December 26, 2022 [upstream] – Russia is preparing to reopen rail loading terminals in East Siberia to increase crude shipments to China and the Asia-Pacific region, according to a top executive with Russian state oil pipeline operator Transneft.

The move by Transneft and the country’s rail monopoly Russian Railroads followed upbeat statements from the Russian government that the European oil embargo and the introduction of a $60 per barrel price cap on Russian oil sales to third countries are not affecting Russian crude exports.

Transneft executive chairman Nikolay Tokarev said during an interview on Russian state television channel Vesti24 that, while the capacity of the East Siberia–Pacific Ocean (ESPO) oil pipeline’s exit points cannot be increased immediately for higher export shipments, his company is working to reopen idle rail tank loading facilities in East Siberia to helps ease the bottleneck.

The ESPO is a major Russian oil export outlet that enables producers to send crude eastwards, both to China via a dedicated connector and to the Asia-Pacific region via the Kozmino marine terminal on the country’s far east coast.

Before 2016, Russian producers had transported some crude to China and Kozmino by rail to overcome ESPO capacity restrictions while expansion work was carried out on the pipeline.

Tokarev said that the reopening of the Meget rail tank loading terminal in East Siberia may enable producers to transport between 62,000 and 145,000 bpd by rail across the Russian border to China.

He added that transporting crude by rail may also enable producers to send an additional 145,000 barrels per day to the Kozmino terminal.

This is on top of the ESPO’s upgraded exit capacity to Kozmino, which was increased to 865,000 bpd from 615,000 bpd in 2021.

Oil marketed at Kozmino — sold as ESPO Blend to buyers in Asia — has dropped only marginally in price against benchmark Brent crude, whereas Russia’s Urals blend has been trading at double-digit discounts since the Russian invasion of Ukraine in February, because buyers in India and China have to pay increasingly higher costs to have Urals crude delivered from ports in western Russia.

Conflicting statements

Work to expand Russia’s crude shipping capacity in the east of the country comes amid statements in Moscow that Russian oil exports to international markets remain unaffected by the European oil embargo and the price cap that came into force on 5 December.

Tokarev claimed that “customers in Poland” asked Transneft to send 85,000 bpd of Russian oil to the country during December via the northern leg of the Druzhba pipeline, which runs from Russia across Belarus to Poland and Germany.

Transneft has also received a request from Poland to deliver about 60,000 bpd of Russian oil during 2023, and an inquiry from Germany to provide Russian oil during the first quarter of the next year, he said.

Slovakia, the Czech Republic and Hungary were granted exemptions from the European sanctions, allowing them to continue importing Russian crude via the southern leg of the Druzhba pipeline which runs through Ukraine.

However, there were no exemptions for the nations using the northern leg of the Druzhba pipeline.

Both Poland and Germany dismissed Tokarev’s claims of requests for crude supplies, with Poland’s largest oil producer and refiner, PKN Orlen saying that the company “will not extend the long-term contract [for Russian oil imports] which expires in January 2023”.

“The only binding contract for the supply of Russian oil in 2023 will cease to be implemented when the sanctions are introduced for which we are prepared,” PKN Orlen said.

Alternative supplies for Germany

A German government spokesperson, meanwhile, said reports that the country had booked Russian oil supplies via the Druzhba pipeline were false and refineries in the eastern German cities of Leuna and Schwedt are no longer ordering Russian crude for the next year, according to Reuters.

he Schwedt refinery — Germany’s fourth-largest — lies close to the Polish border and is on track to become independent of Russian crude as early as January, according to government officials.

The refinery has been under trusteeship since September, when its majority Russian owner was ousted by federal regulators and temporary restrictions were placed on two other refineries, Miro in Karlsruhe and Bayernoil in Vohburg an der Donau, in which Russian players also held interests.

A spokesperson for Germany’s Ministry for Economic Affairs & Climate Action told Upstream that the Schwedt refinery “has prepared well in recent months and will be able to produce without Russian oil in January”.

“With assurances from Poland in particular, the refinery can produce at a comfortable capacity utilisation rate,” the spokesperson added.

“Russia has proven that it is not a reliable energy supplier. We have helped the companies to change and become independent of Russian oil. This frees us from one-sided dependencies and places our supply security on more stable pillars.”

Germany’s Economic Affairs & Climate Action Minister Robert Habeck and Poland’s Climate & Environment Minister Anna Moskwa signed a declaration earlier this month pledging mutual support in securing oil supplies for their respective nations.

The agreement calls for bilateral investments, trade and cooperation between German and Polish oil companies to maximise the use of infrastructure and strengthen energy security, the German government said at the time.

The agreement guarantees sufficient supplies of oil to refineries in Gdansk and Plock in Poland, and to Germany’s Luna industrial area, as well as Schwedt.

The German ministry spokesperson said that, along with oil imported via Poland, Germany is looking to upgrade the pipeline capacity linking the German port of Rostock to Schwedt, helping to bring the refinery’s utilisation rate to more than 70%.

Russia was Germany’s biggest supplier of crude before the invasion of Ukraine in February, with imports peaking at more than 20.44 million barrels per month in January 2022.

Imports from the US were a distant second, at less than 7.3 million barrels per month, and Kazakhstan its third largest supplier at almost 6.6 million barrels per month, according to Germany’s Federal Office for Economic Affairs & Export Control.

Eyes on Kazakhstan

With Germany striving to replace Russian volumes, the ministry spokesperson pointed to an elevated role for Kazakhstan in the future.

“Negotiations between the (refinery) owners and Kazakhstan on delivery volumes are in full swing. We are providing support wherever we can,” the spokesperson said.

However, Tokarev said that while sending Kazakh oil to Germany via Russia is technically feasible with swap arrangements, there is no guarantee that Russia would comply, as it considers Germany an “unfriendly nation” because it participates in international sanctions against Russia.

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