CPC pipeline damage and oil market implications amid ongoing Russia-Ukraine war

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Joel Hanley:
Hello and welcome to the Platts Oil Markets podcast from S&P Global Commodity Insights. I'm Joel Hanley. In this episode of the podcast, we are going to be taking a look at CPC Blend, that huge crude oil grade out of the Caspian region. After recent drone strikes and the repeated upending of sweet-sour spreads, what are the prospects of this light sweet crude? CPC Blend is one of the world's largest grades of light sweet crude oil, emanating from the Caspian region of Kazakhstan and making its way along the 1500 kilometer Caspian Pipeline Consortium's route. This is a grade that has fed Europe and beyond for many years and only shows signs of growing.

However, after drone strikes on a pumping station on February the 17th, CPC Blend's hard-earned reputation for security of supply looks under threat. Added to this, further strikes could be impacting the possible destinations for the crude, which along with limited supply for sour crude grades could have a negative impact on price. With me to discuss this on this edition of oil markets are Nick Coleman, a senior writer on oil supply and various other things in the Platts News team, Elza Turner, senior reporter on all things refineries and CIS, and Luke Stuart whose daily price reporting includes the assessment of CPC Blend and other grades in the region. Welcome to you all. Nick, let's start with you. Why don't you tell us some of the background on CPC Blend, but also maybe more pressingly, the recent attacks that we've seen?

Nick Coleman:
So CPC Blend, the production is normally around one and a half million barrels a day. A little bit less than that. Importantly, it's Kazakhstan's main export route to the world. It's about 80% of Kazakh oil production and Kazakh oil production has been on the rise in recent years. We've had a big expansion project just completed at the Tengiz field. That's the highest contributor to CPC Blend. And interestingly, the grade is quite a different grade from Russian Urals, and I think that's why it has a particular place in the market. Of course, then you bring in the geopolitics. Add to that, it's an unsanctioned oil grade, so the complications attached to Russian oil are much less. So that's the overall background than just what's actually happening. Fundamentally, it's quite a complicated delivery route to get this oil out of Kazakhstan. This is a pipeline that runs one and a half thousand kilometers across Western Kazakhstan, around the Caspian Sea over into Southern Russia to the Russian port of Novorossiysk, that's in the northeast corner of the Black Sea.

And this pipeline, it's been pretty reliable. I mean, there was a lot of anxiety when the Ukraine-Russia war started up in earnest in 2022 that there would be disruption, but actually it's stood the test of time, I think as you said in your introduction. But this week for the first time, we've seen apparently the first direct military attack on some of the equipment along this route, specifically a pumping station called Kropotkinskaya in southern Russia, which helps move the crude through the pipeline in large volumes. It was apparently attacked by seven drones carrying very lethal explosives and bits of metal. And the Russian authorities are now squarely pinning the blame on Ukrainian forces. We have seen a bit of an uptick, I think, in Ukrainian drone attacks on Russian infrastructure, but obviously we don't have a sort of independent proof of exactly where these drones came from.

So the upshot is that the flows through the pipeline apparently are going to be reduced by 30% or thereabouts while they carry out fairly major repairs on the pumping station. So they've got some kind of workaround where they can sort of bypass the pumping station, but obviously it affects the volumes. And those repairs apparently according to Transneft today, that's the Russian pipeline company, could take one and a half to two months to complete the repairs. There's a bit of a buffer if you want to then talk about actually shipping the crude across the Black Sea; there is a bit of a buffer there because there are storage facilities in Novorossiysk, quite a large storage tank farm. So probably there's some crude for these type of eventualities, but I think we probably expect some reduction in coming weeks.

Joel Hanley:
And there's a very reliable source of crude oil coming out of Novorossiysk from the Caspian. As I mentioned in the introduction, it is a hard-earned reputation for security of supply. When Russia invaded Ukraine, we saw differentials of CPC Blend dropped to about dated Brent minus nine, minus $8. I mean, everything sort of crashed a bit naturally, but especially if it was related to Russia. But since then it's kind of struggled to reach pre-invasion or pre-pandemic kind of prices. Luke, hasn't it? It is an interesting grade because there's a lot of it, as I mentioned, therefore, there's more supply than demand. You might naturally get a lower price, but it's a grade that despite being light sweet has often traded at a discount to dated.

Luke Stuart:
Yeah, that's right. It generally does trade at a discount to dated Brent. Recently, the weakness across the broader Med Sweet crude complex has seen differentials drop back down a little bit. The demand in Europe has been very thin among refinery outages and crude traders have called the market depressed.

Joel Hanley:
So what does this mean for the current price of CPC Blend and how are people reacting to that right now?

Luke Stuart:
So market participants in the Med Sweet crude market have so far not reacted with any immediate concern to the drone attack. One trader said that they've yet to hear of any impact. While a second said, it would take some time to assess how much of the oil flow will be impacted and how long any reduction will last for. Obviously, as well as Nick mentioned, we have some storage facilities too, which will prevent any immediate disruptions to loadings at the ports. So I think for now we're in a bit of a wait-and-see mode as to what any potential impact could be.

Joel Hanley:
Yeah, I mean, an outage of roundabout 30% or however much it is for the next few months will naturally have an impact on supply. But there are several lighter sweet grades that are absolutely not at a premium to heavy sour grades given the OPEC situation. Given the fact that Russia is increasingly feeling the pinch of sanctions around the world, it is an interesting market for this to fall into. As well, on the refinery network situation, I mentioned earlier that maybe some of the destinations for this crude might be under attack. We've seen Ukraine upping the aggression inside its invader's borders, and now as we record this, at the very moment we record this, Russia and the USA are meeting in Saudi Arabia to discuss this. So there's all sorts of brinkmanship and aggression going on ahead of any possible deal that might be agreed to or not agreed to by Ukraine. What impact are you seeing on refineries in the last few weeks? Because I think that we've started to see that really bite.

Elza Turner:
Yes, you are right, Joe. In the last few weeks since the beginning of January, there has been an increase of attacks on Russian refinery infrastructure, on tank farms. There have been attacks on the crude pipeline inside Russia, and they have been rumored attacks on some pumping stations along the Transneft pipeline. Unfortunately, Russia has decided to clamp down on any reports and on news about these attacks. So everything is kept very quiet. You need to dig a lot around Russian media, Ukraine media, Russian, various news outlets, market sources to find out what's happening.

What is clear is that three big refineries were attacked, and these are Volgograd, Ryazan and Saratov. And for a while, they stopped their operations. Now it wasn't clear for a while how big the damages are. Eventually, it turned out that maybe they didn't sustain very significant damages, or at least some of the damages have been partial. So all these three refineries, as we understand, are currently in various stages of restart. The big problem for Russian traders also is the lack of transparency on these attacks because they can't gauge what the expected supply will be. So prices of gasoline, and gasoline is the key motor fuel in Russia, have been on a see-saw recently up and down, depending on the state of rumors on the expected impact of attacks. They have been various rumors about a gasoline export ban and so on.

Joel Hanley:
So we have seen Russian diesel and gas oil leaving the country. Has Russia's profile of import and export, when it comes to refined products had to change? Obviously, it has a very large refining network, but are we starting to see Russia importing more motor fuels? Do we know?

Elza Turner:
No. No. Russia hardly ever imports motor fuels. The only place it can import from is Belarus, but we haven't got to this stage. Sometimes when there are shortages, they do import some volumes from Belarus, but that's about it. Russia basically balances gasoline. That's why it doesn't export much. So if the authorities see that there is a threat of shortages and price spikes, they'll just reinstate the gasoline export ban fully.

Joel Hanley:
Right. Okay. And speaking of alternative plans to compensate for logistical issues or market issues, is there another way that CPC Blend can move if let's say there's a further attack of some kind and the CPC pipeline is further damaged, how else can it reach the market as it needs to serve?

Nick Coleman:
I think the big question is this sort of the start of a trend or is this short-term blip? I mean, we've seen short-term issues with CPC loadings over the years, and in the short term you can sort of deal with storage or sending the oil in some other direction. There are a few different options. None of them are terribly good options if you're thinking about optimizing your price. So there is actually, one of the world's longest oil pipelines goes from the Caspian Sea East into China, into Xinjiang. So physically you can send the oil the other direction to the east, and CNPC does have a bit of a stake in some of the CPC oil volumes in the Kashagan field. Not a huge stake, that might quite suit some people in China or in CNPC. You can of course send it into the Russian Transneft system.

Joel Hanley:
But then it becomes very limited as to where it can go. Well, sanctions are taken.

Nick Coleman:
Yeah, it becomes much more of a legal quagmire and the whole thing.

Joel Hanley:
Yes, indeed.

Nick Coleman:
And then I suppose the third option, one that gets quite a lot of attention is sending it in tankers across the Caspian Sea where you unload it at the port of Baku, and theoretically you can then load it back into another pipeline. The main one that goes to the Mediterranean, that's not too bad. The Ceyhan port, the BTC pipeline.

Joel Hanley:
BTC, yeah.

Nick Coleman:
There's a second pipeline that goes up to the coast of Georgia on the Black Sea at Supsa. But this is by no means a simple... the complexities all the way. And one of the main complexities is that you can only have rather small shallow draft tankers on the Caspian because parts of the Caspian are very shallow. And that's before you come to the kind of unloading, loading, logistical costs in Azerbaijan. The price, there's a lot of complexity with does Azerbaijan actually want to kind of mix in that much third country crude into their prized Azeri light crude grade, which there's a different kind of price structure altogether.

Joel Hanley:
There is, we'll come to that with Luke in a minute, but as you say, so there are some very extreme viable options.

Nick Coleman:
There are short-term fixes, workarounds.

Joel Hanley:
But workarounds are just that, right? They're not optimal.

Nick Coleman:
So I suppose the question is are we going to see a further deterioration? Will the whole thing be fixed and forgotten about really in six weeks time? In which case all good really.

Joel Hanley:
Right, exactly. And then we will go along like before. But then yeah, as you say, it probably won't come to shuttle tankers across the Caspian, but if it does, that will only serve to make the grade more volatile in terms of price. And this is going into a market that, Luke, that it already has quite a lot of weaknesses. You mentioned Azeri light there, Nick, and how is CPC Caspian, how is that Mediterranean market faring at the moment generally, Luke?

Luke Stuart:
So recently traders have called this market quite depressed. There's a very thin demand for street crude barrels across the Mediterranean. Demand destruction has stemmed from various refinery outages around Europe, which were both planned and unplanned. Looking at Azeri light, we've seen some February loading cargoes deferred into March demand, which of course now means March cargoes are struggling to find homes. On top of that soft demand, there's been a significant increase in CPC Blend output, which has lengthened sweet crude supply in the region. The March CPC Blend program only has nine Aframax cargoes compared with 27 in January and 22 in February.

And the rest of the program is made up of larger Suezmax cargoes. Of course, this long supply and soft demand have weighed in differentials across the Med Sweet crude complex, and Platts recently assessed CPC Blend at a $4 per barrel discount to dated Brent on February 13th, which has been the steepest discount we've seen since March 2023. With softer CPC differentials, we've seen the arbitrage to Asia reopen and a growing number of Suezmax cargoes have been fixed for buyers in South Korea and China. Although the CPC Blend flow to Asia has helped clear some of the supply, there is still a lot of excess volume struggling to find demand among local buyers in the Med.

Joel Hanley:
Now we're seeing that in Europe across the board, and I mentioned the sweet sour spreads, and there's a lot of WTI Midland coming over as well. So naturally those light sweet grades are in a lot of competition, which is leading to actually quite low prices in Europe. Great. Luke, I think that's a good place to pause for now. Thank you, Luke. Thank you Nick, and thank you Elza. And thank you also for listening. Now I should tell you that we are excited to announce the upcoming 14th International FUJCON Conference hosted by S&P Global Commodity Insights, along with the government of Fujairah and the Port of Fujairah. Building on the success of previous years, FUJCON 2025 promises to deliver another exceptional experience filled with thought-provoking discussions, expert insights, and unparalleled networking opportunities. Join us as we gather to explore the latest trends, challenges, and innovations shaping the bunkering and fuel oil landscape in the Middle East and indeed globally.