Ukraine has suspended Russian oil pipeline flows to parts of central Europe since early this month because Western sanctions prevented it from accepting transit fees from Moscow, Russian pipeline monopoly Transneft said on Tuesday.
International benchmark Brent crude jumped by $2 per barrel to trade near $98 as the news added to energy supply concerns, but turned negative later in the day.
Europe is heavily reliant on Russian crude, diesel, natural gas and coal. Energy prices have rallied this year on short supply as Europe scrambles to replace Russian energy with alternative sources.
Flows along the southern route of the Druzhba pipeline have been affected while the northern route serving Poland and Germany remains uninterrupted.
The suspension of pipeline flows on Tuesday will hit countries such as Slovakia, Hungary and the Czech Republic, which all rely heavily on Russian crude and have limited ability to import alternative supply by sea.
The fact that refiners have to import seaborne oil on such short notice will make the job to secure alternative supply even more difficult in an already tight oil market, traders said.
Hungarian energy firm MOL and Slovak pipeline operator Transpetrol confirmed flows have been halted for a few days over the payment of transit fees.
MOL said it had reserves for several weeks and was working on a solution. MOL's oil refiner Slovnaft said that it initiated discussions with Ukraine and Russian partners on possible payment of the transit fee by Slovnaft or MOL.
Hungary is one of the most reliant countries on Russia oil and its government has been lobbying hard to get exemption from wider EU sanctions on Moscow.
Hungary can import oil via Adria pipeline that connects the Omisalj oil terminal in Croatia to its Duna refinery in Hungary, but the capacity of the route is limited and shipments are much more expensive than via Druzhba.
Slovakia's options for alternative oil imports are even more limited as it has to import oil via Hungary.
Poland's PKN Orlen, which controls refiner Unipetrol in the Czech Republic, may secure alternative supplies from Trieste in Italy via the Transalpine (TAL) pipeline, though the route is operating close to its limited capacity and might not be enough to fulfil feedstock needs, traders said.
The Czech Republic's pipeline company MERO has operative oil stocks that can last at least until the second half of August, and the government is not currently planning to tap its near 90-day strategic reserve, Industry Minister Jozef Sikela said on Tuesday.
MERO said it expected Russian oil supplies through the Druzhba pipeline to the Czech Republic to restart within several days.
Russia's Transneft said it made payments for August oil transit to Ukrainian pipeline operator UkrTransNafta on July 22, but the money was returned on July 28 as the payment did not go through.
It said the shipments were halted from Aug. 4.
Transneft said in a statement that Gazprombank, which handled the payment, told it the money was returned because of European Union restrictions.
SANCTION RULES
Under the new sanctions, European banks have to receive approval from a relevant government authority instead of deciding by themselves whether to allow a transaction, Transneft said.
It said European regulators had yet to decide on algorithms for all the banks, which complicates the dealings.
Transneft is considering alternative payment systems, but had sent a request for the transaction to be allowed, the pipeline monopoly said.
MOL and Unipetrol are the main buyers of oil via the Druzhba route, also known as the Friendship pipeline, while Russia's Lukoil, Rosneft and Tatneft are the main suppliers of oil.
UkrTransNafta did not respond to a request for comment.
Since March, Hungary, Slovakia and the Czech Republic have relied extensively on supplies of Russian Urals crude via the Druzhba pipeline and reduced purchases of maritime crude.
A decline in European demand for Russian oil since Russia invaded Ukraine at the end of February has pushed the value of seaborne Urals, used to price Druzhba deliveries, to the widest discount in history against the dated Brent benchmark.
Moscow refers to the invasion as a "special military operation".
Russia normally supplies about 250,000 barrels per day (bpd)via the southern leg of the Druzhba pipeline. If the supplies remain suspended Russian oil exporters will have to divert volumes to sea ports, traders said.
Russian oil loadings from its western ports of Primorsk, Ust-Luga and Novorossiisk were set at 8.74 million tonnes in August.
Russia, the world's second biggest oil exporter and leading gas exporter, has already reduced gas pipeline flows to many EU members, citing problems with turbine maintenance on the Nord Stream 1 pipeline as well as sanctions against some buyers Moscow describes as "unfriendly".
