Robert Amsterdam

Friendship Pipeline Creates More Enemies

By Tom Nicholls

Russia’s reputation for reliability as a energy supplier to Europe has taken another battering. The country's second largest oil producer, Lukoil has significantly reduced oil flows to German refineries, reminding EU policymakers – as if they needed it – of the importance of diversifying energy supplies away from Russia.

In July and August, Lukoil cut oil supplies to Germany, through the Druzhba pipeline, by a third. So far, it has not said why, although an explanation is expected this week.

The Druzbha pipeline: not as busy as it used to be

Top of the pile of conspiracy theories is that the company – whose leadership has carefully shaped a corporate strategy that fits with the Kremlin’s strategic goals – is trying to bully its way to an equity share of European refineries or to extract higher prices for crude oil from Germany.

Lukoil has, in the past, expressed an interest in buying shares in European refineries to complement downstream holdings in Bulgaria, Romania and Ukraine. In addition, Russia has plenty of recent form for threatening to withhold energy supplies to advance strategic and commercial aims. And this is not the first time Europe has been affected.

Gazprom briefly shut off gas supplies to Ukraine in January 2006 in a dispute over prices, causing pressure to drop in transit pipelines feeding Europe. A year later, Russian oil supplies to Europe through the 1.2 million barrels a day Druzhba pipeline were briefly disrupted after a trade dispute between Russia and Belarus. Druzhba accounts for a fifth of Germany’s crude supplies and a third of Russia’s exports to Europe.

During the Belarus crisis, as now, Germany has been able to source crude from elsewhere to make up the deficit from Russia. But the latest events will have done nothing to stem the creeping tide of suspicion about Russia’s reliability as an energy supplier.

Additionally, Lukoil’s actions have been compared to the sudden stoppage in 2006 of pipeline supplies to the Lithuanian oil refiner Mazeikiu Nafta (Transneft blamed a pipeline leak) after Poland’s PKN Orlen bought the plant – beating off competition from Russian companies – from bankrupt Yukos.

The likeliest explanation, though, is that privately run Lukoil is trying to extract better terms from Sunimex, Germany's monopoly importer of Russian crude, in an effort to improve margins, with which it has been dissatisfied for several months.

Yet, whatever the reason, the emotive questions of Europe’s energy security and Russia’s reliability as a supplier are centre stage once again. The next question is whether Brussels and European energy companies will be able to devise a strategy to cope with it.