Would Surgut investment in MOL save CEE oil flow?

The question should be asked whether an emerging decline in oil being shipped to  Central Europe could be stopped if Russian investment took place in the region’s refinery sector. And more pointedly, whether Surgutneftegaz’s investment in MOL could save the CEE region from declines in Russian oil shipments. According to this well written analysis from EurActiv.com,

Russia’s growing oil exports to Asia and the Baltic have unsettled European traders and refiners, who fear shortages on the Black Sea and in Central Europe should Russian output stall or decline.

The point that makes this report credible is that the decline is not from a coordinated policy, but one that is emerging gradually over time, due to new supply routes and customer base. While, shifting the supply of Russian energy sources have been threatened in the past, it appears that a coordinated strategy has yet to be implemented. This decline appears to be emerging from the gradual growth, from more localized and less coordinated infrastructure building.

The northern European markets and the Asian markets, with new pipelines and oil terminals coming on line, may reduce the flow of oil through the Druzhba oil pipeline, the article states.While the analysis on EurActiv concentrates on the impact on Poland and Germany and forcing traders in these countries to buy through Baltic ports, there may be a more severe impact on more landlocked countries of Central Europe that are more highly dependent on Druzhba for oil.

The other oil import options open to Slovakia and Hungary are primarily through the existing pipeline connected to  Krk in Croatia. However, a trial of this a few years ago, showed that the oil was more expensive to import than through the Druzhba pipeline which Hungary is (basically) totally dependent on. This make sense even when you consider the lower cost involved in pipelines.

But then we have the obligatory quote concerning the death of Druzhba.

“With the Chinese pipeline due to start any day and the launch of Ust Luga, I’m wondering if we will witness the death of Druzhba. Merkel should call her ‘friend’ Putin to figure out what’s going on,” one trader with a Russian major said.

The slow decline, or rather, slow drying up of Druzhba may occur because of a lack of interest of Russia into the region. While it is unfathomable to think that Russia would let the grapes wither on the vine in Central Europe, forcing them to seek energy resources away from Mother Russia; this may happen through unprepared policies or a lack of foresight into the oil sources necessary for the delivery to Central Europe. Overtime a slow shift may occur.

The fact that Russia/Surgutneftegaz is interested in operating through/with MOL by owning 20% of the company may have secured the region against this slow decline. The involvement in the refinery of the oil produced from Russia adds the value-added and profit level that would maintain Russia’s interest in the region. This does not mean that Russia will pull back ‘purposely’ from the region, but rather if the oil does fetch higher prices through other routes, then a reduction of flow to the region cannot be ruled out.

Hungary and MOL have blocked the investment avenue that Moscow and Surgutneftegas were seeking in the region. There is no doubt that the Russians maintain a strong interest in the CEE/SEE region and for operating more in the refinery sector (and gas is of course always an interest). But reduced oil flows to Hungary and Slovakia will not necessarily increase the countries’ security of supply by forcing them to diversify to a more expensive source. The fact that the pipeline already exists to Croatia adds the necessary security of supply element, expensive oil does not have to be shipped through it to actually improve supply diversity. The higher price to be paid for shipments through Croatia, and the fact that in this one area, Russia has been a reliable supplier, may just mean consumers will have to get used to higher oil prices.

In providing analysis on the CEE/SEE region, I usually try to take a conservative approach. One of my underlining understandings of how energy markets work, and even life, is that sustained change, is usually not brought about by one purposeful action, but smaller actions that culminate into something big. In the case of oil shipments from Russia, through Druzhba, we may, have an uncoordinated and gradual decline. While this allows the region time to prepare, (if anyone notices) it also means this will come at a much higher cost. For Hungarians, the price for blocking Surgutneftegaz may be higher than whatever they now find under the carpet to give to the Russians.