MOSCOW/LONDON — Trading houses Vitol, Glencore and Trafigura are caught in the crossfire between Russian oil producers and Western buyers, which have refused to take contaminated Russian crude bought by the traders.
At least 10 crude tankers with 1 million tonnes of oil, worth more than $500 million in normal circumstances, are marooned across Europe and still looking for buyers because they have been tainted with organic chloride.
The three trading firms bought the biggest number of cargoes loading from the Russian Baltic port of Ust-Luga in late April to early May, while around two or three cargoes were also taken by trading units of Total and BP, four traders familiar with the market data said.
Russian sellers included Rosneft, Russneft, Surgut and Kazakh firms, according to the traders and the loading schedules from Ust-Luga port in April and May seen by Reuters.
But buyers including Eni, Exxon Mobil, Royal Dutch Shell, PKN and Repsol have refused to take the oil into their refining systems, according to at least a dozen traders and Refinitiv shiptracking data.
Trading houses declined to comment.
“This is a disaster and a huge blow to Russia’s image as a reliable supplier. We hear promises from the Russian government that the problem will be fixed but it still hasn’t been fixed,” said a buyer of Russian crude, who asked not to be identified because his employer forbids him from speaking to the media.
The contamination was discovered at the end of April, forcing Russia to shut the Druzhba pipeline which pumps 1 million barrels per day (bpd) of crude, or 1 percent of global supply. Druzhba serves Germany, Poland, the Czech Republic, Slovakia, Hungary, Ukraine and Belarus.
Oil from Ust-Luga, which ships 500,000 bpd to global markets, or 22 large tankers a month, has also been contaminated with organic chloride. The chemical compound is used for oil extraction but can damage refining equipment.
The Russian supply problems contributed to an oil price spike to six-month highs and led to a drop in production from the world’s second-largest exporter of crude.
“The severity of the problem could mean that up to 400,000 bpd of Russian exports could be pulled out of the market,” Citi said in a note adding that a prolonged outage could force refineries in Europe to cut refining runs steeply.
A build-up of unsold cargoes from Ust-Luga could create a supply shortage in Europe and dent financial results of trading houses, which also faced a tough business environment in 2018.
The Russian government promised to fix the quality problem at Ust-Luga by May 6-8 but five Russian oil buyers said on Wednesday the levels of organic chloride remained too high. At 60-75 parts per million (ppm), they were six times above normal levels, down from 10-15 times above the norm previously.
“I asked my refining manager at what discount he would take such a cargo,” a trader with a Western major that declined a cargo from Ust-Luga said.
“Can we make a profit if we buy it at a huge discount? My refining manager told me – don’t touch it. Why bother? The risks to refining equipment are just too big.”
The trading houses are helping Russia ease tensions with buyers, as they are freeing up Russian producers and pipeline monopoly Transneft from having to dilute the contaminated oil with clean supplies before finding buyers.
Crude contamination is not rare and has happened in recent years in the United States, Mexico and the Middle East. But the scale of Russia’s problem is unusually large.
For Ust-Luga cargoes, fixing the problem is a challenge, as blending contaminated crude with clean oil to meet required standards requires time, storage space and money.
Terminals in Europe’s biggest storage area, Amsterdam-Rotterdam-Antwerp, told customers they would not accept any crude with organic chloride above 50 ppm, three trading sources said.
The Russian government and Transneft have not said whether Russian oil producers would receive compensation, which could in turn be provided to traders or western refiners. Moscow and Transneft have also not offered any help towards diluting contaminated oil.
A Russian presidential spokesman declined to answer a question on Wednesday about whether Transneft should compensate Russian producers.
Russian officials have said contaminated oil from the Druzhba pipeline could be taken by rail towards the Black Sea port of Novorossiisk, where Transneft has large storage tanks.
“We are now performing mandatory quality checks from every single Russia port to avoid a repeat of the Ust-Luga disaster,” a second trader with a Western major said