CZECH REPUBLIC OFFSETTING RUSSIAN OIL SUPPLY CUTS FROM ALTERNATIVE SOURCES

The Czech Republic is successfully weathering, thus far, the deep cut in Russian oil deliveries for the month of July. Despite the suddenness of the cut—Moscow announced it only after the fact—the Czech Republic was able to switch almost instantly to an alternative source of supply. Exceptionally among former Soviet-ruled countries, the Czech Republic has easy access to alternative sources of oil supply, thanks to a pipeline connection with Germany.

The country is 100 percent dependent on imported oil. Some 70 percent of it comes from Russia, via Ukraine and Slovakia, through the Druzhba pipeline system. The Czech Republic imports 5.5 million tons annually from that direction and another 2.2 million tons per year through the Trans Alpine Pipeline (TAL), which carries Middle Eastern oil from Trieste (Italy) via Austria to the refining and storage center at Ingolstadt in Bavaria. The multinationally owned TAL has a continuation line that runs from Ingolstadt to the Kralupy and Litvinov refineries in the Czech Republic.

That continuation line, IKL, with a capacity of up to 10 million tons annually, was built by the Czech state in the early-to-mid-1990s as part of a national policy to diversify suppliers. In addition to the regular imports, the government also made arrangements for contingency deliveries through the TAL and IKL pipelines. The Czech state oil transport and storage company, MERO, owns and operates the IKL and Druzhba pipelines on Czech territory, as well as the Czech oil reserves for 95 days of usage amounting to almost 1 million tons (CTK, Hospodarske Noviny, July 22). In the event of supply shortfalls from Russia, the Czech Republic can activate the agreements for increased deliveries through the TAL and IKL pipelines.

Those alternative deliveries are now fully offsetting the volumes of crude oil withheld by Russian suppliers. There are no reported shortages of fuel and other oil products and no price increases on the Czech market as a result of the Russian supply cut. The Kralupy and Litvinov refineries are operating normally and negotiating for crude supplies from Trieste via TAL-IKL for August. The crude arriving through that route is considerably more expensive, however, compared to the Russian crude (Hospodarske Noviny, July 25).

The Ceska Rafinerska consortium owns the Kralupy and Litvinov refineries. Shareholders are the Polish PKN Orlen (via its fully owned Unipetrol group) with 51 percent, Italy’s ENI-Agip with 32.5 percent, and Royal Dutch Shell with 16.5 percent. ENI and Shell are also among the shareholders of the TAL pipeline. The Czech Republic is in talks on the possible purchase of a stake in the TAL pipeline (CTK, July 17).

PKN Orlen faces a somewhat analogous situation at the Mazeikiai refinery in Lithuania, which the Polish company privatized in 2006. Russia promptly terminated oil deliveries to Lithuania by the northern branch of the Druzhba pipeline in 2006. The move forced that refinery to rely on oil delivered by sea tankers from Russia and from other sources. Those supplies are more expensive, compared to the pipeline-delivered Russian oil. Evidently, Moscow wants to erode PKN Orlen’s profit margins—and, in the process, the host country’s tax revenue—in Lithuania and possibly also in the Czech Republic, if the supply cuts persist in August there.

Ceska Rafinerska’s plants were expecting to receive a first batch of Azerbaijani oil in July or August, to be followed by regular deliveries of Caspian oil via the Odessa-Brody pipeline. Although relatively small in volume, those deliveries would have added a further element of diversification to the Czech Republic’s oil supply picture. Ukraine and Poland were also expecting to receive a share of those Caspian oil volumes this summer, enabling them as well to reduce dependence on Russian oil.

Using the Odessa-Brody line in the originally intended direction, south-north, the oil was to be pumped at Brody directly into the Druzhba pipeline’s Ukrainian section and onward through the Slovak section to the Czech Republic. Decisions to that effect were officially announced at the Kyiv energy summit in May of this year, with implementation due to begin within three months. Differences between the Ukrainian president and government on the business terms of this project, however, are delaying its implementation (see EDM, May 23, July 25). Meanwhile, the Russian company Tatneft, which withholds part of the pre-contracted supplies to Ceska Rafinerska for declared commercial reasons, has been involved in litigation over Ukraine’s Kremenchug refinery since 2007 and has stopped crude oil supplies through the Druzhba pipeline to that customer also.

Russian Prime Minister Vladimir Putin has supposedly instructed his government to ensure the resumption of full supplies of oil to Czech Republic refineries. Putin’s July 21 televised assurance notwithstanding, Czech authorities have yet to receive any information from Moscow on the matter (Pravo, July 26, 28). Meanwhile, the situation vindicates Prague’s decision 15 years ago to reduce dependence on Russia through diversification of supplies (see EDM, July 15, 28).