January 24, 2012
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№ 7 (July 2007)

Lukoil Admits Cutting Supplies to Germany

Russia's second largest oil producer, Lukoil, admitted on Friday it had reduced oil supplies through the Druzhba pipeline to Germany by around a third in July and August.

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Moscow based financial analysts are privately claiming Lukoil's actions are likely to be a reaction to its dispute with Germany's largest oil importer, Sunimex, or part an aggressive play to acquire Western European refining assets. The German Economics ministry said that refineries could bridge the gap in supply by using alternative sources; however, Lukoil's actions are likely to raise fresh concerns about the reliability of Russian supplies to the EU.

Last Friday, officials from the Schwedt refinery in Germany said their supplies from Russia had been reduced and they were actively seeking alternative sources of oil. However, the Vice President of Transneft, the Russian state owned company that runs and owns Russia's pipeline network, immediately declared that the reduction was not Transneft's decision and implied that it was down to Lukoil. Lukoil then acknowledged it had reduced supplies by about one-third in July and August but offered no explanation for its actions.

Although Lukoil have promised to explain the actions at some stage this week, the Financial Times presents an argument that this latest cut in supplies fits with Lukoil's long term strategy. According to the FT, supplies to Mazeikiu refinery in Lithuania have been reduced several times since PKN Orlen out bid Russian competition and bought the plant from Yukos last year. The FT notes that Lukoil has bought several Soviet-era refining plants in Bulgaria, Rumania and Ukraine, and is looking to secure access to more as part of its long term strategy to process oil closer to its end markets.

The FT also provided an alternative, more benign argument, quoting Ivan Mazalov, a portfolio manager for Prosperity Capital Management, as saying "One explanation could be that Russian export taxes are higher on crude oil than products so it is more profitable for companies to sell oil products abroad."

However, Oil and Gas Eurasia analysts believe that Lukoil's decision to cut supplies to Germany is just as likely to be part of a long running dispute with Sunimex. Sunimex is Germany's largest oil importer and has been acting as a monopoly as far as German imports of Russian are concerned. For several months, Lukoil has attempted to negotiate better deals with Sunimex to help improve Lukoil's margins.

Whatever the reasons behind Lukoil's decision to reduce supplies to Germany, the action alone is likely to fuel EU suspicion that Russia is not a reliable energy supplier. The EU has already this year ramped up its efforts to identify alternative sources of oil and gas in order to reduce its energy-needs dependency on Russia, and the UK, as reported elsewhere on this site today, has increased its energy ties with Norway in a bid to become less reliant on Russian gas. Lukoil's actions, coming hot on the heels of Gazprom's latest dispute with Belarus, is likely to strengthen the opinion of EU leaders that diversifying energy supplies and staying away from Russian dependency is a prudent strategy.

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