Hoisted from Comments: Rosneft Refinery in Schwedt as a Microcosm of Europe’s Sanctions-Induced Energy Mess

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.

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  1. DJG, Reality Czar

    Compliments to vao: In spite of the reputation of Germans for being dispassionate and logical (which has produced, for instance, the excellent Lufthansa), the current proxy war seems to have messed with something in Germany: Ideas of order? Normal business practices? A sudden embarrassing lack of preparedness?

    vao is without a doubt a diplomat: I enjoy the understatement in 8b and 8c.

    Thanks again. As someone who lives in Italy, I can assure you that the current behavior of Germans, and the continuing swamp of Brexit, has caused some collective head-scratching here. È un rompicapo, ne.

  2. Ignacio

    That was an excellent contribution vao. Let me know If I am getting this wrong: looks like like people in charge, not knowing how the industry works, and as it seems from your contribution, not asking for proper counselling in the matter, are letting the refinery to rot and all the looming consequences downstream, because… “solidarity with Ukraine” as the best of explanations they can offer.

    Notive the reduction of complex policies on energy

    1. lambert strether

      > solidarity with Ukraine

      “We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.” –Lord Palmerston, Famous Realist

      Toddler-level thinking by “the people in charge”

      1. Johnny Conspiranoid

        “Toddler-level thinking by “the people in charge”
        Or perhaps they are disguising their real motives.

        1. kam

          While we are on the Toddler-level thinking.
          Riddle me this: Doesn’t “buying crude oil in Kazakhstan, delivered via the Druzhba pipeline” require Russia to agree to stop moving Russian oil in the Druzhba line (which is also located in Russia) to make room for Kazak oil for Germany?
          Geography does have a way of messing up great ideas.

    2. Greg

      Perhaps the need to understand how oil logistics and industry works has run up against an ideological resistance to learning in the Green party.

      I could see a group that is dedicated to an energy transition and embrace of “new” energy sources being extremely dismissive of “old” energy and it’s needs, to the point of assuming away a lot of problems.

  3. The Rev Kev

    I personally would like to also extend my thanks to vao for this great post showing in almost like a flow chart how German leadership has led that great nation up Scheiße creek without a paddle. No wonder the Ukrainians have decided to jack up their fees on this pipeline – they know that Germany has boxed itself in with nowhere to go. They could try to make nice with Russia again but then probably the Druzhba pipeline would blow up all by itself. There is that classic German word that describes the situation here – ‘zugzwang’ – in which any move you try to make serves only leads to more serious, if not decisive, disadvantages arising. Most of this is technical difficulties but what Habeck and the Greens are doing is nothing less than catastrophic in their mishandling of the situation – and one that they created themselves. I read that anybody that protests what they are doing is usually suspected of being a Putin-puppet which is just paranoia. Why the Greens did not help send a fully authorized trade team to secure oil from the Kazakhs months ago I do not understand and Görke’s trip was underwhelming. So I would ask people like Scholz and Habeck and Baerbock in my rusty German-

    “Sind Sie verrückt? Sind Sie gestört?”

    1. Skip Intro

      At some point it will become even more obvious this the ‘Olive’ Greens have been captured by a foreign influence and are working intentionally to deindustrialize Germany.

      Haben Sie noch alle Tassen im Schrank?” –
      es piepst dir”

  4. Bugs

    Many thanks for posting this separately. The German Greens have really proven themselves unfit for government. The French Greens have taken similar positions on Russian sanctions and their environmental policy is pure fantasy. We’ve got rural market villages putting in bike lanes because Paris sends the money. What mind sickness has been unleashed in Europe? I actually voted for a few of these people but never again.

    1. jrkrideau

      . We’ve got rural market villages putting in bike lanes
      Well, if you have no petrol then bikes sound pretty good but if there are no automobiles on the road the bike lanes may be superfluous.

  5. Louis Fyne

    “through ignorance of engineering and logistical issues”

    This is gob-smacking as one doesn’t need a petrochemical degree to understand the rudimentary basics of logistics—this is more willful disregard by German leadership to ignore a subordinate who doesn’t have the right pedigree.

    I attended a fancy pants school (and everyone who I ever met from that H-school in Cambridge was perfectly normal) but there must be some idiocy-survivorship bias (or self-selection bias) when credentialed people work in politics/bureaucracy.

    Heaven help the US given all the Harvard Law and Yale Law grads in the DC bureaucracy governing us in this idiocracy (even being regular Princeton or Stanford undergrad isn’t good enough for the DC resume alphabet soup, lol)

    1. lambert strether

      That’s where I was going, too; people this stupid can only have been educated at Harvard or Yale, et al.

      I think it makes sense to think of the hegemonic fractions of the PMC as international; they all went to the same schools, and they all make the same kind of mistakes. I would speculate that China’s turn to mass infection had to do with the machinations of this class as well.

      1. Michaelmas

        I think it makes sense to think of the hegemonic fractions of the PMC as international; they all went to the same schools, and they all make the same kind of mistakes.

        To some extent possibly true, but simplistic. I don’t think whatever afflictions the CCCP is suffering from were incubated by exactly the same set of institutions as in the neoliberal West, since only a small segment of the Party’s managers would have been gone abroad to Harvard and Yale.

        Rather, all through human history when regimes reach the stage of seeing themselves as unable to fail but only to be failed — regimes as varied as neoliberalism, the Confucian state, the Party, whatever — then those particular regimes’ managerial elites see themselves as by definition great-and-good and all-competent. Dunning-Kruger of course applies here: the more incompetent the PMC, the more they imagine themselves all-competent.

        Neoliberalism, of course, particularly promotes incompetents to political and policy-making power: individuals who, firstly, never have held responsible managerial positions in material enterprises but rather, if they’ve any experience at all before becoming career politicians, were lawyers or financiers; and, secondly, understand their role as being only to facilitate the operations of that ultimate information processor, the Market, which, in practices, equates to taking money from their corporate donors and expecting the big payoff (a la Blair or Obama) after they’ve held office.

        China is a different story. My impression was always that the Party’s managerial class hewed more to engineering backgrounds. Where they seem to have gone wrong with COVID, as far as I can tell, is in hewing to the fomite-transmission narrative and not using the time the lockdowns provided to develop more effective vaccines — which didn’t necessarily mean busting the mRNA vaccine technology patent-monopoly, either, because the adenovirus-based approach of the Oxford-AstraZeneca and Sputnik V vaccines should have been tenable for them.

        1. Greg

          It’s possible that Chinese researchers reached the conclusion that a reliably sterilising vaccine for coronaviruses was not possible in a reasonable timeframe given the current state of knowledge and technology.
          Given that, there’s a limit to how long you can kick the can down the road and hope for a miracle.

          1. Michaelmas

            A sterilizing vaccine for coronaviruses may very well never be possible. A vaccine that does only what the mRNA or adenovirus vaccines do, which is create some greater degree of immune response to Covid, would still be preferable to what the Chinese have, which is the weak Sinovac vaccine.

        2. hk

          I don’t think it’s an issue with Harvard or Yale per se, but a set of conventionally accepted “right answers” that prevail among the elites of a given society–a dogma or, a even profession of faith, if you will, that you have to repeat to indicate your adhere to “the way.”.

          There may be some logical/intellectual basis for this profession: I’m sure people have come up with ingenious and even brilliant arguments explaining the filioque clause or the logic of eight legged essays. But these are ultimately, made up constructs whose legitimacy is based on acceptance of the proposed premises and not have no “empirical” legs to stand on, based on a reality independent of their premises. At any rate, sitting the Chinese state examination and writing up a “brilliant” eight legged essays that meets all the requisites does not require that you actually understand their “logical” foundations and defend/criticize them, only that you are skilled and trained enough to follow the “correct” form. If the mandarinate is full of such people and you are suddenly required to think in terms of, say, six-legged essays (or whatever), the best they can do is to claim that the reality (that demands such nonsensical things as six-legged essays that every educated person knows don’t exist) cannot possibly make sense.

          The number of legs in a “properly scholarly” Chinese essays notwithstanding, this, of course, did happen before: China in the latter half of 19th century. It’s not quite as if Chinese were completely ignorant of the outside world and their relative power: as early as 18th century, Kangxi Emperor instructed future envoys to Russia should treat Russian rulers as if he/she were Chinese emperor, which they did, several times before Czarina Anna. It was already obvious, even to the Chinese, that the world was a big place, there are other vast and powerful empires, and that diplomacy with them should take these into consideration. But a century later, Chinese mandarins wilfully forgot all these and insisted on their haughty self-righteous arrogance towards Western powers, when things were already bad even if they were acting diplomatically. The more I see the West today, the more I see of the late imperial China. The description offered by British diplomat Lord Macartney might apply to the West of today, too: “an old, crazy first rate man o’ war, which a fortunate succession of able and vigilant officers have contrived to keep afloat for these hundred and fifty years past.”

      2. clarky90

        Perhaps we need to turn to Fairy Tales to make some sense,,,,,?

        “And A Very Bad Wizzzzzzard cast a powerful spell of DELUSION on OUR Illuminati, who immediately fell into a deep deep sleep…..

        They began to dream that they had extraordinary mind powers….

        that they could conjure food and warmth, and love itself, with their spells…….

        That they had The Limitless Majik Money at their fingertips…..!”

    2. Mikel

      The credential is a “fail upward” pass.
      These are the type of people that also exalt “risk taking.” That’s something easy to exalt when in possession of a pass – through credentials or other means.

      Here is a party whose platform revolves around energy and they don’t know the first thing.
      Now people are supposed to believe them also when they talk about they understand “the science.”

  6. Ahimsa

    Great report!

    Am also here in Germany. My perception is people put up with a lot here so long as things function in the end and stability reigns. This basic tolerance will be sorely tested the longer this goes.

  7. Taurus

    Thank you, vao. I guess the solution would be importing refined product from the US (at a cost). What a cluster…

  8. doug

    Thanks for bringing this here. The ‘solution’ seems to be ‘do without’. I am not sure how well that goes down.

    1. John Zelnicker

      johnf – Masterful. Three excellent descriptors for the PMC in general.

      I’m filing that for future use.

  9. Ludus57

    I voted Remain in the Brexit referendum. However when I look at the current leadership of the EU and Germany, I now realize that the UKhas, in one sense, had a lucky escape and desperately needs a sensible social democratic government blessed with a good dose of reality, which can start the job of repairing the damage done – both materially and reputationally.
    Vao has done us the great service of showing us how Europe is allowing itself to be a mere pawn in this whole Ukrainian farago.
    The German Greens are clearly compromised in this situation, particularly when one looks at the background of Foreign Minister Baerbock, and her strong Washington credentials.
    Talking with ordinary German citizens will surely bring home the hollowness of the call “Solidarity with Ukraine”, as they see the problems it is creating around them.

    1. dandyandy

      I was on the other side of the Brexit vote, but I have also been baffled by the current clusterf*** leadership of the EU and Germany. I also felt UK had a lucky escape and now enjoys a luxury of not being bound by the lowest common denominator decisions of EU’s collective mind. These thoughts very much reinforced by reading the german french polish etc sources (autotranslated :)! ). Even their milder media outlets are occasionally calling out the utter uselesness of their rulers (not likes of DW Figaro ElPais or FT of course).

      On the other hand my conspiratorial instinct also asks whether, given that UK govt is heavily in the management of the anti-Russia mess, including dirtied hands, we are only being given a temporary reprieve for doing a good job, whilst the Hungry Master demolishes the EU’s prosperity. Once EU is eaten away, I suspect it will be our turn. 3-4 years perhaps?

  10. KLG

    I read the original comment and thought, “I have to come back to this.” Thank you vao and Yves!

    ‘Tis a puzzlement. But I have been puzzled for a very long time.

    1. ChrisPacific

      Same – thanks to NC admins for featuring it.

      Reading between the lines, there would seem to be a de facto plan D (none of the above) which may well end up being the choice, and that’s the reason for the alarm in 8a.

      Plan A is clearly not a short term solution and Plan B strikes me as way too dependent on Poland to ever be viable. Plan C looks like the option Germany has the most influence over and ability to deliver – it sounds quite workable absent new EU sanctions, and Germany could kick and scream mightily if they were proposed (even to the point of running Syria-style propaganda on all the poor children that will die if Germany’s last energy option is removed). It does feel like a soft end-run around sanctions though (where does all that Kazakh oil really come from?) which could present problems – and if the article is accurate, Germany is not treating it with the required degree of seriousness anyway.

  11. flora

    Thanks for this post; this is important information about how things are working at the govt level. “Assume a can opener.” (A competent senior civil service would have at one time been able to ward off this level of incompetence by hand-waving politicians.)

  12. Irrational

    According to Statista.de, Baerbock and Habeck are the two most popular politicians in Germany. Go figure.

    1. The Rev Kev

      Canned polls? You can get polls in the US saying how Americans think that Joe Biden is completely sharp and on top of everything.

  13. Matthew G. Saroff

    In terms of Russian counter-sanctions, at what point does Russia announce that it is considering not recognizing US and EU patent and copyright protections?

    Given the nature of the internet, it was, after all, designed to survive a nuclear war, it strikes me that while the US/EU/AUS/JPN could block such content from entering their countries, it would have the effect of creating a free for all in the rest of the world.

    1. Alex Cox

      The Russian Ministry of Economic Development eased copyright laws as a response to western sanctions a few months back. Since the Hollywood studios won’t supply the product, Russian cinemas are screening pirate copies instead.

      This would have been cumbersome in the days of 35mm prints; digital makes it easy.

  14. DickyGee

    This reads like a Jorge Vilches (from the Saker site) piece a few months back . . . he predicted all of the above in a lot more detail, outlining huge energy pain for Germany. 3 strikes and yer out: agreeing with the U.S. to sanction Russia, voting in the “Greens,” and then getting the Coup de Grace from Uncle Sam (to eliminate any “back-sliding”) by blasting the NStream pipelines. Dark days ahead for Deutschland!

  15. Johnny Conspiranoid

    Or the people who made these decisions are controlled by the people who will profit from them.

  16. Victor Moses

    This is an extremely interesting post. Not sure when sh*t will hit the fan in Europe though. It seems all of these cracks are being papered over for now.

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