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Prima / Vladimir SOCOR / RUSSIAN OIL PIPELINE SHUTOFF TO LITHUANIA: FAR-REACHING IMPLICATIONS
06.06.2007
RUSSIAN OIL PIPELINE SHUTOFF TO LITHUANIA: FAR-REACHING IMPLICATIONS
by Vladimir Socor
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Moscow’s closure of the oil pipeline to Lithuania in July 2006 “looked, sounded, and felt” (see EDM, August 3, 18, 2006) like political and economic retaliation against the privatization of Lithuania’s Mazeikiai refinery by Poland’s PKN Orlen, which had prevented a Russian takeover. The Russian government cited the need for “emergency repairs” on the Russian stretch of that line, a northbound spur from the westbound Druzhba pipeline. However, Russia failed to carry out any repairs ever since and ignored Lithuania’s and the European Union’s requests for information.

The cutoff has now become all but official. On May 31 and June 1, Russia’s Industry and Energy Minister Viktor Khristenko told the press that repairing the Russian pipeline stretch for Lithuania would be too complicated and not make sense (Interfax, RIA-Novosti, May 31, June 1). Moreover, he stated, the oil volumes that were previously supplied to Lithuania through that line would be switched to Russia’s port of Primorsk, as part of the large-scale project to redirect Russian oil from the Druzhba pipeline toward the new Baltic Pipeline System (BPS-2), which runs on Russian territory to Primorsk

This scenario adversely affects Lithuania, Poland, and potentially other countries downstream the Druzhba pipeline that runs from Russia and Belarus to central Europe.
While Lithuanian and Polish refineries can still receive Russian crude oil from Primorsk, the transport by tanker adds to the price of crude, cuts into refineries’ income and profit margins, affects their share values, and reduces their tax contributions to state budgets. In his news conference, Khristenko tersely disclaimed any responsibility on the part of the Russian government for those consequences or indeed for exporting oil through the Druzhba pipeline, once it has decided to redirect that oil to Primorsk. The Russian stretch of the pipeline to Lithuania as well as BPS are under the jurisdiction of pipeline monopoly Transneft.

While seemingly unassailable legally, Moscow’s stance seems to bear out the recent forecast of Moscow-based, Russia-friendly investment expert Eric Kraus: “Russia would have no need to shower the West with nuclear missiles to create Armageddon. A simple announcement that the Transneft export pipeline would be shut down for ‘emergency repairs,’ but would be working again, soon, sometime, hopefully, [such an announcement] would send oil prices spiraling above $200 [per barrel], creating financial chaos. Yes, this is politique fiction, but it is meant to underscore the simple fact that the West shall be forced to seek an accommodation with Russia” (Truth and Beauty and Russian Finance, nikitskyfund.com, Johnson’s Russia List # 125, June 3).

Russia’s decision to redirect the lion’s share of oil from the Druzhba pipeline into BPS-2 is not just a move to bypass Belarus. It is also a move to bypass Poland, which receives most of its crude oil from a Druzhba spur that enters Poland from Belarus. The planned phase-out of the Druzhba system affects eight countries, including six EU members.
The Druzhba system ramifies from Belarus into Lithuania, Poland, and Ukraine; further spurs run from Ukraine into Hungary and Slovakia; and from there into the Czech Republic and finally into eastern lands of Germany. Except for Germany, all the EU countries along this route receive most of their crude oil supplies through the Druzhba system.  The planned phase-out may enable Russia to try playing off some consumers against others, in a situation of limited and decreasing supplies through the Druzhba system.
After Lithuania, Poland is the country directly affected and first to react. Visiting on June 1 the Warsaw headquarters of PKN Orlen, Polish Prime Minister Jaroslaw Kaczynski and his Lithuanian counterpart, Gediminas Kirkilas, jointly remarked that Russia’s apparent intention to phase out oil deliveries through the Druzhba pipeline is motivated politically, not economically. “If someone thinks that he is able to force us to concessions in other areas, then he is wrong,” Kaczynski remarked (PAP, BNS, June 1). According to Polish Economy Minister Piotr Wozniak, a possible phase-out of oil deliveries through the Druzhba system would be “very disturbing” but “not a tragedy,” as Poland’s two largest refineries -- PKN Orlen and Lotos -- can receive crude oil transported by sea, though that mode of delivery is more expensive than pipeline deliveries (PAP, June 4).

Poland, with Lithuanian support, proposes that the European Union write into any new partnership and cooperation agreement with Russia a clause on the inadmissibility of unilateral decisions on energy deliveries. Polish parliamentary deputies propose writing an energy solidarity clause into any new European Constitution, as a safeguard for all EU countries against the use of energy deliveries as political instruments (PAP, June 4).

The Russian government’s decision-making process on building the BPS-2 system is moving forward rapidly. At the end of May, the government tasked the state construction trust Rosstroy to proceed with the engineering work. Transneft is in overall charge of the construction project. According to Khristenko, citing precedent cases, a simple decision by the government would suffice to authorize the financing for BPS-2 construction (Interfax, June 1).

President Vladimir Putin told members of the government in front of television cameras on June 4 to proceed with expanding the port of Primorsk -- the Russian Baltic terminal of the BPS-1 and BPS-2 systems -- but also to ensure balanced development of the nearby port, Ust-Luga, for oil and liquefied-gas exports (Interfax, June 4).
The planned expansion of loading capacity to 125 or 150 million tons of oil annually is the same figure as the combined throughput capacity of the BPS-1 and planned BPS-2 systems. This could reduce the flow through the Druzhba system to a trickle.
While Moscow claims that BPS-2 is just a Belarus-bypass project, this is in fact a project to bypass the new member countries of the EU and a test of European solidarity. While new EU member countries would pay an economic price, the Nordic EU countries of Finland, Sweden, and Denmark would pay a different kind of price in terms of severe hazards to environment and navigation in the highly sensitive Baltic Sea (see EDM, February 6, March 7, April 19, May 24).

 
Prima / Vladimir SOCOR / RUSSIAN OIL PIPELINE SHUTOFF TO LITHUANIA: FAR-REACHING IMPLICATIONS
 
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