Iran, Venezuela, Libya. The threats to global oil supplies are well known, reading like a laundry list of the world’s hotspots afflicted by sanctions, strife, and civil war. But over the past week another risk has emerged, that does not trip so readily off the tongue of geopolitical analysts: organic chloride contamination. Russia’s Druzhba pipeline, one of the main conduits from the world’s second largest oil exporter to Europe, has been crippled by the glitch since last week and traders are increasingly fretting that it could lead to long delays to supplies from the country. Partly as a result, the price of crude has held above $70 a barrel.
The problem, which has seemingly been caused by a failure to remove the highly corrosive compounds from Urals crude before loading it into the pipeline, makes the oil unusable for refineries and looks increasingly like it will take a significant amount of time and effort to rectify. In the process, it has caused a big embarrassment for Russia and tarnished its image as a reliable supplier of crude. This is at a time when the oil market has already been tightened dramatically by US sanctions on Iran and Venezuela, while violence in Libya has put that country’s output at risk.
Energy Aspects, a consultancy, this week warned that the scale of the problem may not be fully appreciated by the market and said there was a real risk that Russian oil companies might need to lower production while the contamination problem was addressed. A portion of Russian crude that would normally be exported by sea is also likely to be diverted, to try to clean up the mess by diluting contaminated crude already in the pipeline. That means in the coming weeks there is likely to be a scramble among refineries in Europe and further afield that are normally reliant on Russian supplies.
“The Urals contamination issue in Europe is now unprecedented,” said Energy Aspects. “But the scale of the potential knock-on waterborne supply loss continues to be widely underestimated in an already tight market.” So far the impact on oil prices has, however, been relatively limited. The Russian issue helped boost prices to a high for the year above $75 a barrel last week, alongside the US decision to remove sanction waivers from some of Iran ‘s biggest customers.