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Western oil majors Total and Eni have suspended payments to the Russian companies that sold them contaminated crude via the Druzhba pipeline, in a new controversy in what trading sources described to Reuters as the “biggest Russian oil supply disruption ever.”
Last month, Russia halted supplies via the Druzhba oil pipeline to several European countries due to a contamination issue, which the Russians say was deliberate.
The oil was contaminated with organic chlorine, a substance used in oil production to boost output but dangerous in high amounts for refining equipment. The amounts of the chemical were found to be at levels much higher than the maximum allowable amount.
According to Russia’s energy ministry, normal deliveries via the pipeline are expected to resume in the second half of May.
Russian pipeline operator Transneft will compensate its customers for the losses they have sustained due to the contaminated crude oil, Russian Deputy Prime Minister Dmitry Kozak said last week, noting that refiners must first prove their damage and loss in order to claim compensation.
The supplies via the Druzhba pipeline are made according to Russian law, under which buyers first pay, and if they are not satisfied with the quality of the crude, they can claim damages and compensations.
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According to Reuters’ trading sources, western companies, including Eni and Total, have informed their Russian suppliers, including Rosneft, that they won’t be paying for the contaminated oil payments that were due on May 15. The western buyers are ready to pay when the damages become clear and when supplies of clean oil restart, Reuters sources say.
The Russian oil supply contamination has disrupted the refinery operations of some companies. Total, for example, halted last week some of the units at its 230,000-bpd Leuna refinery in Germany to conduct technical checks. On Thursday, Total declared force majeure on shipments of refined oil products from the Leuna refinery.
Meanwhile, commodity trading houses Vitol and Unipec are said to be trying to sell some of the contaminated Russian crude refused by European refiners to Asian buyers. Chinese independent refiners are the main target buyers, but no one is sure how much the crude should cost, how much it would cost to dilute it with clean oil to reduce the chlorine levels, and if it can be refined at all, trading sources tell Reuters.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.