Germany: How does its Kazakh oil deal benefit Russia?
March 1, 2023
This week, Kazakhstan shipped the first batch of crude to Germany through the Druzhba pipeline system as the German government looks to shore up supplies for a key refinery in Eastern Germany that until the turn of the year was fed almost exclusively by Russian oil.
The shipment of 20,000 tons, or about 145,000 barrels, is part of Germany's broader plan to cut its dependency on Russian oil. Europe's largest economy stopped buying oil from Russia this year even as pipeline crude oil remains exempt from a European Union embargo on Russian oil prompted by Moscow's invasion of Ukraine.
Kazakhstan, a Russian ally, aims to transport 1.2 million tons of crude oil to Germany this year. The country's state-run pipeline operator KazTransOil has already received approval from its Russian counterpart Transneft to deliver 300,000 tons through the Druzhba pipeline this quarter.
Druzhba, which means "friendship" in Russian, is one of the largest oil pipeline systems in the world with the capacity to carry 2 million barrels per day.
Why Germany is buying oil from Kazakhstan
The Kazakh oil is headed to Germany's PCK refinery in Schwedt, located 120 kilometers (74 miles) northeast of Berlin. The refinery was until this year supplied with oil from Russia.
The Schwedt refinery — which provides 90% of Berlin's fuel and is a key employer in an already economically backward region — has been on a sticky ground ever since Germany decided to halt piped oil imports from Russia.
Germany — which relied on Russia for more than a third of its oil needs before the war in Ukraine, importing 687,000 barrels per day of crude in November 2021 most of it via the Druzhba pipeline — has managed to replace most of the Russian supplies in a relatively short space of time. However, it has struggled to find alternatives for Schwedt, which is not connected to the Western German pipelines and supply routes. That has left the refinery working at just 60% of its capacity.
The supplies from Kazakhstan would ensure the refinery works at a higher capacity utilization level so that it remains economically viable.
The refinery, which was partly owned by Russia's Rosneft until the German government took control last year, is currently being primarily supplied with crude from global markets, including the United States, through a pipeline leading from the Baltic Sea port of Rostock.
What's in it for Russia?
Russia stands to collect additional revenue in the form of a transit fee that Transneft would earn for allowing the oil to be shipped through its pipeline network — a welcome source of cash for Moscow at a time its oil revenues have been hit by Western sanctions and price caps.
Moreover, the oil must be transported through thousands of kilometers across Russian territory, putting the supply at the mercy of Russian goodwill.
"We have to observe how Russia acts regarding the flow through the Druzhba," a spokesperson at the German Economy Ministry said on Monday, adding that it was difficult to predict Russia's actions as shown by last year's gas supply freeze.
Does the deal breach EU or German oil embargo?
Oil from Kazakhstan is not subject to the EU embargo, nor does it fall foul of Germany's voluntary ban on pipeline oil from Russia.
Oil from the country is first pumped to Russia where it is blended with Russian crudes before being exported from Russian seaports. Last year, Kazakhstan rebranded its cargo as KEBCO to dissociate it from Russia's REBCO (Russian export blend crude oil), or Urals, to avoid falling in the crosshairs of Western sanctions.
However, the blending of crudes in Russia has raised concerns, especially in Poland through which the Kazakh oil will flow to Germany, that it would be difficult to ascertain the origin of the oil.
The German Economy Ministry says while it's unavoidable that some Russian oil will end up in Germany, it's important that no money would be flowing to Russia as the oil supplies would be bought not from a Russian firm, but a Kazakh one.
Edited by: Rob Mudge