17 February 2020, Monday, 6:16
The Wait Is Nearly Over

Forbes: Shocking Statistics From Lukashenka

Forbes: Shocking Statistics From Lukashenka

What is the real damage from the dirty oil in the Druzhba pipeline?

There have been attempts in the media to calculate the damage caused by the incident with the discovery of oil with high concentrations of chlorine in the Druzhba pipeline, but they do not look credible. Who will suffer the principal damage and what issues are still to be addressed? This is what Forbes magazine writes about.

The situation with the supply of dichloroethane-contaminated oil to the Druzhba pipeline is going to be sorted out gradually. However, this only concerns the oil supplies to Belarusian refineries and transit to Europe through Belarus and Ust-Luha. The other issues remain open. This is both the problem of compensation and the question of how such a situation became possible. The first problem, strange as it may seem, is a little simpler.

The media have already tried to calculate the damage from the chlorine incident, but such attempts hardly seem to be realistic and most often look alarmist. Why is that? They are based on calculations of how much oil was not pumped because of the accident, when the oil transportation was reduced and no supplies to Belarusian refineries were made. This is not quite correct. We should not look at the April-May losses, but at the annual perspective. The supplies will be restored and the total volumes will be closed by the end of the year. The situation is simple – the spring breaks will be compensated by greater pumping in the second half of the year. This is similar to the OPEC+ agreement. The production was held back at the beginning of the year, and in the second half of the year, when the deal is over, it will grow at an accelerated rate. So, on the whole, the effect will not be noticeable within the year. This also applies to transit through Belarus. Minsk has already announced a possible transit loss of 8-10 million tons in 2019 – but it's actually just an attempt to present more impressive the state of suffering and damage.

By the way, from May 2 to 12, the production in Russia fell from 11.23 (the average level in April) to 11.16. It is clear that this is the result of the same accident. But until July 1, the Russian Federation is constrained in its production by the obligations to participate in the OPEC+ agreement. And when the agreement stops working, crude oil supplies will be resumed. The May subsidence will be compensated.

That is why two things remain: the damage to foreign refineries and the use of contaminated oil. The latter is simple. Small amounts of dirty oil will be simply added to normal oil. This may take more than a year – the exact figure can be said when it becomes clear how much oil is contaminated. The figure of 5 million tons of oil called by Minsk is overestimated. Yes, there will be expenses for storing dirty oil, as well as for organizing the mixing procedure. Transneft will pay for all this (even if it succeeds in shifting the blame for the entry of chlorine on the Samara oil workers, they won't be charged anyway, they are already bankrupt). But this figure is not going to be gigantic.

The damage to the equipment remains. So far, no European plants have reported any technical problems. Only Belarusians have problems. But it is also clear that they will try to include everything in the repair budget. There is room for imagination – the question is how to curb it. Let's say, the stories about the damaging half a centimeter of the line pipes look like a fairy tale. So the real damage to the Belarusian oil refineries is unlikely to exceed several million dollars.

Here we have reached the most important aspect of the damage.

There are frightening estimates of damage made by the Belarusian side. Aliaksandr Lukashenka mentioned the losses of "hundreds of millions of dollars." It is clear that Belarus is interested in maximizing the amount of damage and using the shocking figure for bargaining with Moscow. But the final figure will be determined not by the analysts, but at the political negotiations in Moscow and Minsk. And the whole question is how effective Minsk’s blackmail will be.

But even if we take into account Lukashenka's phrase about hundreds of millions, we can easily give the Russian leadership a cue where to get the money. The simplest thing to do is to cancel the story with the retaxing 6 million tons of oil. We remind you that Lukashenka managed to get from Russia the right to re-export 6 million tons of crude oil a year. In reality, there is no re-export. Russia just transfers the export duty, which is collected from these volumes, to Belarus. This is called by a beautiful word of retaxing, though in reality it’s a gift to Minsk. Cancel this concession, and here's the money to compensate for the Druzhba incident. Starting from May 1, 2019, the duty per ton of oil is $104.6 – so there’s $630 million. This will be more than enough to pay for even the most daring Lukashenka's fantasies.

The cue number two. It can be explained to Belarus that it will not receive gas at the Russian domestic prices. But that is exactly how Minsk understands the promise to create a common gas market in the Eurasian Economic Union (EEU) by January 1, 2025. So tell your neighbors that they are looking absolutely wrong at the issue of gas prices.

The cue number three – do not go for compromises regarding tax maneuver. However, the Cabinet of Ministers knows all this perfectly well itself. But there is a traditional question – how valuable is Lukashenka as a political ally and how much (and in what way) he is ready to pay for it? So the question of damage is a part of the bargaining between Moscow and Minsk, which is already underway, and is being held quite actively.

But in addition to the amount of damage, there is a question about the causes of this situation. The explanation proposed by Transneft seems to be quite logical. There is a small regional company that has access to the custody transfer facility. It may well use this opportunity for earning money. Dichloroethane is used both to enhance oil recovery and to flush wells with paraffin oil. The company could deliberately drain the dichloroethane into the line pipes, hoping that the dirty oil would be mixed up there. This explanation was also supported by the Investigative Committee of the Russian Federation. However, the data it voiced makes this explanation doubtful. The Investigative Committee has declared that Nefteperevalka had been engaged in such fraudulent activities for nine months. Then it is not clear why the problem became evident only in April 2019. The effect of greed may have played a role: the Nefteperevalka managers could have thought that if nobody had noticed their fraud before, the increased amount of chlorine (oil with no purification at all) would not be noticed and could be drained "blatantly". But there is also a discrepancy here. The Investigative Committee estimated the amount of damage at about 1 million rubles. But it means that an absolutely insignificant volume of dirty oil was poured into the pipe. Then it is not clear how the oil with dichloroethane reached Belarus.

How will all these things be explained to us in the end?