Nov 24, 2022
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Kyiv again sells “Druzhba” – and as always at a loss

Kyiv again sells


From 2023, Ukraine plans to increase the fee for the transit of Russian oil through the Druzhba pipeline to Eastern Europe. Bloomberg writes about this with reference to a letter from Ukrtransnafta to the Russian company Transneft, which is at the disposal of the agency.

“The ongoing destruction of the Ukrainian energy infrastructure has led to a significant shortage of electricity, an increase in its cost, a shortage of fuel, spare parts,” the company said in a letter.

In addition, the costs of organizing safe working conditions for the personnel of a Ukrainian company and protecting its facilities have increased.

Ukrtransnafta said it would raise tariffs for transporting crude oil to Hungary and Slovakia by 2.10 euros per tonne to 13.60 euros ($13.90) from January 1. Since April 1, the company has already raised the tariff, resulting in an overall annualized increase of 51%.

The agency also recalls that on November 15, Ukraine suspended the pumping of oil through the pipeline to Eastern Europe for a day due to damage to the transformer station as a result of a Russian missile attack.

Transneft has confirmed receipt of the letter from the Ukrainian company and intends to discuss it with the Russian government.

“We are studying these proposals, preparing relevant messages to the state bodies of Russia – the FAS and the Ministry of Energy,” an adviser to the president of the Russian company told RIA Novosti Igor Demin.

The southern section of the Druzhba oil pipeline also passes through Ukraine. Deliveries to Hungary, Slovakia, the Czech Republic, and Croatia are carried out along this line. In October 2022, Hungary and Serbia agreed to build a pipeline to Serbia, through which Russian oil delivered through the Druzhba could be delivered.

As explained leading expert of the National Energy Security Fund, lecturer at the Financial University under the Government of the Russian Federation Igor Yushkov, formally, Kyiv must coordinate the change in tariffs.

– The formula is such that Transneft pays for pumping, but this tariff is added to the cost of oil. Ultimately, the cost for the buyer increases, and as a result, the buyer will suffer more than the Russian side. Of course, the Ukrainians must coordinate this.

“SP”: – So can then agree and let the Ukrainians deal with the Europeans?

“We can’t just wave the letter, and that’s fine. Because of this, the total cost of Russian oil for Eastern Europe is rising, and our oil is becoming less competitive. In general, it is not clear why the consumer should pay more for transit, because the pipeline is not being modernized, there are no additional costs. Why should they pay then?

Any increase in tariff must be justified. Since April 1, they have raised, saying that this additional money will be used for possible repairs related to hostilities. They had a shutdown in November due to damaged transformers. Why did traffic stop if they collected money from April to November?

We collected a lot – pumping per month is approximately 1 million 100 – 1 million 500 thousand tons of oil. It can be calculated that in total they collected several million dollars. With this money, it was possible to re-create the entire backup power supply system, that is, install industrial generators everywhere, purchase fuel and instantly switch to generator energy when transformers from the general network were damaged. So why was there a transit stop then? Where did the money go? Do these generators exist or not? I doubt there is, since it didn’t work.

The cost of transformers is calculated in thousands of dollars, but not in the millions! And they are still asking for an additional increase in tariffs for the same purposes. That is, it is not clear what they did with that money, they obviously spent it inappropriately, nothing was done for the pipe. But they ask for more money to spend it again, no one knows where?

The problem is that the stated reason for the increase in tariffs does not reflect reality. In reality, money is not spent on what justifies the increase in tariffs. First of all, the Hungarian oil and gas company MOL also needs to move. Obviously, they are afraid of their own politicians, maybe not the Hungarian, but the pan-European reaction, but this cannot continue indefinitely. If now they agree to raise tariffs, then Ukraine will raise them even more. Ukraine understands that it can blackmail the Europeans in this way, collect money from them in ever greater volumes and do nothing at the same time.

“SP”: – What can really do the Hungarians and Europeans in general?

– The Hungarian MOL must somehow control the expenditure of these funds. We see that, for example, in regard to military aid, the Americans and Europeans are proposing to conduct an audit of where the weapons go. The same is true with money for oil transit.

MOL should draw up a system with Ukrtransnafta that will allow them to control where the money received by Ukrainians goes. Not just for shareholders to withdraw through profit, but the amount received in a month or two or six months, the Ukrainians will have to spend on the purchase of certain generators – and the Hungarians will come to check. This is how the work should be arranged if they agree to increase tariffs. This is not just an increase in the profitability of a Ukrainian company, but since an increase in reliability is announced, it is necessary to control how this reliability increases.

“SP”: – But this applies not only to Hungary, but also to other countries. If now these countries do not agree to an increase, what can follow? Ukraine can block transit?

– Actually, yes. They can overlap. First of all, Hungary will suffer, because they practically have nowhere else to get oil from anywhere else and cannot fully load their refinery. Even if the Hungarians find some other oil on the world market, the capacity of the Croatian oil receiving port and the oil pipeline that goes towards Hungary will not be enough to fully load the Hungarian refinery.

Croatia will suffer to a lesser extent, because it imports oil by sea. The Czechs are counting on the fact that they will be able to take oil through Germany – there is a pipe to Rostock. But here is the same question: if the Germans, as they say, refuse to buy oil through the Druzhba pipeline from the new year (although there is now talk that neither the Germans nor the Poles will refuse), then they will have to load their ports completely for their needs, and even Polish Gdansk, to receive oil there, then pump it to the Druzhba oil pipeline on Polish territory and then drive it to Germany. Then there will be nothing left for the Czechs.

The Serbs are also suffering. They are already tense because the European Union has banned the acceptance of Russian oil by sea since December 5th. They expected that they would receive it from Hungary – from there it would come through pipes to Croatia and turn around to Serbia. As long as such oil pipelines exist. In the future, the Serbs wanted to build an oil pipeline directly from Hungary, there is literally about a hundred kilometers, but it turns out that they can get there.

All of Central Europe will have problems.

“SP”: – What can Russia and the Europeans do in this situation?

– First of all, we are waiting for a reaction from the Europeans. They should be active and insist on the justification of tariffs, and not just because the Ukrainians wanted money.

I think that it is expedient for the Europeans to point out to Ukraine that it will also suffer from this. If there is no transit, they will not be able to earn. In addition, there will be a shortage of fuel throughout Central and Eastern Europe, and this will already limit Ukraine’s ability to import fuel. Ukraine has practically no processing left, the Kremenchug Oil Refinery, in particular, suffered during the hostilities. All the fuel they use, they import. And they import from the same countries. If Hungary does not have its own processing, then it will also import, including from neighboring states, which means that Ukraine will get less.

I think that Ukraine should take into account, and the Europeans should convey to it, that if they have a problem with fuel, then Ukraine will also have a shortage, including diesel fuel, which is used for fueling military equipment. So Ukraine is also interested to some extent, so that transit continues.

Kyiv needs to be reminded of this, because some company, in this case Ukrtransnafta, may not see the forest for the trees – they want to earn more and push through such a decision, but it does not notice that other Ukrainians will suffer from this.

“SP”: – The position of Hungary on Ukraine is no secret to anyone. You already mentioned blackmail. Can we regard the demand of Kyiv, first of all, as blackmail, namely us and the Hungarians, who are most interested in this transit?

– Part of the Ukrainian decision can be seen as pressure on the Hungarians – “do not resist Russian sanctions, you must observe all-European discipline, because there are levers of influence on you.” That is, if Hungary thought that it had secured itself when it lobbied for the exclusion of pipeline supplies from the sanctions package, then this is not a guarantee that it will be able to exist normally.

I think that after all, the main reason is banal – to get more money.

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