing to operate, with the company also purchasing a shipment of crude via the Polish city of Gdansk. The country's PCK Raffinerie said it had several days of reserves to supply its customers. In Hungary, the government said it would dip into its 90-day oil reserves to keep supplies uninterrupted should the disruption continue, and was also prepared to get further oil through a pipeline from the Adriatic Sea. Poland's PKN Orlen refinery in Plock said it would maintain production and was ready to find alternative supplies through either its own reserves, the Gdansk oil terminal or through delivery be sea. The Lotos Group's refinery at Gdansk indicated it could keep producing until mid-February using its own crude reserves and national supplies. Slovakian oil refiner Slovnaft said its oil supplies were operating at a sufficient level, but began procedures to access state reserves of 100,000 tonnes and the Czech Republic announced it had begun drawing from a strategic reserve of 55,000 tonnes of crude oil that will cover four days’ worth of its needs, and will be able to draw on other state reserves to provide it with 100 days of consumption altogether.
Political Disapproval Builds
Despite the fact that refiners appeared to be coping with the sudden shortfall, European leaders showed they were not prepared to sit back and take such disruptions. Andris Piebalgs the EU's energy commissioner demanded an "urgent and detailed" explanation of the events from the Russian and Belarussian governments, according to the Wall Street Journal. Poland, already involved in a dispute with Russia over an import ban on Polish meat, took the opportunity to raise questions over the reliability of the country as a supplier. "This shows us once again that arguments among various countries of the former Soviet Union, between suppliers and transit countries, mean that from our perspective, these deliveries are unreliable”, Piotr Naimsky, Poland's Deputy Economy Minister said.
Meanwhile, a meeting between European Commission (EC) president José Manuel Barroso and German chancellor and EU president Angela Merkel yielded perhaps the strongest criticism. "It is not acceptable for suppliers or transit countries to take measures without consultation”, Barroso said, with Merkel adding that such actions "destroy confidence" and that "you cannot build cooperation based on true mutual trust in this way”.
Meanwhile, Transneft, the Russian company that actioned the pipeline closure, refused to acknowledge that Russia's ongoing relationship with Europe might be damaged by the events. "I'm sure this won't affect our reputation as a reliable energy supplier”, Transneft vice-president Sergei Grigoriev said.
Outlook and Implications
Unfortunately for Grigoriev, his claim has already proven false: the Druzhba closure has again bought the spotlight on Russia's reliability as the key energy supplier to Europe and, unfortunately for Russia, the attention that such an event brings will only be negative. Russian authorities have already made efforts to deflect attention (and blame) over the incident, claiming Belarus provoked the disruption by illegally syphoning off Russian oil. However, the fact that Russia was ultimately the one that cut off supplies, coupled with the country's involvement in a similar dispute last year that saw gas exports to Europe temporarily halted, means that such attention is likely to be difficult to deflect. Russian president Vladimir Putin moved yesterday to mitigate damage to the country's reputation by urging government ministers to "do everything to secure the interests of Western consumers". But, to a large extent, the damage already seems to have been done.
The question that Europe now has to grapple with is: "What more can be done to secure the region's energy supplies?" The oil cut has sparked calls for the region to diversify its energy mix, with Merkel even taking the opportunity to raise questions over the prudence of Germany's nuclear phase-out plans. However, moves towards diversification will require years to realise and are unlikely to alleviate short term concerns.
Political assurances are likely to be the key near-term focus for European leaders, with Merkel to travel to Moscow later this month for talks with Putin on the EU-Russia relationship. Energy security will be central to these discussions, and the Druzhba cut could even prove to have a silver lining by giving Europe greater leverage to negotiate assurances from Russia on its future energy supplies. To date, however, such pleas have struggled to gain traction (see Europe: 24 November 2006:Energy: Europe: EU Grapples with Unified Approach to Energy Policy Ahead of Russian Summit).
With the EC's long-awaited energy policy review to be released today, the Russian oil cut is bound to place energy security for Europe firmly at the centre of the policy agenda for some time to come. But with no obvious near term responses to the issue, and with the current disruption coming almost exactly one year after Russian gas supplies to Europe were temporarily halted following a price dispute with the Ukraine, European policy makers must now be wondering whether, in a further year's time, they can hope to be in a substantially different position in relation to their vulnerability to supply disruptions from the former Soviet republic.