Page 6 - MEOG Week 02 2021

MEOG COMMENTARY MEOG

Aramco eyes opportunities

in Russia’s backyard

SAUDI ARABIA SAUDI oil giant Saudi Aramco is reportedly various heavy sour crude grades produced in
eyeing a 30% stake in Polish firm Lotos’ 210,000 the Volga-Urals Basin and lighter grades from
barrel per day (bpd) refinery in Gdansk – a Siberia. But since the launch of Russia’s Eastern
WHAT: move that could help expand its oil market share Siberia-Pacific Ocean (ESPO) pipeline in 2009,
Saudi Aramco is in Central Europe. Polish refiners have tradi- Russian producers have sold an increasing share
reportedly eyeing a stake tionally relied mainly on Russian Urals grade of their lighter, higher-quality oil grades to China
in Lotos’ 210,000 bpd crude, but they have taken steps in recent years and the Asia-Pacific region, attracted by higher
refinery in Gdansk. to diversify supply, reaching out to Saudi Arabia prices. This has affected the quality of supplies
and other Middle Eastern producers. Besides to Europe, with Urals reporting a steady rise in
WHY: securing the best price, these moves are political. sulphur content and higher gravity over the past
The investment would Poland is also aiming to phase out Russian gas decade.
give Aramco greater imports over the coming years in light of its sour Russia’s reputation as a supplier was then
reach in the Polish relationship with Moscow, replacing them with severely undermined in 2019, when millions
oil market, which is LNG and Norwegian pipeline deliveries. of barrels of oil in the Druzhba pipeline sys-
dominated by Russia. Lotos is due to be acquired by its larger Polish tem were contaminated with organic chlorides.
counterpart PKN Orlen, as part of Warsaw’s plan These organic chlorides are used at oilfields to
WHAT NEXT: to establish a national energy giant. The Euro- boost recovery but can damage refining equip-
Refiners face further pean Commission cleared the deal in July, but ment if left in the oil. The so-called “dirty oil”
margin pressure after only on condition that PKN Orlen shed some crisis brought the bulk of Russian oil supplies to
Saudi Arabia’s surprise assets, including a 30% interest in the Gdansk Europe to a standstill. Refiners had to reach out
decision to take 1mn bpd plant. According to Polish press reports, poten- to alternative suppliers, giving them an opening
of supply off the market. tial buyers for Lotos’ assets are expected to be to lock in market share.
shortlisted by the end of the first quarter. Hunga-
ry’s MOL had previously been seen as a favour- OPEC+ talks
ite to acquire the assets, although Aramco is also Russia and Saudi Arabia, together with their
understood to be in the running. OPEC+ allies, have made unprecedented cuts
PKN Orlen’s relationship with Aramco began to oil production, raising concerns in Moscow
in April 2016, when the company struck a long- about Russian producers losing market share
term deal to take 200,000 tonnes (1.47mn bar- as a long-term consequence. However, OPEC+
rels) of oil per month from the supplier. The pair talks ended with a surprise concession by Saudi
agreed to expand shipments to 300,000 tonnes Arabia, which agreed voluntarily to remove a
in 2018, and PKN Orlen also signed a contract further 1mn barrels per day of oil supply from
for up to an additional 800,000 tonnes of Saudi the market in February and March. Russia and
crude over a six-month period last year. Kazakhstan in contrast will be able to bring an
“This is not a great investment for Aramco extra 75,000 bpd of production back on stream
in a purely business sense, with downstream next month.
profits falling and Asian rivals growing,” Robert “Part of the reason this decision was so sur-
Tomaszewski at Warsaw-based think-tank Pol- prising is the harsh rhetoric of Riyadh towards
ityka Insight commented in an interview with sub-compliers [in OPEC+],” Bjornar Touhaugen
Deutsche Welle in late December. “But it would at Norwegian energy consultancy Rystad Energy
give the company a new refining installation, and said in a note on January 6. “One can only won-
is open to the sea, opening up the Baltic and close der what exact back-door deals have been made,
to Germany’s terminals at Schwedt and Iuna. The but it is no surprise that Russia would not be
key, however, is that this is Rosneft’s backyard cutting or even keeping production steady into
and that would be a game-changer.” the winter months, as cuts to operations of the
country’s old mature wells and fields create last-
Quality concerns ing damage to its production capacity.”
PKN Orlen still depends on Russia for 70% of The Saudi reduction should create an oil mar-
its crude supplies, although having Aramco as ket deficit in February and March, according to
a partner in Gdansk would surely lead to more Rystad, which is good news for producers. But
Saudi supplies entering Poland. Beyond pricing the resulting strength in oil prices spells even
and politics, Polish and other European refiners weaker margins for refiners, which will have
have had another reason to reduce Russian pur- to pay more for crude supplies at a time when
chases: recurring issues with quality. fuel demand is sapped by renewed COVID-19
Russia’s flagship Urals blend is a mixture of lockdowns.™

P6 www. NEWSBASE .com Week 02 13•January•2021