Thanks again to reader vao who has been diligently following the sorry tale of how sanctions are hindering the operations of the Rosneft refinery in Schwedt, which provides a meaningful portion of total German refining capacity. His impressively detailed update yesterday includes a discussion of the legal row between Rosneft and the German government over the latter’s efforts to execute a non-expopriation expropriation:
I had previously reported on the difficulties piling up on the Rosneft refinery in Schwedt. It is time for an update — it is a bit long, and references are in German, sorry.
1. The refinery can process 11.5 M tonnes crude per year, which till the end of 2022 it received from Russia via the Druzhba pipeline. For technical reasons, it cannot operate below 50% capacity, and must ensure at least a 70% load for medium-term viability. It was placed under fiduciary administration by the Bundesnetzagentur in September 2022.
As the EU embargo came into effect in January 2023, Germany decided to stop buying crude from Russia entirely. Finding substitutes has proven challenging, with none of the three solutions being sufficient by itself: oil unloaded from tankers in Rostock and then delivered via a pipeline to Schwedt; from tankers to Gdansk and then via another pipeline; Kazakh oil transferred through the network of Soviet-era pipelines with Druzhba as the last leg.
The pain is completely self-inflicted:
1.a) The EU oil embargo does not apply to Russian oil delivered via pipelines. This explains why the Slovaks, Hungarians and Czechs continue receiving oil through the Southern branch of the Druzhba pipeline.
1.b) It is not a matter of price either: the EU price cap on Russian oil only affects seaborne deliveries.
1.c) The fact that Rosneft was a sanctioned entity right from the start is also no issue, as the EU carefully crafted specific exemptions to allow payment for oil deliveries.
1.d) The most recent EU package lengthened the list of sanctioned Russian financial institutions; this may make payments more cumbersome, but not impossible.
2. Currently, Schwedt is supplied at a rate equivalent to 6 Mt/y — just above the minimum required. Most crude is delivered via Rostock; capacity is limited both by the 54-year old pipeline and by the restricted facilities of the Rostock harbour. Germany has a plan to overhaul the pipeline and upgrade the port so that they will be able to fulfil 70%-75%of the needs — but the new infrastructure will only be ready in two years.
The Kazakh alternative is promising: the initial discussions revolved around deliveries of 5-6 Mt/y, with the Kazakhs being ready to send up to 7 Mt/y. Transneft, the Russian pipeline operator, officially agreed to the utilization of its infrastructure. The ramp-up takes time though: a first test delivery of 20000 t took place in February, with another of 100000 t taking place in March. There is also opposition to the deal (including from German trade unions), because it maintains the dependency on Russian infrastructure managed by Transneft, a sanctioned entity.
The Polish route has proven unsatisfactory. Poland has not yet committed to precise figures for oil deliveries; it also blocks them as long as Rosneft remains officially owner of the Schwedt refinery. So far, the crude of just two tankerswas unloaded in Gdansk and forwarded to Schwedt — and this was possible because their cargo had been bought by Shell, a minority partner in the Schwedt refinery.
3. The fastest way to ensure sufficient provisioning of Schwedt would be to bow to the demands of Poland and expropriate Rosneft. This is easier said than done.
3.a) The Bundesnetzagentur is entitled to sell assets in order to maintain the viability of the refinery. However, the point is not to, say, divest a bit of real estate, or dispose of part of a vehicle fleet, but to transfer the entirety of the refinery as an on-going concern to another party. A trustee is not allowed to do this.
3.b) Nationalization is the obvious solution — but it would require a proper appraisal of the refinery and a corresponding compensation for Rosneft. The expropriation process takes long and is fraught with legal stumbling blocks (what if Rosneft contests the evaluation?) Besides, I suspect that the very ordoliberal Germans are put off by the idea of State-owned enterprises.
3.c) Letting the Land of Brandenburg become shareholder of the refinery, as proposed by “Die Linke”, was categorically rejectedby its parliament and government, which consider the scheme “too risky”, taxpayers being potentially on the hook for unforeseen costs. This attitude does not show much confidence in the future of the refinery, and this is no surprise: 9 months ago, regional authorities urged the German government to diligence and there is considerable discontent about how things have been handled. Representatives in the regional parliament decried the actions of the German ministry of economy as a “bad cabaret show”, marred by “confusion” and “dilettantism”.
3.d) In the end, the German government resorted to tweaking the lawso as to allow the direct sale of shares in a firm under fiduciary administration, without a formal expropriation procedure.
Rosneft did not take this move lying down. It sued the German government, demanding back the full control of the refinery on the following grounds:
3.e) The refinery was placed under fiduciary administration without Rosneft being granted a proper hearing.
3.f) The legal conditions for a fiduciary administration are not met anyway. As there is no legal basis to embargo Russian oil via the Druzhba pipeline, the supply of the refinery could continue unimpeded as before. The existence of the refinery is therefore not at risk. In any case, Rosneft had already declared its readiness to operate the refinery with crude from a provenance other than Russia. As for the difficulties with hesitant subcontractors and financial partners during the first half of 2022, they were being brought under control.
3.g) The suspicion of the German government that Rosneft would siphon off equity from the refinery, thus endangering its future, is unfounded. Even if Rosneft did it, this would be of no consequence given the unprecedented profits the refinery is generating. Truly, in 2022, thanks to the high prices of oil products and the favourable cost of Russian oil acquired under long-term contracts, the Schwedt refinery booked € 1B in profits — a multiple of its yearly income in the past. Notice that as long as the fiduciary administration lasts, these profits are placed under escrow; nobody can access them.
Today (14th March), after spending four days hearing the arguments of the parties and the testimonies of witnesses, a tribunal in Leipzig rejected Rosneft’s complaintand confirmed the legality of the fiduciary administration, which will be probably extended beyond the 15th March. Now, Poland will again insist on expropriating Rosneft and granting a participation in Schwedt to the Polish oil firm Orlen.
4. On top of procurement and legal entanglements, there are thorny technical issues: the refinery is specifically designed to process Russian oil, but the crude it has been receiving since January, whether via Rostock or Gdansk, exhibits markedly different characteristics — with serious consequences.
4.a) The refinery used to produce 90% of the diesel, petrol, and heating fuel, as well as 80% of the jet fuel consumed in the Land of Brandenburg and the Land of Berlin. It is now unable to yield the required quantities, because intermediate products necessary for the diesel and gasoline production plant cannot be adequately generated out of non-Russian oil.
4.b) The Schwedt refinery was the source for one third of the bitumenproduced in Germany; under the current circumstances, it cannot generate any. Left unaddressed, the resulting shortage will render road construction and upkeepin the Eastern part of Germany significantly costlier.
4.c) The refinery burns residual fuel oil for its power, heat and steam needs — but is struggling to generate enough of it with the current crude qualities.
4.d) Finally, controlling emissions has become more difficult — again, because the refinery is configured to process crude with very different chemical properties.
None of this should come as a surprise: last year, the management of the refinery had already warned the authorities about the unavoidable trouble should crude not satisfy the specifications for refining in Schwedt.
Not only does the refinery currently operate barely above the minimum capacity, it operates very poorly at that. The (Green) officials at the German ministry of economy would initially not allow the director of the refinery to report on those problems in an expert meeting; they relented after an intervention by members of the party “die Linke”.
Oil from Kazakhstan would really help, since its characteristics are closer to Russian oil. Unfortunately, Poland is itching to sanction the Druzhba pipeline — now that Tatneft (an unsanctioned Russian entity that replaced Rosneft as supplier since the beginning of the year) interrupted oil deliveriesto Poland via Druzhba, reportedly because of a dispute regarding payment (according to the Russians), as political retaliation for the new EU sanctions package (according the the Poles).
Meanwhile, discussions started regarding the “grüne Transformation”, i.e. converting the Schwedt refinery into a hydrogen fuel plant. An explanation of how this has anything to do with decarbonisation and sustainability would be welcome.
Leuna (owned by Total-Energies) is another refinery on former GDR territory, located at the end of the Druzhba pipeline and designed to process Russian oil. It managed to fully switch to crude from Norway and the Near East in late 2022 after a lengthy and costly reconfiguration. However, it struggles to maintain a minimum workload, because it is not receiving enough oilvia the Gdansk route, the only one available…
Two refineries where Rosneft is a minority (albeit substantial) shareholder, Vohburg (Bavaria) and Karlsruhe (Baden-Württemberg) do not face such technical and commercial difficulties. They handle a mix of crudes from the Persian Gulf, Africa, Russia and Venezuela, delivered via the Transalpine Pipeline (from Trieste in Italy), and, for Karlsruhe, the Southern-European Pipeline (from Fos-sur-Mer in France) too. The participations of Rosneft were of course placed under fiduciary administration. Interestingly, Rosneft also has a participation in the Transalpine Pipeline since 2017.
Finally, further refineries owned by Lukoil are causing headaches in Bulgaria and Italy because of EU sanctions, as I reportedbefore.
It almost seems as if European politicians are intent on plunging their countries into scarcity by turning vital energy infrastructure into stranded assets.