European oil refineries exposed as fears of Russia invading Ukraine grow

European oil markets and refiners are the most exposed to potential tougher Western financial sanctions or pipeline interruptions likely to follow a possible Russian invasion of Ukraine, according to data analyzed by S&P Global Platts.

About half of Russia's crude and oil product exports -- currently at around 6.5 million b/d -- are sent to European countries where they account for roughly a quarter of total oil and product imports, according to EU data, Russian statistics, and the Joint Organizations Data Initiative.

The Druzhba, or 'friendship', pipeline system moves around 1 million b/d of crude from Russian fields to Europe, mostly to refineries in Germany, the Netherlands and Poland.

So far, the biggest potential supply threat from a conflict has focused on Russian crude flows through Ukraine itself.

Ukraine moves Russian oil to Slovakia, Hungary and the Czech Republic through the southern leg of the Druzhba pipeline. The country's transit of Russian crude for export to the EU was 11.9 million mt in 2021, down from 12.3 million mt in 2020, while oil transit to Belarus remained unchanged at about 800,000 mt.

Last year, Platts reported crude shipments via the Southern branch of the Druzhba pipeline network included 5.2 million mt, or around 104,427 b/d, to Slovakia; 3.4 million mt, or around 68,279 b/d, to Hungary; and 3.4 million mt, or around 68,279 b/d, to the Czech Republic.

Europe's exposure to Russian oil supply risks in the wake of a possible attack has already pressured prices for Moscow's key medium sour crude export grade Urals.

Urals has gained about $1/b against Brent from early to mid-Jan, reflecting the growing potential for conflict between Russia and Ukraine.

German ties

But wider repercussions from a conflict, such as swinging US and EU financial sanctions or Russian reprisals, could affect more of Russia's oil exports to Europe.

The northern branch of the Druzhba route via Belarus provides Urals crude to refineries in Poland and Germany.

The 230,000 b/d PCK refinery at Schwedt and Total's 230,000 b/d Leuna refinery are both supplied via Durzhba, although they could also get alternative supplies via the Baltic Sea ports. PKN's 326,000 b/d Plock refinery also processes crude delivered via Druzhba, which accounts for more than half of its feedstock, but has been diversifying its sources of supply, buying crude from Norway, Angola, Nigeria, Saudi Arabia and the US.

Growing commercial ties between Russia and its biggest European customers also complicate how a political conflagration would play out.

In Germany, Europe's biggest refiner and most exposed to Russian crude, Russian state oil giant Rosneft is already the second-biggest refiner in terms of capacity behind Shell. Already responsible for around a quarter of crude imports into Germany, Rosneft has been growing its downstream footprint in the country over the last decade and is poised to become Germany's biggest refiner by 2025 when it completes the expansion of one of its sites.

Sanctions own goal?

Most market watchers, however, believe the prospects of tough new sanctions hitting Russian oil supplies to Europe are remote. When Russia seized Crimea in 2014, crude flows into Europe were largely unaffected by the retaliatory US sanctions on Moscow at the time.

"We do not anticipate Russia voluntarily cutting off large energy supplies to Europe, given the lack of a major disruption in 2014-15, its desire to remain a dependable supplier, and the fact that such a move could unite the US and Europe," said Paul Sheldon, chief geopolitical advisor at S&P Global Platts Analytics.

Still, recent threats from the Biden administration that the US is developing new, tougher financial penalties in response to a possible Russian invasion remain a concern.

A "worst-case scenario" of military escalation, could affect the 250,000 b/d of Ural's crude flowing through Ukraine, according to Sheldon.

Sea route options

Even if pipeline flows to Europe are disrupted, alternative export capacity exists with seaborne shipments from Black Sea and Baltic ports.

In the Czech Republic, although Unipetrol's Litvinov refinery relies on crude supplies from the Druzhba pipeline, its Kralupy facility is supplied mainly by the TAL-IKL pipeline which ships crude delivered by tankers to the Italian port of Trieste.

Hungary's Duna and Slovakia's Slovnaft refineries, both owned by Hungary's MOL, process crude predominantly delivered via Druzhba. However, they can also be supplied with seaborne crude via the Janaf pipeline which ships crude from the Croatian terminal of Omisalj.

Poland's 210,000 b/d Gdansk refinery also relies in Urals imports via Druzhba, though thanks to its location on the Baltic Sea it can also get crude deliveries by tankers.

"Urals, which ships through Ukraine, could see disruptions to pipeline exports in the event of a conflict, but Urals loadings via ports such as Novorossiisk, Primorsk, and Ust-Luga should remain unaffected," Platts Analytics said.

Besides crude, Russia is also an important supplier of oil products to Europe, led by its semi-refined 'mazut' heavy fuel oil in addition to diesel and naphtha exports. Although Russian heavy fuel oil gas is increasingly heading to US and Asian refiners in recent years, Europe has still been importing around 400,000 b/d used as a refining feedstock.

With oil markets already pricing in growing expectations of $100/b oil later this year as the global economy rebounds from the pandemic and spare capacity thins, any additional supply disruptions hitting the world's second-biggest oil exporter could trigger even greater price volatility than currently feared.