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Gefira

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The Gefira Foundation is a part of the Pan-European think-tank focused on current geopolitical and financial instabilities.Gefira provides in-depth and comprehensive analysis of and valuable insight…

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Oil Wars: Can Russia Hold Off Middle Eastern Oil In Eastern Europe

pipelines

Russia still has supremacy over Central and Eastern Europe, especially over its crude oil market. However, Middle-East countries like Saudi Arabia, Iraq and Iran, have recently entered this traditional Russian trade because every oil producing country is searching for new markets and bigger market share regardless of the price.

Last year, oil from the Saudi Kingdom arrived in Poland for the first time, and in August this year Iranian crude came back to the Polish market after being absent for a couple of years. Hungary, the second biggest export destination for Russian oil in the region, has increased the import of fuel from Iraqi Kurdistan, while Ukraine, the greatest adversary of Russia, is trying to become the gate to Eastern and Central Europe for National Iranian Oil Company. It appears that the energy supply security has increased in the region, but will oil from the Middle East be a real secure alternative to the Russian Urals oil?

This summer Iranians shipped 2 million barrels of oil to Poland. The August arrival of the supertanker “Atlantas” to the Polish port in Gda?sk was greeted as a political game-changer, just like the April’s opening of the new oil Terminal Naftowy PERN. Polish and German refineries depend on Russian oil coming mainly through a pipeline from Russia. The Naftowy PERN Gda?sk Terminal allows Poland to import oil from other countries if oil supplies from Russia are disrupted.

The diversification of energy supply sources has always been the main topic in the political discourse in Central-Eastern Europe and the arrival of oil from the Middle-East to Poland is important news. However, there are some conditions without which the import of Saudi or Iranian oil could not be possible; that may not last forever.

First, the oil price is still low, as oil in storage is at record highs, every producer is trying to dump as much oil as possible into the market. Iranians are said to sell their crude at half the price of their competitors in Saudi Arabia and Iraq. Second, the cost of shipping is extremely low nowadays. If shipping prices increase and the export of crude oil from Iran or other Middle-East countries to the Baltic Sea stop being profitable, Poland will still be dependent on Russian oil supply.

Even under current favorable market conditions, Central and Eastern Europe energy diversification is hard to achieve: The National Iranian Oil Company has already rejected Hungary’s MOL refinery request to deliver light crude oil, as “Iran is not ready (…) at the moment.” Related: Yemeni Rebels Claim Unconfirmed Second Strike On Saudi Aramco Oil Facilities

The political situation in the Middle East is still escalating. Energy exposure to Iraq and Iran adds new uncertainties to Poland’s energy security.

The transport of oil by sea has always been riskier than by pipeline. Even if Ukraine and Iran reach an agreement regarding the usage of the Ukrainian pipeline infrastructure, the oil still has to be shipped to the port in Odessa through Bosphorus (Turkey) and the Strait of Hormuz, which remains a flashpoint between the U.S. and Iran. Is it reasonable to claim that the supply by sea from the “unstable” Middle East is more “secure” than delivery by the Druzhba pipeline from an unfriendly but still business-oriented Russia? Maybe for Ukraine…

The Baltic Sea has its limits, too. The supply of 2 million barrels of Iranian oil to Gdansk is enough for only 3 to 4 days of Polish oil consumption. Two million barrels is a massive sea delivery for Poland. However, to achieve this, the “Atlantas” had to travel 22 thousand kilometres (half of the length of the equator), going around the Horn of Africa. Because of natural conditions in the Danish straits, 700 thousand barrels had to be reloaded into a second tanker “Calidy”. Therefore, a permanent sea bound supply of large volumes of crude to Gdansk seems a mirage.

However, Iranian oil in Gda?sk is a signal to Russia, and they should be concerned, as they were last year when Poland received its first oil supply from Saudi Arabia. Oil exports make up 50 percent of the Russian federal budget, and Poland is the fifth biggest destination for Russian oil, after China, Germany, the Netherlands and Belarus. Rosneft has long-term contracts for the oil supply with Polish refineries PKN Orlen and Lotos S.A., but Saudi Aramco signed the first ever long-term deal with PKN Orlen for oil delivery to Poland, Czech Republic and Lithuania. Before the signing of this contract last April, Saudis and Poles had only arranged spot contracts. Related: The Magic Number For Oil Bulls Remains In Sight

The cooperation with Saudi Aramco has a better prospect than the agreement with Iran for geopolitical reasons: the government in Warsaw may prefer to support the U.S. ally House of Saud or may be forced to do so. Importing oil from the Middle East is important for Central-Eastern Europe because it provides an alternative to the Urals and enhances the negotiating position with Russia. But in reality, the Russian share in oil delivery to these countries will drop by only few percent.

By GEFIRA

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