Compensation for tainted Russian oil to be decided company by company

ST PETERSBURG: Compensation for the tainted Russian oil supplied to Europe earlier this year via the Druzhba pipeline and in cargoes will be decided company by company, Russia's Deputy Energy Minister Pavel Sorokin told Reuters.

Russia halted some oil supplies in April after excessive levels of organic chloride were found in the million barrel-per-day Druzhba pipeline that crosses Belarus and serves customers as far west as Germany.

Russian oil pipeline monopoly Transneft put the volume of oil affected at 3 million tonnes, or nearly 22 million barrels.

France's Total and Russia's Lukoil have both said compensation per barrel of tainted oil should stand at around $15.

Belarus has said the volume of contaminated crude could be as high as 5 million tonnes, equivalent to a month's exports via Druzhba of about 1.2 million barrels a day and worth $2.3 billion at current prices. However, not all that will be subject to compensation.

Asked about compensation, Sorokin, who is holding talks on the contamination on behalf of the Russian energy ministry, said: "Each (company) has its own situation. There are different schemes of work for oil supplied by the pipeline and in cargoes."

"This means different approaches and, as a result, completely different costs of eliminating the consequences." He said his team had suggested an algorithm for calculating costs.

The compensation will take into account the time needed to mix tainted oil with clean volumes to keep chloride levels within allowed limits, as well as the cost of storage, freight costs, and other expenses, Sorokin said.

He said no foreign buyers of Russian oil have yet calculated the exact amount of compensation they are seeking, though talks were expected to conclude in the near future.

"Russia is and Russia will be a reliable supplier," Sorokin said. "Compensation will be fair."

HOW TO PROCESS THE OIL

Officials have said Transneft is to pay compensation rather than the state.

They said while it will compensate oil producers for their losses from the tainted oil, oil firms should in turn talk to their customers about losses further down the supply chain.

Druzhba splits into the two routes in Belarus. Russia has managed to restore some supplies of clean oil to Poland via Druzhba's northern leg and to Ukraine, the Czech Republic, Hungary and Slovakia in the south.

Russia has put some tainted oil into storage in Europe, including in Hungary, and has agreed to pump some volumes back from Belarus to mix them with clean crude at home. It can then be refined domestically and re-exported.

Sorokin said Russia will be pumping oil back from the Unecha-Polotsk line in two weeks and for now, the contaminated oil is being stored at the Naftan refinery in Belarus. In the south, all tainted oil has been put into storage, he said.

Some Russian ports which were not initially affected by the crisis have seen an increase in chloride levels as Russia has been diluting the tainted oil with clean volumes, he said, though they remained within permitted levels.

Sorokin said chloride levels at Russian ports would not be higher than at Ust-Luga, where the energy ministry said on Monday organic chloride levels in oil cargoes stood at 2.7 parts per million (ppm).

He said the level would remain in a range of 2.5-4 ppm, while for pipeline supplies to Europe, oil will have 'minimal' chloride content. "(European customers) will mix it (with clean oil) according to their own plans," he said.

Russia is still studying other options for cleaning the oil other than mixing it, Sorokin said. Tainted oil can affect refining equipment, but oil products are unaffected and there will be no impact on end-users such as motorists, he said.

Sorokin said the resumption of oil supplies via Druzhba to pre-crisis levels depends on ongoing talks between buyers and sellers, but the energy ministry expects full resumption in the "quite near" future.

Asked if he expected some European countries to seek a substitute for Russian oil after the crisis, Sorokin said: "We don't see issues with the Urals supplies after the situation is resolved."

Druzhba accounts for around a quarter of oil exports from Russia, the world's second biggest oil exporter after Saudi Arabia.