Germany Seizes Rosneft Refineries, But Doesn’t Solve Its Oil Problem

After taking over a Gazprom subsidiary earlier this year, Germany has now assumed control of Russian Rosneft refining assets in the country in a bid at securing energy independence just over three months before an EU ban on Russian oil goes into effect.  Now, with Russia's oil refinery assets in Germany out of Moscow's hands, a final question lingers: Where will Germany get non-Russian oil to run key refineries?

Over the weekend, Germany moved to seize the local unit of Russian oil major Rosneft PJSC, including three oil refineries as Berlin goes for a radical overhaul of its economy, hoping to control its industrial base and prevent shortages and blackouts this winter. 

"Over the next few months, we'll have to continue to preserve critical infrastructure in order to achieve energy independence," Verena Hubertz, a leading lawmaker for Scholz's Social Democrats, has told Bloomberg.

Rosneft has protested against the seizure calling it illegal and saying it amounts to an expropriation of equity assets in which it had invested €4.6bn in refining capacity. In a company statement, the Russian oil giant says it will "consider all possible measures to protect its shareholders, including legal action".

Together, the three refineries run by Rosneft Germany provide some 12% of the country's total refining capacity, and the PCK Schwedt refinery near Berlin is key. This refinery, on the border with Poland, supplies fuel to the Berlin-Brandenburg region and tensions have been rising over the possibility that the refinery would grind to a halt, its workers laid off. This is a restive region and the German chancellor is keen to avoid the consequences of a workers' lament here.

Seizing Rosneft's assets and placing the refinery under state control is a political move that staves off a shutdown and layoffs, and prevents possible unrest. However, it does not resolve a key issue: What will replace the Russian oil refined here?

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The oil that feeds these refineries comes from the Druzhba pipeline, which transports Russian oil to Germany via Ukraine. The refineries are set up to refine this oil, specifically. And while the Russian oil that goes through Druzhba is not included in the EU's oil embargo beginning on December 5th, Germany has vowed to stop importing that oil regardless. Poland, too. 

Replacing it will not be easy. A potential work-around is to get oil for this key refinery from the Baltic or from Poland, instead of through Druzhba. What Chancellor Olaf Scholz has accomplished with his seizure of Russian assets is to render one option for replacing Russian oil more palatable for Poland. It is possible, based on Polish-German talks, for Poland's Gdansk region to use a pipeline link to feed into the Druzhba with non-Russian oil, but the sticking point for Warsaw was feeding non-Russian gas into a refinery owned by Rosneft. That is no longer an issue. 

So where would that non-Russian oil come from? Potentially, the United States or Kazakhstan, though the latter is also complicated. Kazakhstan ships most of its oil through Russian territory, which gives Moscow another avenue of leverage over Europe. And, indeed, it has used this leverage recently. The U.S., on the other hand, is already set to overtake Russia as the largest crude supplier to Europe-which will be cemented with the implementation of the EU ban on December 5th. 

The other complication is the nature of the oil itself. Without expensive modifications, the Schwedt refinery cannot operate on any other oil. To that end, the German chancellor has announced nearly 1 billion euros in investment. 

What about natural gas?

Alongside the seizure of the Rosneft unit, Chancellor Olaf Scholz's administration says it's in advanced talks to take over Uniper SE and two other major gas importers. A decision will have to be made urgently considering that Uniper is losing 100 million euros ($99.7 million) a day as it struggles to replace Russian gas as well as maintain deliveries to local utilities and manufacturers. 

Three weeks ago, Europe's natural gas prices plunged sharply on news that Germany's gas stockpiles were running ahead of schedule. Benchmark Dutch front-month futures crashed 21% in a single day, reversing the previous week's 40% jump after Germany's Economy Minister Robert Habeck revealed that the country's gas stores are filling up fast and are on target to meet the October objective of 85% full.

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The plunge has brought some relief after a furious rally, though futures are still trading almost six times higher than a year ago. Europe is on the brink of a recession, with inflation running at the highest in decades in several countries. European Governments have collectively set aside some 280 billion euros ($278 billion) in relief packages. 

There seems to be no decisive consensus on what is in store for Germany this winter. 

Some feel the fundamental picture still looks bleak for Germany even with full storage sites, with the country in danger of not being able to go through the winter if Russia decides to halt flows.

Goldman Sachs has told Barrons that Europe has managed to solve its gas crisis ahead of winter and that prices could drop by half in the next six months. This is set to curb oil demand since some operators have begun switching from gas to oil generation due to high natural gas prices.  "The EU already surpassed its September 1 interim filling target in early July and is still on pace to reach the November 1 target," Jacob Mandel, senior associate for commodities at Aurora Energy Research, has told Reuters.

Analysts at Standard Chartered Plc are also rather upbeat, saying that President Vladimir Putin's gas weapon will be effectively blunted by the inventory build, with Europe set to go through winter "comfortably" without Russian gas.

However, many other analysts are less sanguine and expect prices to remain high into 2023 before moderating slightly by year end. Gas futures for Q1 2023 are trading at 199.50 euros ($199.05) per megawatt hour.

Europe is paying a heavy price for its gas: the cost of replenishing natural gas stocks across the continent is estimated at over 50 billion euros ($51 billion), 10 times more than the historical average for filling up tanks ahead of winter.

By Alex Kimani for Oilprice.com

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