Cold War Relic Threatens Europe's Plans to Ditch Russian Oil



Stefan Nicola and Rachel Graham
Wed, May 18, 2022

(Bloomberg) -- Berlin risks running out of fuel unless German officials can find a way to keep a Cold War relic from falling victim to geopolitics.

A refinery on the Polish border, which supplies the bulk of the jet fuel for the German capital’s airport and gasoline for the region’s vehicles, is caught up 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 off supplies to the facility in the small town of Schwedt, which would cripple Berlin and much of eastern Germany in the process.

The PCK refinery is directly connected to a pipeline pumping Russian crude from the other side of the Ural mountains. Because the facility is far from a major port, there’s no easy alternative, and the fact that it’s controlled by the Kremlin’s oil champion Rosneft PJSC multiplies 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 town of 34,000 on the Oder river. Closing the refinery “would be a disaster.”

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

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

“The refinery is not configured for anything else” but Russia’s high-sulfur crude oil, said Ben Van Beurden, chief executive officer of Shell Plc, which owns a stake in PCK that it had been trying to sell. The refinery declined to comment for this story.

German Economy Minister Robert Habeck traveled to Schwedt last week to address concerns over the refinery’s future. With hundreds of workers straining to hear, he climbed on a table to better deliver his message on how the government is working to ensure that operations can continue if Russian oil is banned.

“We need your production, your work to safeguard Germany’s supply,” Habeck told PCK’s staff, adding that there will likely be disruptions. “I don’t want to take you for a fool or paint a picture that’s too rosy.”

German authorities are scrambling for options and have determined that an old pipeline linking Schwedt to the Baltic port of Rostock could be used for crude delivered via tanker. But its relatively small size means it could only cover some 60% of normal volumes. To boost supplies, plans to increase the pump pressure and modernize the infrastructure are under discussion, according to officials familiar with the matter.

Another option would be to have tankers dock in Gdansk in Poland and send crude through a pipeline that connects to the Druzhba. That would require the help of Warsaw, which has its own supply issues to deal with as it phases out Russian energy.

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 ownership. She indicated the country might seek even more in return.

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

Michael Kellner, a deputy German economy minister, said Wednesday on NDR television that he’s optimistic that a solution can be found with the Polish government. If needed, Germany could tap oil reserves to supply Schwedt, he said, adding that the country is prepared for every eventuality given the refinery’s “massive importance” for the region.

Locals in Schwedt, which boasts a church dating back to the 13th century, are skeptical that decades-old infrastructure connections can be re-routed successfully in little more than six months.

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

Berlin already had a taste of what could happen if Russian crude dries up. In 2019, supplies through the Druzhba were found to be contaminated. Within just a few weeks, Berlin was running short and needed to secure emergency deliveries of heating oil, diesel and gasoline from Hamburg.

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

Over the longer term, city officials are pushing to transform not just the refinery but also the local economy by creating an “innovation campus” to attract startups and sustainable industrial firms.

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

But those efforts aren’t an immediate replacement for the refinery, which employs around 1,200 people and sustains at least as many more jobs at local partners. Also, heat generated by the plant keeps 80% of Schwedt’s homes warm during the winter.

“If PCK will stop production, there is no fuel in East Germany and no fuel in Berlin anymore,” Claus Sauter, Verbio’s chief executive officer, said on a conference call last week. “A whole region will die.”