Germany closes long energy chapter with Russia by turning on Rosneft

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In May 2017, Rosneft CEO Igor Sechin visited Berlin to present a five-year plan to double the Russian oil company’s investment in German refining to 600 million euros.

Cut to 2022 and Rosneft’s assets were taken over by the German government. Sechin’s dream of downstream expansion into Europe’s biggest petroleum products market is in shambles, a victim of the escalating energy war between Russia and the West.

On Friday, the German government said it was taking control of Rosneft’s stakes in three German refineries – PCK in Schwedt, northeast of Berlin, MiRo in Karlsruhe and Bayernoil in the Bavarian town of Vohburg.

Olaf Scholz, Chancellor, said the decision was “inevitable”. “We have known for a long time that Russia is no longer a reliable energy supplier,” he said. “That’s why it’s important to do everything we can now to protect Germany’s energy supply.”

“Ultimately, it’s about Germany rediscovering the need for energy security,” said Amrita Sen, analyst at Energy Aspects. “Germany recognizes that its dependence on Russia has gone too far, and now, with the embargo coming, there aren’t many options left.”

Indeed, the trigger for the takeover was the impending EU ban on Russian oil imports, which will come into effect on January 1 and could put massive pressure on the German refining industry. Russia has already cut off natural gas supplies to Germany, threatening a deep recession in the country this winter.

Berlin managed to find alternatives to Russian crude, but the Schwedt plant presented a problem: not only does it sit right over a Russian pipeline, the 4,000 km, but it is also 54 percent owned by Rosneft, a company with little interest in refining non-Russian oil at the site.

The government, which places Rosneft’s holdings under the federal energy regulator, the Bundesnetzagentur, said Russian ownership of Schwedt and the other two refineries jeopardizes their business operations.

“Major critical service providers such as suppliers, insurance companies, banks, IT companies, but also customers, were no longer ready to work with Rosneft,” the Economy Ministry said.

We are a long way from Sechin’s press conference in 2017, which marked the opening of the new Berlin office of Rosneft Deutschland. It was a time when German-Russian relations were in good shape and the Kremlin was still seen by many in Germany as a reliable partner.

The optimists were personified by Michael Harms, head of the Ost-Ausschuss, the main lobby for German investors in Russia. Alongside Sechin, one of President Vladimir Putin’s closest confidants, he said Rosneft’s new representation in Berlin was “proof of Russia’s unwavering commitment to the European market”.

Graphs showing Rosneft's German assets - Refinery ownership share (%)

German-Russian trade had, he added, “increased dramatically” in the first two months of 2017, and was expected “to grow by 10% this year, if not more”.

Sechin echoed his assessment. The volume of trade between Russia and Germany had quadrupled between 2000 and 2013 to reach 56 billion euros, German imports from Russia having tripled to 27 billion euros and German exports to Russia sevenfold to 29 Billions of Euro’s. “And it’s not just oil deliveries and oil refining, but also technology cooperation,” he said, alluding to the massive market Russia had become for German manufacturers.

Yet the warm words exchanged between Sechin and Harms went against the mood that prevailed in many Western capitals. Russia had annexed Crimea just three years earlier, a breach of international law that had plunged East-West relations to their lowest point since the Cold War. Europe and the United States responded with sanctions, some of which targeted Rosneft.

Instead of being hurt by punitive measures from the West, the energy partnership between Russia and Germany has intensified. Russia has built a new gas pipeline under the Baltic Sea, Nord Stream 2, which would allow it to double the volume of gas exports to Europe, bypassing Ukraine. Germany backed the project despite warnings from the United States and its allies in Eastern Europe that it would increase the continent’s dependence on Russia.

The close energy relationship has its roots in a historic agreement between West Germany and the Soviet Union in 1970, whereby the Germans paid for Soviet natural gas with exports of steel pipes.

The agreement was supported by Ostpolitik, the policy of engagement with the Soviet bloc led by Chancellor Willy Brandt in the late 1960s and 1970s.

But according to Thomas O’Donnell, a Germany-based energy analyst, he was also driven by a German desire for “strategic balance – it was a way for Germany to free itself from its reliance on live in the United States”.

Many members of the German establishment, he said, resented US dominance in energy and disliked “this idea of ​​a fungible global oil market traded in dollars and protected by the United States Navy”. This resentment, he said, was one of the reasons Germany stayed away from the US war in Iraq in 2003. And it was why it was fitting for Germany to have direct access to Russian oil and gas.

For decades, the system worked well, with “long-term assets like refineries and pipelines serving as the cement of the relationship,” said Henning Gloystein, an analyst at Eurasia Group.

Russian hydrocarbons flowed into Europe regardless of Cold War tensions, and Germany was spared the construction of expensive liquefied natural gas terminals and other infrastructure to handle alternatives to Russian energy imports.

“But when your biggest supplier gets hostile, things break badly and they break fast,” Gloystein said.

“The energy system that Germany relied on for 40 years is effectively in shambles, and they can no longer afford to leave these strategic assets in Russian hands.”

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