Lack of Oil Storage Adds to Russia's Woes

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Russia's lack of storage capacity could force it to shut in a big chunk of its production as buyers shun the country's oil following its invasion of Ukraine.

The US and UK banned imports of Russian oil on Tuesday, and exports had already fallen sharply as a result of financial and shipping sanctions, as well as an abundance of caution among buyers.

Shell said it would stop buying spot cargoes of Russian crude immediately and would not renew term supply contracts after previously announcing that it would divest its upstream investments in the country.

Russia's limited storage capacity was highlighted in 2019 when oil carried by the 1 million barrel per day Druzhba export pipeline to Europe was found to be contaminated with corrosive organic chlorides.

Pipeline operator Transneft had to ship contaminated crude back to Russia, which disrupted the normal export flows and created an acute need for storage capacity.

Russian industry sources said some oil producers have recently contacted Transneft to discuss options for storing oil that they can no longer export via the country's Baltic Sea ports because of a lack of buyers. Transneft declined to comment on the matter.

Problem Recognized But Unresolved

The country recognizes that its limited storage capacity is a problem and has discussed it many times over the past 20 years or so.

Various solutions have been proposed including storing oil in underground salt caverns and building additional storage tanks at oil fields or ports, but the problem remains unresolved.

Transneft has a combined storage capacity of some 21 million tons (153 million barrels) for crude and refined products, but insists all of this is needed to support its normal operations.

Storage tanks at the country's four main marine export outlets in the Baltic Sea (2), the Black Sea (1) and the Far East (1) can store roughly 3 million tons (22 million bbl). But those stockpiles are a crucial buffer to maintain steady operations in case of planned maintenance or emergencies for up to 72 hours.

Transneft sources say the company can store some unallocated export volumes in its system, but not for long.

In 2019 Transneft managed to gradually return some 5 million tons (36.6 million bbl) of contaminated crude to Russia from Europe, but it was a challenge for its system.

Russian oil companies also have storage facilities at their fields and refineries. Their combined capacity has been estimated at 15 million tons (110 million bbl), but spare capacity does not exceed 5 million tons, with the rest used in day-to-day operations.

Energy Intelligence estimates that Russia's combined exports of crude oil and refined products could fall by about 5 million b/d by the end of this week.

If those kind of volumes cannot be shipped out of the country for an extended period of time, Russia will quickly run out of storage capacity and producers will have no option but to shut in wells.

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