Rosneft-owned Schwedt refinery near Berlin puts the problems with sanctioning Russian oil under the spotlight

Rosneft-owned Schwedt refinery near Berlin puts the problems with sanctioning Russian oil under the spotlight
Russian oil major Rosneft bought majority control of the Schwedt oil refinery near Berlin on the day before the invasion of Ukraine. Supplying the capital with 95% of its oil products yet forcing it to stop Russian supplies is not a simple task. / wiki
By Ben Aris in Berlin March 30, 2022

The oil refinery in Schwedt, a large town on the river Oder in the northeast of the Brandenburg region that surrounds Berlin is a key piece of northern Germany’s energy infrastructure, as it supplies the capital with about 95% of its oil product needs.

The problem is that it was sold to Russia’s state-owned oil major Rosneft only a week before the war in Ukraine started. With talk of banning imports of Russian oil into Europe, just how that can be made to work has become a major headache for Germany and Berlin in particular.

The refinery is an old one, built by the former German Democratic Republic, or GDR, that was still under Moscow’s orders.

After Germany’s reunification it was sold off to a consortium of European energy companies as many of East Germany’s assets were privatised as part of the process to put them on a market footing.

Germany has famously been sympathetic to Russia and has extensive commercial ties there. There are literally ten times more German companies registered in Russia than any other western European country and in 2021 they invested a record €3bn into their businesses.

Germany is also heavily dependent on Russian energy. Germany is the world's largest importer of natural gas, which covered more than a quarter of primary energy consumption in Germany in 2021. It imports some 140bn cubic metres of gas a year, of which an estimated 32% is Russian gas, an amount it can not easily replace, especially as Germany has been banking Russian piped gas and has yet to build any LNG terminals. The talk of banning imports of Russian gas will hurt Germany more than any other country, as it will be almost impossible to replace in the short term.

The story is the same for oil. About 98% of oil consumed in Germany is imported. In 2021, Russia supplied 34.1% of crude oil imports, the US 12.5%, Kazakhstan 9.8% and Norway 9.6%. However, as oil is largely transported by ship it can in theory replace Russian oil imports by sourcing oil from elsewhere.

In practice that is harder than it looks, as the refinery at Schwedt gets its oil not by ship, but by pipe – from Russia, via the Druzba (Friendship) oil pipeline that runs across Ukraine and that was built in the 70s. The Soviet-era pipeline keeps Europe hooked on Moscow’s oil and Druzhba is a critical link to Germany and forms the biggest single flow of Russian crude to Western Europe. Switching the oil deliveries to another supplier is much harder for Schwedt, as Russia is deeply ingrained into the German energy infrastructure.

“How does Berlin tell a Russian-owned refinery to stop using Russian oil?” asked Oliver Moody, the correspondent for The Times, in a tweet.

To make things even more complicated, the German regulator approved the sale of a stake in the refinery to Rosneft that would increase its holding from 38% to 92% on February 23, the day before Russia invaded Ukraine.

In a strange coincidence, on the day before Russian forces crossed the border into Ukraine, the latter’s national power company also decided to take itself off the Russian power grid in what was supposed to be a 72-hour experiment, but rapidly became a mad scramble to hook Ukraine’s grid into the European Network of Transmission System Operators for Electricity (ENTSO-E), which it managed in only two weeks.

Given that tensions with Russia were escalating rapidly ever since the Russian Foreign Ministry sent the West an eight-point list of demands in December 2021 and the US intelligence services were warning repeatedly of an imminent Russian invasion, which was first reported by the Washington Post on October 30, the German competition regulator’s decision to sell Rosneft the Schwedt refinery looks at best foolhardy.

“With the takeover of Schwedt, a large part of the petrol production for East Germany and Poland is de facto transferred to Russia. The "Friendship" pipeline from Russia, through which Germany is supplied with 25% of crude oil, according to the refinery, also ends in Schwedt,” German broadcaster reported at the time.

“The PCK refinery currently processes approximately 220,000 barrels of crude oil per day [bpd]. The plant supplies 95% of the regions of Berlin, Brandenburg and western Poland with petrol, diesel, jet fuel and heating oil,” added.

Since the start of the invasion Germany has been running to catch up with the basic change in its relationship with Russia. Before the attack Berlin was very reluctant to shut down the controversial Nord Stream 2 gas pipeline, or even say out loud that it could be closed down should Russia attack Ukraine. After that attack happened it was the first thing that the new German Chancellor Olaf Scholz decided to do.

Since the start of the invasion, Germany has been frantically trying to reduce its reliance on Russian energy, including oil. The EU has accelerated plans to wean itself off Russian oil and gas, which it now hopes to achieve by 2025. However, an early progress report released by the economics ministry on March 25 suggests that even that deadline will be hard to reach and little progress has been made. 

“Import of oil products from Russia will account for about 35% in 2021. In the last few weeks steps have been taken to end supply contracts with Russia. Supply contracts are expiring and are not being extended. Imports are rapidly being replaced,” the ministry said in the report, adding that the share of Russian oil in supplies would be reduced to 25% in the coming months. “Russian oil imports to Germany are expected to be halved by the middle of the year. By the end of the year we aim to be almost independent.”

But the ministry admitted it was not going to be easy, especially in reorienting Berlin to new suppliers.

“However, the process is demanding: The short-term substitution of crude oil in suitable qualities, especially at the refinery sites in Leuna and Schwedt, which supply petrol stations, airlines, private households and companies with petrol, diesel, aviation fuel or heating oil, among other things, presents the mineral oil industry with major problems, as they get their crude oil from Russia via pipelines,” the reports said.

To change the supplier the ministry went on to detail some of the new initiatives that must be undertaken, including supplying Germany via ports such as Rostock and possibly Gdansk in Poland. Deliveries from western Europe would have to be delivered by truck and train – an expensive alternative to cheap piped oil.

“Companies and the federal government are currently working flat out to create these conditions,” the ministry’s report concluded.

The Leuna refinery is operated by Total, which buys about a third of Russia's oil imports, but has changed the contracts so that oil imports from Russia will be halved from mid-April and all supply relationships with Russia will terminate by the end of 2022.

“Another third of the oil imports from Russia are accounted for by refineries in western Germany. Here, a substitution of Russian imports via other delivery routes is easier to organise,” the ministry said. But making the same changes at Schwedt is a major headache.

“The refinery in Schwedt accounts for the last third of Russian oil imports. Since it is largely owned by the Russian state-owned company Rosneft, a voluntary termination of supply relationships with Russia is much more difficult,” the ministry said in its report. “This is your comeuppance when a Russian energy firm has established such strong influence over the supply situation despite the war in Crimea. The federal government is working intensively to solve this complex problem in order to achieve complete independence from Russian oil.”

The German government is treading carefully, as it is afraid of legal challenges. It cannot simply order Rosneft to stop buying Russian oil, as the supplies are all under legally valid contract and the company itself is doing nothing illegal by importing oil from Russia.

It is not clear if the equity deal of February will be completed. Although Rosneft has regulatory approval to increase its stake to 92%, it may also need the approval of the Economics Ministry, which may not be forthcoming. However, even in this case Rosneft remains a major stakeholder in a key German energy asset that is for the meantime locked into a supply contract to buy Russian oil piped through the Dzhuba pipeline.