"Turkmen blend" and why it is difficult for the EU to part with Russian oil

The European Commission on Wednesday proposed a phased embargo on Russian oil, but even if approved by member states, it could be difficult to implement.

There are at least two reasons for this – Europe’s complex distribution network and the challenges of tracking crude oil after it has been blended or refined.

Terms such as “Turkmen blend” and “Latvian mix” have already emerged to describe how Russia – following the example of Iran and Venezuela under sanctions – can disguise its oil by mixing it with other varieties.

EU ambassadors have so far failed to agree on exactly what the sanctions should look like, with Hungary and Slovakia likely to receive exceptions by the end of next year (in whole or part), and Bulgaria and the Czech Republic said today they would apply for such a mechanism.
OPEC exporting countries do not have enough spare capacity to fill the gap that would be opened by the oil embargo, said Mohamed Barkindo, secretary-general of the group. The loss of Russian exports of more than 7 million barrels a day will be felt strongly in the energy markets, he added. Barkindo has been issuing warnings since mid-April.

The plan, presented by Ursula von der Leyen, will enter into force – if approved by the Member States – in six months for crude oil and eight months for diesel and other petroleum products. But the separation will be complicated. “Dnevnik” summarizes what several sources explained why.

How severe will the sanctions be?

According to the proposal, Hungary and Slovakia will be given a longer period – until the end of 2023 – to adapt to the embargo. It also means that EU countries will still be able to buy Russian oil through Hungary and Slovakia unless the plan is refined to prevent both countries from buying more oil than they need.

Can Russian oil end up in Europe after the embargo?

European countries may continue to buy Russian oil from other third countries without being aware of their origin. Oil can usually be traced back to its origin based on its chemical composition (sulfur content and density, for example). However, some buyers have been deceived in the past with fake documents hiding the origin of the cargo from countries under sanctions, including Iran and Venezuela, according to industry sources.

This becomes more difficult if the raw material is mixed with other refinery raw materials, and almost impossible once it is processed into standard products such as petrol, diesel, or kerosene.

Who is trying to gradually reduce or stop supplies?

At least 26 major European refineries and trading companies have stopped spot purchases or intend to phase out total imports of 2.1 million barrels per day (BPD) from Russian imports, according to JP Morgan.

European companies, including Shell, TotalEnergies, Repsol, and BP, no longer buy any refined products with Russian content. And BP’s contracts state that any deal with a seller that violates its policy will be invalid, according to trade information detailed by Platts.

Several shipping companies are also seeking assurances that the cargo is not of Russian origin or that there is no Russian interest behind it and that it was not transferred from a ship with Russian connections, according to documents seen by Reuters.

Why is it so difficult to track shipments of Russian oil?

Even with all these documents, there is no guarantee that any traces of Russian hydrocarbons will be removed once the shipment enters the EU’s main oil import center. It is the Amsterdam-Rotterdam-Antwerp (ARA) complex, consisting of eight ports located in two countries, 96 terminals, and 6,300 storage tanks owned by hundreds of international oil companies.

“Some products processed in European refineries will continue to contain Russian oil,” said Shell. “At the same time, many products such as diesel fuel are usually mixed – which means that some of the liquids mixed in the pipes and tanks that supply the entire industry will come from Russia.”

In the ARA, mixed Russian oil could appear in customs data simply as fuel from the Netherlands, said Kuneit Kazokoglu, head of analysis at the FGE. “I think a lot of European countries will point to imports from the Netherlands to hide the origin of Russian products,” he said.

Where does ARA oil go?

The fuel can be re-exported to other regions and countries. It can go by barge to other terminals within the same port or head upstream on the Rhine to Switzerland, France, and Germany. This could hide the origin of the fuel, traders said.

From ARA’s distribution center, oil products can be distributed through NATO’s Central European Pipeline System (CEPS), which connects six seaports and 11 refineries across the continent, three railways, 16 truckloads, and six international airports.

“If it is not a Russian owner, then apart from the certificate of origin – but even it can be changed – it is difficult for the (warehouse) terminal to identify the origin of the products,” said Krien van Beek, a broker at ODIN-RVB Tank Storage Solutions in Rotterdam.

What are companies doing to keep their promises?

Buyers are increasingly looking for breakdowns on the origins of mixed oil coming from landfills, industry sources said. This helps them decide for themselves whether they can accept it. However, fully traceable origin documentation is not always readily available within a reasonable period before the transaction takes place.

Some shipping charter operators provide a certificate that describes where the fuel was produced or processed. Although the customs authorities of a country have access to this data with imported goods, the documents are considered confidential.

Earlier, Shell classified goods of Russian origin as those with 50% or more of fuel produced in Russia. But the company recently tightened restrictions on buying Russian oil, saying it would no longer accept refined products with Russian content, including blended fuels, under clauses in its trade agreements. However, the restriction only applies to platforms where companies are allowed to insert their clauses and would exclude the gas contract on the ICE major stock exchange, said a source familiar with the matter.

What is the “Turkmen Blend”?

In the first three weeks of April, oil from an “unknown destination” loaded in Russia jumped from almost zero before the invasion to more than 11.1 million barrels, according to an analysis by the Wall Street Journal of data from TankerTrackers.com. Analysts explain to the publication that this is a known scheme for circumventing sanctions as cargo is mixed with raw materials of different origins onboard large tankers waiting in international waters. The markets called the result a “Turkmen blend”. Some traders continue to believe that a diesel blend, for example, containing up to 49% Russian diesel, would be considered a non-Russian product, three trade sources told Reuters.

Reuters and Bloomberg quoted their sources as saying that Brussels had proposed banning European ships and companies from providing services related to the transportation of Russian fuel, incl. insurance. This is an important point, Bloomberg insists, as 95% of tanker insurance contracts go through the International Mutual Insurance Club Association Group in London.

This part of the package of sanctions from the European Commission wants to enter into force a month after their approval. But countries such as Greece, Cyprus, and Malta were against it, according to Reuters and Bloomberg. For these EU countries, shipping is an essential part of local economies, and their governments believe that it will only allow competitors to take advantage.

What would be the effect on Europe…

The European Union imported 2.2 million barrels per day (BPD) of crude oil and 1.2 million barrels per day of pre-war refined petroleum products in Ukraine, according to the International Energy Agency (IEA).

… for cars

Charging the car will probably become more expensive. Europe imports not only crude oil but also diesel for freight and passenger vehicles. Importing diesel from afar means higher transport costs and correspondingly higher prices at the gas station. In Germany, for example, 74% of pre-war diesel imports came from Russia, according to FGE Energy.

… for refineries

Russian oil accounts for one-fifth of Europe’s refined oil, according to the IEA. Some refineries producing petrol to jet fuel – Germany’s PCK Schwedt and Leuna, as well as refineries in the Czech Republic, Hungary, Slovakia, and Poland – are supplied via the Druzhba pipeline. Deliveries through this pipeline have fluctuated sharply in recent years, reaching 1.5 million barrels per day and declining to about 0.8 million barrels per day in recent months.

Poland can switch to maritime deliveries from places like Saudi Arabia or Norway through the Baltic port of Gdansk.
PCK Schwedt, which supplies cars and airports in Berlin and the region, and Leuna near Leipzig can get some oil from the German Baltic seaport of Rostock – a much smaller crude oil hub than Gdansk – but not enough to run at full capacity. capacity.

Poland, which is trying to replace all Russian crude oil in its refineries, may direct some of the oil arriving in Gdansk to the two German refineries, but details have not yet been determined. Changing these supply routes is likely to mean higher raw material prices for two of Germany’s largest refineries, leading to higher end-user prices.

For all refineries in landlocked countries, full compensation for Druzhba oil will be a huge task. It is likely to include more expensive and less efficient transport by truck, rail, river, or future extension of other pipelines such as TAL, passing from the Mediterranean through Austria to Germany. Such an extension still needs approval from the authorities in southern Germany.
Slovakia, Bulgaria, and the Czech Republic are seeking exceptions to the upcoming ban to prioritize such alternatives, while Hungary does not support plans for fear of its energy security.

Where can the replacement come from

Refineries are usually set up to run on a certain type of crude oil, such as the first-class Russian Urals. Other crude oil from Norway, the Middle East, the United States, or West Africa may mix or refine refineries but may change refinery production and cost more money in addition to higher transport costs.

Traditional consumers of Russian oil will also have to compete not only with each other for alternative oil imports, but also with existing customers in Asia.

Less refined products?

The oil refinery cannot simply be shut down, as restarting is expensive and complicated. Globally, refining capacity is shrinking as the world tries to reduce its dependence on petroleum-based fuels. Morgan Stanley estimates that capacity has shrunk by as much as 2.7 million BPD since the start of the pandemic.

With the resumption of economic growth after the end of lockouts, refining margins have skyrocketed, which means that refineries will try to make as much fuel as possible on the market. However, refineries that have the most difficult supply problems are likely to receive lower margins as the price of their raw material will rise, so operators may delay processing.

Countries and refineries also usually have storage tanks that they can open in the event of short-term outages.

Transitional period?

EU countries have until the end of the year to prepare for the outage and are likely to fill warehouses in areas close to refineries, which could run into difficulties.

This would lead to more serious disruptions if Russia were the first to cut off supplies. Germany has warned of a recession without Russian oil and gas.

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