The Fuse

Polish Refinery’s Imports of U.S. Crude Send Strong Signal to Moscow

by Matt Piotrowski | January 05, 2018

Ukraine is now buying coal from the U.S., European countries are receiving LNG from shale producers, and U.S. crude is being shipped to Poland. These deals are geopolitical maneuvers to counter Russia’s energy monopoly on parts of Europe. They provide buyers diversity of supply and send a strong signal to Moscow that they will reduce dependence on Russian energy, even if volumes are relatively small. Poland—along with the Baltic countries—is determined to weaken Russia’s hold on oil and gas exports to Eastern and Central Europe. By buying energy supplies elsewhere, European countries are able to reduce Russia’s leverage and force Moscow to negotiate and be more cooperative.

By buying energy supplies elsewhere, European countries are able to reduce Russia’s leverage and force Moscow to negotiate and be more cooperative.

Last month, the 210,000 barrel-per-day Grupa LOTOS refinery in Poland signed an agreement to take at least five cargoes from the U.S. throughout 2018. The facility started receiving cargoes during the second half of 2017.

“Countries in Eastern Europe favor diversity of supply and don’t want to be solely dependent on Russia,” John Auers of refining consultancy Turner, Mason & Co. told The Fuse. “They can demonstrate that they have options and won’t be held hostage.”

LOTOS is able to process a wide variety of crudes from around the world. It has imported Hibernia crude oil from Canada and West Texas Intermediate from the U.S., with cargoes delivered by sea through Naftoport in Gdańsk. The refinery has also processed crude from the Middle East, Latin America, and North and West Africa.

“The contract [for U.S. crude] will certainly contribute to building Poland’s energy independence and strengthening its energy security,” said Krzysztof Tchórzewski, Poland’s Minister of Energy, in a statement. “Consistent diversification of energy supply sources is one of the priorities of the Ministry of Energy’s policy, and business decisions made by state-owned companies are a vital element of its implementation.”

U.S. crude exports soared last year to average approximately 1 million barrels per day, with an increasingly large amount heading to Asia. U.S. sellers have also been able to find more regular customers among European refiners, which are ideal outlets for the U.S. since they are configured to run lighter grades produced in shale areas. In October, seven European countries purchased U.S. crude. The U.S. is a stable alternative supplier at a time when North Sea production is declining, West African producers are dealing with internal conflicts, and OPEC is reducing output.

Reducing reliance on Russia

Poland is heavily reliant on imports for crude oil and gas. The Eastern European country imports roughly 95 percent of its crude oil, with most coming from Russia through the Druzhba pipeline. For gas, approximately 70 percent of its needs are imported, with Russia as the dominant supplier.

Poland and other Eastern European countries have learned lessons from Russia’s use of its energy resources for political gain. The most egregious example occurred at the beginning 2006, when Moscow cut off gas supplies to Ukraine during a critical time of high demand. That is why Ukraine is importing coal from the U.S. now even though it is not economic.

Volumes of U.S. LNG began reaching Europe last year. In May, Poland bought shipments from the U.S., and in August, the first U.S. LNG cargo landed in Lithuania, giving the Baltic nation an alternative to imported natural gas from Russia. The arrival of U.S. LNG in Russia’s backyard demonstrated the weakening of Gazprom’s near-monopoly on gas supplies to Eastern Europe. Last October, the U.S. exported more than 80 billion cubic feet of LNG, 25 times higher than the same time in 2016, with China and Korea as the main buyers. The amount of LNG exported should rise as more export facilities come online, including Dominion’s Cove Point in Maryland, which will reduce travel time to Europe. The Energy Information Administration expects U.S. LNG exports to quadruple from now until 2035.

Economic benefits of buying U.S. crude

While politics may be a strong motive for Poland to buy U.S. crude, the economics are favorable, too, at least for now.

While politics may be a strong motive for Poland to buy U.S. crude, the economics are favorable, too, at least for now. With U.S. benchmark WTI trading $6 below European marker Brent, it is economic for overseas customers to purchase U.S. crudes. Other major consumer countries, such as Korea and China, have also seen their refineries test different U.S. crudes amid wide discounts. The tests give the buyers options in the future in case of market volatility, unplanned supply outages, or OPEC reductions. Diversity of supply provides certainty during times of geopolitical turmoil, but also offers economic security and allows buyers more room to negotiate with Russia or other dominant suppliers.

How long will U.S. export boom last?

Russia is still overwhelmingly dominant and will use pricing concessions and expansions of its supply and infrastructure to hold onto market share.

Rising U.S. crude exports have helped stabilize the global oil market by providing consumer countries such as Poland with supply diversity and partially offsetting OPEC’s supply cuts. Being able to export gives domestic producers more outlets for their crudes and keeps U.S. prices relatively close to benchmark Brent. However, there are questions about how long shale output will continue to grow. The sector has yet to turn a profit, and shale has steeper decline rates than conventional fields. The export craze that gripped the oil market in 2017 should persist this year, but dynamics may be significantly different in the medium to long term. Furthermore, despite the arrival of U.S. crude and LNG in Europe, Russia is still overwhelmingly dominant and will use pricing concessions and expansions of its supply and infrastructure to hold onto market share.

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