Embargo on Russian oil / We can replace it, but it will be difficult and expensive. We will feel it most with diesel – attitude.sk

We can replace it, but it will be difficult and expensive. The Russian aggression in Ukraine has been going on for more than two months, and Europe is coming up with further sanctions. The sixth package in a row attacks, among other things, a key source of revenue for the Russian budget: oil. According to the proposal, European countries are to stop importing Russian oil by the end of this year. The move will be particularly painful for Vladimir Putin’s country, as black gold export revenues bring billions of euros to the state treasury every year. However, the new sanctions will not be painless for Europe either, with some countries being particularly painful. Slovakia is one of them. As Economy Minister Richard Sulík explained at yesterday’s press briefing, only 10 to 20 percent of Russian oil consumed in Europe comes via pipelines, the rest is shipped. “Replacing one ship with another is easier than replacing a pipe with another pipe that is not even eligible. We are in a much worse situation, “Sulík pointed out. Slovakia is therefore calling for a three-year transition period during which it could prepare for a cut from Russia. However, this change will mean higher prices, as reorienting to other suppliers will bring with it a number of difficulties. The problem will be not only with transport, but also with whether there will be enough oil on the market without Russia. What will the oil embargo mean for Slovakia and what problems will it have to solve? Druzhba ends, other pipelines need to be found Compared to gas, transporting oil from non-Russian sources is easier for Slovakia. In 2015, the Adria pipeline was expanded and adapted, through which oil can reach Slovakia from Croatian ports. In order for this oil to really flow to us in large quantities, the pipelines will still have to be adapted, but according to sources from Slovnaft, these works could be completed in a relatively short time and could be operational in two months. Oil is already flowing into Slovnaft from this direction, although only in minimal quantities, in 2020 it accounted for about five percent of total consumption. The problem, however, is that we could only cover 70 percent of Hungarian and Slovak consumption with oil from this pipeline. Hungarian consumption is especially important for us, as Slovnaft belongs to the Hungarian MOL and all issues are therefore solved from one headquarters. As Richard Sulík explained at the press conference, another option being considered is deliveries via the Transalpine Pipeline, through which oil could reach us from ports in Italy or France. However, this would be more complicated, as according to Sulík, an agreement would have to be reached with Germany and France on the relaunch of one section of this pipeline. In addition to deliveries to Slovakia, it is also necessary to complete the filling of material reserves. Half of the capacity is located in the east of the country, while they can only be filled from the east. Therefore, if oil flows to us only from the west, it will not be possible to refill these tanks under current technical conditions. According to Sulík, this would cause half a billion euros in damage. The plan is to adjust the pipelines so that oil can flow into the tanks from the west, but the costs will be around 160 million euros. “We will do it, and the European Union will probably contribute to it, but it will not work from day to day or from year to year,” Sulík stated. Russian oil is unique, it will be difficult to replace it. The raw material as such will come to us, but the problem is that it is difficult to find oil with the same properties as Russian oil. Unlike gas, which is essentially the same from any source, there is great diversity in oil. The one that flows to us from Russia is a mix of so-called heavy oil from deposits in the Urals and light oil from Western Siberia. This mixture contains a larger amount of sulfur and is particularly suitable for the production of diesel. This is the main product of Slovanft. The refinery’s technologies are set up and optimized for this type of oil, and a change in supply will thus require extensive changes in the instruments, their calibration and settings. Well, it won’t be free. Slovnaft has been researching alternatives to the Russian mix for some time, but they still haven’t found anything comparable. The closest seems to be oil from Iran, for which, however, sanctions are also currently being imposed. The refinery is technically able to process other types of oil after some modifications, but this will have implications for the efficiency and functioning of the whole chain. For example, if the proportion of diesel produced decreases, the proportion of gasoline produced increases automatically. But unlike oil, which is scarce in Europe, there is plenty of gasoline, and Europe is already exporting it on a large scale. Will there be enough oil? It would not be without problems, but we would be able to transport black gold to us from other sources and Slovnaft would be able to adapt to another type. However, the question remains whether alternative suppliers would sell us oil. The imposition of an embargo on the world market will almost certainly cause a shock. Russia accounts for only 6.2 percent of the world’s proven oil reserves, but even that makes it the sixth country with the largest reserves. The largest deposits are in Venezuela, but mining there has lagged far behind in recent years. In addition, it is part of the Organization of the Petroleum Exporting Countries (OPEC), which has recently refused to increase production in order to keep market prices at a certain level. The fact is that the OPEC countries not only do not want to significantly increase production, but are currently not meeting the volumes they have agreed on. The situation is also complicated by frequent terrorist attacks on mining fields in Iraq or Saudi Arabia, which also reduces mining. OPEC thus claims that it is not even able to increase production so quickly that it can immediately cover the outage that will occur after the embargo is imposed. Other possible players are Canada, the United States, but also Norway and the United Kingdom, which do not belong to OPEC. In any case, it is clear that there will be great interest in oil on the market and lower supply. Should we prepare for the price increase? Higher demand and lower supply, which will happen after the embargo on Russian oil, logically leads to higher prices. The European Commission wants to prevent this by making the transition gradual, so that the market should gradually adapt to the new conditions. However, according to experts, we can already see that we will not be able to raise the price, and Sulík announced this at yesterday’s press conference. The worst development can be expected in diesel prices. Even today, Europe is unable to produce enough and covers a significant part of its consumption with oil imports from Russia. However, they will end after the embargo is imposed. In addition, domestic production of this product is most likely to decrease. Thanks to its composition, it is possible to produce a larger amount of diesel from Russian oil than from other types. Therefore, even if the same amount of crude oil flows to us, Slovnaft’s production will be lower. The problems with oil have already been felt by the markets and the current prices at the pumps also prove it. Currently, diesel sells for an average of 1.71 euros per liter, which is 50 percent more than in the same period last year. Overall, therefore, we need to prepare for rising prices, not least because the prices of the raw material itself will rise. Transporting oil through pipelines other than Druzhba is more expensive, Slovnaft will have to invest in adapting its systems, and all this will be reflected in final fuel prices. The situation in Slovakia will also affect neighbors Due to the complications explained in Brussels, Slovakia is struggling to have a three-year transition period during which we will make all the necessary adjustments. However, the Commission only mentions a one-year exception in the proposal. However, the Ministry of Economy argues that not only Slovakia but the entire Central European region would feel the negative consequences. Slovnaft also exports its products to neighboring countries. In 2020, the Slovak refinery processed 5.6 million tons of crude oil, with more than 95 percent coming from Russia. However, not all products remained in Slovakia. As for motor fuels, which make up the majority of products, only 43 percent remained in Slovakia, the rest went to export. However, according to the daily Politico, some European diplomats consider the Slovak position only as a typical negotiating strategy, where it starts with a high demand in order to achieve the desired result, which is in fact lower. However, negotiations in Brussels are still ongoing and it is still unclear how they will end. However, Slovak officials believe that a three-year transition period will be won. According to the sources of the daily Politico, the European Commission would like to have a new package of sanctions ready on Monday. However, some diplomats are more optimistic and believe that member countries will agree by the end of this week.