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Cold War relic threatens Europe’s plans to dump Russian oil

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Stefan Nicola and Rachel Graham

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(Bloomberg) — Berlin is in danger of running out of fuel unless German officials can find a way to prevent a Cold War relic from falling victim to geopolitics.

A refinery on the Polish border, which supplies most of the jet fuel for the airport in the German capital and gasoline for the vehicles in the region, is embroiled in the European Union’s standoff with Moscow over the war in Ukraine. A plan to ban Russian oil imports by the end of the year threatens to choke supplies to the factory in the small town of Schwedt, which would cripple Berlin and much of eastern Germany.

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The PCK refinery is directly connected to a pipeline that pumps Russian crude oil from across the Ural Mountains. Since the facility is far from a major port, there is no easy alternative, and the fact that it is controlled by Kremlin oil champion Rosneft PJSC adds to the complexity.

From Berlin to Germany’s Baltic coast and parts of western Poland, “virtually every plane, police car, fire truck and ambulance is powered by fuel from Schwedt,” said Annekathrin Hoppe, mayor of the city of 34,000 on the River Oder. Closing the refinery ‘would be a disaster’.

Covering an area more than twice the size of New York’s Central Park, the facility was built in the 1960s to bolster former communist East Germany’s reliance on the Soviet Union. The struggle to find a solution shows that more than three decades after the fall of the Berlin Wall, those ties are still strong.

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Read more: Europe’s hard road to make a Russian oil ban work

To comply with the EU’s planned oil embargo, Chancellor Olaf Scholz’s government is considering a number of heavy-handed solutions, including taking over the refinery as it did with the German unit of Gazprom PJSC. But a change of ownership wouldn’t solve the main problem: replacing the 12 million tons of crude oil pumped to the refinery each year through the Druzhba pipeline, named after the Russian word for “friendship.”

“The refinery is not configured for anything else,” said Ben Van Beurden, chief executive officer of Shell Plc, which has a stake in PCK that it was trying to sell. The refinery declined to comment on this story.

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German Economy Minister Robert Habeck traveled to Schwedt last week to allay concerns about the refinery’s future. As hundreds of workers scrambled to listen, he climbed onto a table to better convey his message about how the government works to ensure operations can continue if Russian oil is banned.

“We need your production and your work to secure German supplies,” Habeck told PCK staff, adding that there are likely to be disruptions. “I don’t want to fool you or paint too rosy a picture.”

German authorities are looking for options and have determined that an old pipeline linking Schwedt to the Baltic port of Rostock could be used to deliver crude oil via a tanker. But due to its relatively small size, it could only cover about 60% of normal volumes. To boost supplies, plans are under discussion to increase pump pressure and upgrade infrastructure, officials familiar with the matter said.

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Another option would be to dock tankers at Gdansk in Poland and send crude oil through a pipeline connecting to the Druzhba. That would require the help of Warsaw, which has its own supply problems to deal with the Russian energy phase-out.

Read more: Germany to stop importing Russian oil regardless of EU sanctions

Polish Climate Minister Anna Moskwa said the government, which is already helping to supply another German refinery in Leuna, wants Rosneft out of PCK’s possession. She indicated that the country might ask for even more in return.

“We are working with the German side on a new joint model for the management of the refineries, so that it is optimal for both Polish and German societies,” she said. “I can assure you that it is a business model. It’s not charity.”

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Read more: How Poland’s plan to stop buying Russian oil is affecting Germany

Locals in Schwedt, who have a church dating back to the 13th century, are skeptical that decades-old infrastructure connections can be successfully rerouted in just over six months.

“There have been several crises with Russia since the plant was founded, but they have never affected the supply relationship,” said Gundolf Schuelke, head of the regional chamber of industry and commerce. “This conflict – with its vast scope and sanctions, as well as counter-sanctions – is unprecedented.”

Berlin already had a taste of what could happen if Russian crude oil dries up. In 2019, the supply via the Druzhba turned out to be contaminated. Within just a few weeks, Berlin ran short and had to secure emergency supplies of fuel oil, diesel and petrol from Hamburg.

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In that case, the problem was short-lived. Now a more structural shift is underway, and PCK has done little to prepare for a time without access to cheap Russian crude oil – or the end of the fossil fuel era.

In the longer term, city officials aim to transform not only the refinery, but also the local economy by creating an “innovation campus” to attract startups and sustainable industrial companies.

Hamburg-based Bio-Lutions International AG is setting up a factory that will turn straw and tomato stems into an alternative to plastic packaging. Leipzig-based Verbio Vereinigte BioEnergie AG already produces biodiesel, bioethanol and biomethane at the PCK site and shares its extensive pipeline, rail and processing infrastructure.

But those efforts are not a direct replacement for the refinery, which employs some 1,200 people and maintains at least as many jobs with local partners. Also, the heat generated by the plant keeps 80% of Schwedt’s homes warm during the winter.

“If PCK stops production, there will be no more fuel in East Germany and no more fuel in Berlin,” said Claus Sauter, CEO of Verbio, during a conference call last week. “An entire region will die.”

©2022 Bloomberg LP


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