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Russia Contaminates Its Oil And Is Finally Forced To Cut Production

This article is more than 4 years old.

Russia finally is being forced to cut its oil production. After buyers in Europe discovered that $2.7 billion worth of oil they had purchased from a Russian producer was contaminated, Russia announced that it will be cutting production by about 1 million barrels per day for five days—about 10% of its total oil production.

Back in December 2018, Russian oil minister Alexander Novak agreed to cut Russian oil output by 2%, or 228,00-230,000 barrels per day over the first 6 months of 2019. Until this week, Russia had yet to comply with this cut at all. In fact, Russia had been talking about increasing production to fill in any gaps left by the sanctions on Iran's oil industry.

Now it seems that Russia has to cut production. Transneft is the pipeline company that transported the contaminated oil. On April 19, Transneft alerted an array of customers in Europe that the oil currently on its way to them via its 3,400 mile pipeline was "heavily contaminated" with organic chloride. Organic chloride is a compound used to increase oil production and accelerate the flow of oil. It is typically removed from crude oil before transportation because it can damage refineries but, for some reason that Transneft has yet to explain, was not removed. In all, about 36.7 million barrels of oil were contaminated. Apparently, at least one Russian firm has been trying to resell the contaminated oil at a discount, but buyers are wary. Transneft was forced to shut most of its operations on the contaminated line and requested the production cut while it figures out what happened.

Customers are still waiting for answers. They say that communication from Transneft has been minimal and that they do not know what is going on. Transneft has blamed "fraudsters" for the contamination, but Russian President Vladimir Putin put the blame squarely on Transneft. He said that the company did not have adequate means to remove the organic chloride before sending it to customers.

Contamination is not a new issue with Russia crude oil. However, Transneft is a state-owned firm with a monopoly on pipeline transportation in Russia, so European buyers of Russian crude oil have few alternatives when it comes to Russian crude. However, there are other options globally, and Russian crude oil will likely suffer from a loss of confidence as the issue—and the lack of communication—drags on.

This is an embarrassment for Russia and hurts its contracts in Europe, but it is also the first sign in 2019 that Russia may actually approach compliance with its commitments to OPEC.

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