Russia says will ensure oil to flow to Europe

DUSHANBE/MOSCOW (Reuters) – Russia’s energy minister and a top oil company denied on Friday they were preparing to cut oil flows to Europe in response to threatened sanctions, a step Moscow never took even at the height of the Cold War.

As Europe prepared its response to Russia’s invasion of neighboring Georgia, the energy minister said Moscow was doing everything it could to ensure stable oil supplies on its key supply line to Europe, the Druzhba (Friendship) pipeline.

“We are doing everything we can so Druzhba can keep working stably and supply European consumers with enough oil,” Sergei Shmatko told reporters in Dushanbe, the capital of Tajikistan.

Britain’s Daily Telegraph reported on Friday that the Russian government had told at least one oil company to prepare to cut deliveries to Europe if sanctions were imposed.

European Union heads of state meet on Monday to formulate a response to Russia’s invasion of Georgia, which was attempting to retake two Russia-friendly separatist provinces, as well as a Kremlin decision to recognize the rebels as independent states.

A senior French diplomat, who could not be identified, said sanctions were not imminent. A spokesman for German Chancellor Angela Merkel said Germany believed Russia would honor its contracts.

Energy markets have been nervously watching the dispute between Europe and Russia, the world’s second-largest oil exporter, over Georgia, a key oil and gas transit zone.

Oil prices were up 1 percent or $1.16 at $116.75 a barrel.

Efforts by Russia to present itself as a reliable energy supplier faltered in 2006, when European countries briefly lost Russian gas flows as state export monopoly Gazprom sparred with transit country Ukraine, like Georgia a West-leaning ex-Soviet republic, over prices.

Shmatko said the reliability of Russian supplies would not be called into question.

“We have worked for many years to gain not just the image, but the status of a reliable energy supplier to Europe and we would never let it suffer, even in this political situation,” Shmatko said in Dushanbe.

The Daily Telegraph story said “reports have begun to circulate” about a possible cut in shipments through the Druzhba pipeline that feeds Poland and Germany, and that it was believed that executives from the country’s second largest producer, LUKOIL, had been put on notice.

“LUKOIL is delivering the same amount of oil and oil products to Western Europe as before,” a LUKOIL spokesman told Reuters by telephone. “We have received no orders from the government.”

On the gas front, a leading analyst on the sector said Gazprom had its own financial interest in maintaining supply to Europe and was unlikely to cut back.

“Gazprom is going to make $60 billion this year from exporting gas to Europe. It’s highly unlikely that, on some kind of whim, it would suddenly decide that it didn’t want to do that,” said Jonathan Stern, director of gas research and Gazprom expert at Oxford Institute of Energy Studies.

“STUPID INSINUATION”

Russian oil traders said they had heard of no cuts to export volumes and it would be almost impossible to mount a serious retaliation against Europe by cutting Druzhba volumes.

Russia’s export crude also leaves the country by sea in tankers and Russia cannot control its ultimate destination.

“That (a cutoff of European supplies) is someone’s stupid insinuation,” a Moscow-based trader at a Western major said. “There is no point in that kind of sanctions. The West gets Russian oil by sea, one way or another.”

“And what would Russia do with the oil? Put it back in the ground? And what about the fact that oil sales form the base of its currency inflows? There were buyers for Russian oil even at the height of the Cold War.”

LUKOIL cut Druzhba supplies to Germany earlier this year in a dispute with Germany’s supplier, Sunimex, but Germany mostly compensated for the loss of oil from the pipeline with seaborne deliveries, including tankers of LUKOIL’s own crude.

“Only a sick mind would think of cutting off Europe,” a trader at a Russian oil company said. “Technically it is practically impossible, since (Russian) refineries are running at maximum rates and it is difficult to arbitrage right now.”

“You can’t completely rule it out, though,” the trader added. “Politics…always interferes with work.”