On Tuesday, Russian state-owned pipeline transport company Transneft revealed that Ukraine had stopped oil supplies to Central Europe through its Druzhba pipeline, also known as the Friendship pipeline, over transit payment issues due to Western sanctions since August 4.
In a statement, Transneft said that it had made an advance payment of $15 million in oil transit fees on July 22 for August to Ukrainian pipeline operator UkrTransNafta. However, Russian state-owned Gazprombank, which handled the transaction, informed them that the payment was returned on July 28, citing the European Union’s (EU) financial sanctions.
Transneft, state-owned operator of the Russian portion of the pipeline, pays transit fees to #Ukraine, UkrTransNafta, for the oil to pass through. Transneft said its July payment had been returned due to EU sanctions aimed at punishing #Russia for its war with the #US in Ukraine.
— Elijah J. Magnier 🇪🇺 (@ejmalrai) August 10, 2022
According to Transneft, European banks can only allow a transaction after direct approval from a government authority instead of deciding on their own. It also mentioned that European regulators “have yet to form a common position” on how or whether the banks should allow the dealings.
“To resolve the issue, Transneft sent an appeal to an authorised bank for further transfer of information to the European regulator in order to obtain permission to conduct settlements... options for an alternative flow of funds are being worked out, daily consultations and negotiations with servicing banks are carried out,” the company disclosed.
As per the new EU rules, the bloc has barred transactions with Russian state-owned institutions, including Transneft. However, the ban does not apply to importing or transporting oil and gas into Europe. In this respect, an EU official said the European Commission is looking into the matter.
Transneft admitted that supplies through the southern route of the pipeline to Hungary, Slovakia, and the Czech Republic had been impacted. However, oil supply via the northern route to Poland and Germany will continue “as usual.”
Kvůli zastavení dodávek ropy přes ropovod Družba jsme v kontaktu se všemi relevantními aktéry, se kterými hledáme cestu, jak situaci vyřešit. Další dny ukážou, jestli se jedná o další eskalaci energetické války ze strany Ruska nebo o technický problém v platbách.
— Jozef Síkela (@JozefSikela) August 9, 2022
All three confirmed that the oil supply had halted early this month, with the Czech Republic’s Minister of Industry and Trade, Jozef Sikela, stating that they are working with “all relevant actors” to resolve the issue. “The next few days will show whether this is another escalation of the energy war by Russia or a technical problem in payments,” he remarked.
Sikela also mentioned that Czech company MERO had stocks that will last at least till the second half of August and strategic reserves for 90 days, which the Czech government does not plan to activate right now. Nevertheless, MERO believes oil supply will be restored within a few days.
Meanwhile, Slovak refinery Slovnaft’s spokesman Anton Molnar divulged that the company’s Bratislava refinery is operational and supplying oil, adding that “technical problems at the bank level in connection with the payment of transit fees from the Russian side” was responsible for the suspension. Furthermore, Linda Vaskovicova, the head of the Slovak oil transporter Transpetrol’s CEO office, told TASR that authorities are “dealing with the situation.”
Molnar also communicated that Slovnaft have started discussions with both Ukraine and Russia about whether Hungarian refineries MOL and Slovnaft could pay the transit fees in an effort to restart oil supplies. Moreover, MOL declared that it has oil reserves for “several weeks” that it could use if needed.
Transneft is insisting that the disruption of oil supply to the Czech Republic, Hungary and Slovakia via Druzhba pipeline was initiated by Ukraine
— Samuel Ramani (@SamRamani2) August 10, 2022
The payment problems that Ukraine is experiencing have not extended to Belarus, which is shipping Russian oil to Poland and Germany
Hungary can import oil through the Adria pipeline linking the Omisalj oil terminal in Croatia to its Duna refinery, but its capacity is limited, and shipments are much more expensive than via the Druzhba pipeline. However, Slovakia’s options are more restricted, as it imports oil through Hungary.
According to Kpler, all three countries heavily depend on Russian energy resources, importing an average of 318,000 barrels per day (bpd) of crude via the Druzhba pipeline last month, higher than 246,000 bpd in July last year. Kpler also said Transneft must pay about $1.61 per barrel to Ukraine in transit fees. Kpler analyst Viktor Katona noted that the shutdown is a significant problem for Slovakia and the Czech Republic since they will be “out of stocks” if pipeline supplies are not restored within days.
According to traders, it will be difficult for the three countries to arrange alternative oil supplies through the sea route at such short notice. A substitute pipeline through the Adriatic Sea could be used to supply oil to all three countries but it may not be enough if Russia completely shuts down oil supply, according to research company IHS Markit.
Russia, the world’s second-largest oil exporter and leading gas exporter, has often been accused of ‘weaponising’ its energy resources as a means to force the EU to relax sanctions. It reduced its gas supply through the Nord Stream 1 pipeline to 80% last month, saying that one of its turbines was stuck in Germany in transit and another had some technical issues. Furthermore, in April, Moscow stopped supplying gas to Bulgaria and Poland, followed by Finland in May in retaliation to the sanctions. Later, in June, Russian state-owned energy company Gazprom announced that it had completely “suspended” natural gas delivery to the Netherlands and Denmark for failing to make gas payments in rubles in response to the EU banning 75% of Russian oil imports.
Given this instability, the EU this week implemented an emergency gas plan that requires members to curb their natural gas use between August and March by 15% and expand their gas storage to prepare for the upcoming winter.