Hat tip reader vao for having the patience to run down and recap the sanctions-created obstacles to operating the Rosneft refinery in Schwedt, which represents a meaningful portion of total German refining capacity. From comments yesterday
I had already reported on what was happening with the Rosneft refinery in Schwedt. Here is an update that is topical with the above article. All my references are in German.
1. Schwedt is a refinery in Northeastern Germany, processing Russian oil, coming through the Druzhba pipeline, into a whole range of products. It represents 11% of the refinery capacity in Germany.
1.a) In September, in the wake of sanctions affecting firms like Gazprom and Rosneft, Germany took the refinery into fiduciary administration.
1.b) The paramount issue is how to secure the supply of oil to the refinery, so as to ensure continued production and maintain employment. The question is all the more burning in view of the looming embargo on Russian oil.
2. A solution is to supply the refinery with seaborne oil, unloaded in the harbour of Rostock and then carried over a 200km pipeline to Schwedt. But there are problems:
2.a) The pipeline was designed to carry refined products from Schwedt to Rostock, not raw oil in the reverse direction. Using it for this purpose is feasible after some technical adjustments.
2.b) The refinery processes 11.5M tonnes of oil per year, whereas the pipeline can only transfer 6.8M tonnes of oil per year. This is insufficient to reach an economically viable load of the refinery.
2.c) Worse, the pipeline was put in service in 1969, and because of its age cannot operate safely with the maximum throughput on a sustained basis. Overhauling it would take a couple of years at a cost of €400M.
2.d) And to top it all, tankers of the larger dimensions cannot berth in Rostock. It would be necessary either to extend or remodel the harbour (which will take years), or to rely upon smaller tankers. But then, a couple of them would be required — per week. It is unclear whether such a fleet can be arranged.
3. So on to Plan B: seaborne oil delivered to Gdansk and sent via another existing pipeline to Schwedt. The refinery has already been receiving small quantities of oil via this route.
3.a) Gdansk is a larger port with a substantial oil terminal, that is already tasked to supply crude to two other refineries (one in Poland, the other in Germany) through a network of pipelines.
3.b) The Poles have declared that they can provide Schwedt with the necessary oil to ensure the required production workload. But there are hurdles.
4. Poland refuses to supply Schwedt as long as the refinery belongs to Rosneft.
4.a) As a consequence, the German government seems set to expropriate the refinery once the fiduciary administration is over (in March 2023).
4.b) Rosneft has anticipated that move and already written off €1B from its assets in Germany. At this point, it is unknown what other actions (especially legal ones) it might take once the expropriation is official.
4.c) Even then, there are major doubts about what Poland will actually supply: it has not formally committed to a supply schedule, and the deliveries to the other two refineries take precedence anyway. This would leave just 3M tonnes oil for Schwedt — far short of the requirements.
5. Fortunately, there is Plan C: buying crude oil in Kazakhstan, delivered via the Druzhba pipeline to Schwedt. The scheme has been put forward by Michael Kellner, a Green member working in the government (Staatssekretär) under the minister of economy and party colleague Robert Habeck, and in charge of the Schwedt dossier.
5.a) This is feasible because the oil pipelines of Kazkhstan and Russia are well interconnected.
5.b) The Kazakh government expressed willingness to supply Germany with crude oil. The administration of the Schwedt refinery has already reserved pipeline capacity for the deliveries from January onwards.
5.c) However, there are some doubts about the scheme, because the German government has been remaining quite vague about deadlines.
6. Enter Christian Görke, Green member of the German parliament, who travelled all the way to Kazakhstan in order to clarify things. He came back from his trip even more worried than he was before.
6.a) Görke met with the deputy minister of energy, the general manager of KazTransOil, and the chairman of KazMunayGas.
6.b) The Kazakhs reiterated their readiness to sell oil to Germany. They would start in January 2023 with a test phase of 20000 tonnes per month, rising up to 5M or 6M tonnes per year when everything goes well.
6.c) There is just a hitch: nobody from the German side entered negotiations with Kazakhstan. In fact, the Kazakhs do not even know who is supposed to buy the oil and who their counterparts would be — the government, the Bundesnetzagentur, or Rosneft itself?
On his return, Görke’s message to his party colleagues in the ministry of economy has been a polite “what the hell are you doing?” — noting that neither Kellner nor Habeck ever bothered to travel to Kazakhstan for negotiations.
But there is worse.
7. The Druzhba pipeline serves to supply crude oil to both Poland and Germany.
7.a) As is usual in the energy market, the oil is delivered to both countries under a long-term “take-or-pay” agreement, meaning that customers must pay for the quantities agreed for, whether they actually collect them or not.
7.b) With the embargo on Russian oil, Poland is unhappy about this situation, as it must still pay for oil that it refuses, or is no longer allowed to collect.
7.c) Poland is now pushing the EU to impose sanctions on the Polish-German segment of the Druzhba pipeline. This would allow Poland (and Germany) to exit the contract with Rosneft without penalties.
7.d) However, this would also imply that the section of the Druzhba pipeline located in the EU would become legally unusable (and also technically, since Russia controls the inputs). Which also means no Kazakh oil for Schwedt. Back to point 1.b) above.
8. All that uncertainty is not going down well in Germany.
8.a) The regional authorities of Brandenburg (Schwedt is part of that Land) are getting increasingly alarmed. They had already exhorted the German government in June to take adequate measures, but so far nothing has been achieved. Fears regarding unemployment and a possible economic shock because of a lack of refined products are mounting.
8.b) The employees and the local population have been protesting repeatedly, basically demanding a return to the status quo ante, i.e. no sanctions against Rosneft and a secure supply of oil to the Schwedt refinery. Kellner has been dismissive, accusing the protesters of right-wing extremism, and of lacking solidarity with Ukraine. This attitude has not endeared him to the inhabitants of Schwedt.
8.c) Amongst the Greens, there is some trepidation: they are losing credibility as a competent government party because of the lackadaisical handling of the Schwedt affair by Habeck and Kellner.
Through ignorance of engineering and logistical issues, indifference to the mechanics of contractual agreements, and the lack of foresight, the German government has managed to put the country in an inextricable situation that will exacerbate supply chain shortages and inflation, for consumers and industry alike.
Sorry if this was a bit long.