Fitch Ratings says recent disruptions in crude oil supply via the Druzhba pipeline from Russia across Belarus to Poland and Germany indicate that supplies of Russian crude oil to Central Europe have become less reliable.

Belarus said today it has reduced the amount of Russian crude oil supply in transit to Poland and Germany. This is likely to be related to the dispute between Russia and Belarus over the excise tax and transit duty on Russian oil (see comment titled "Fitch: Russia and Belarus Energy Battle Takes a New Twist" dated 5 January 2007).

"Belarus is an important transit country for Russian crude oil to CE given that all three sections of the Druzhba pipeline pass through it," says Arkadiusz Wicik, Associate Director in Fitch's Energy team. So far only the supplies to Poland and Germany have been halted as reported by the Polish crude oil transportation company PERN "Przyjazn" S.A that operates the Polish part of the Druzhba pipeline. However, there may also have been supply disruptions to refineries in Ukraine, Slovakia, the Czech Republic and Hungary.

The crude oil disruptions news came as a surprise given the lack of significant disruptions of crude oil to Poland's PKN Orlen S.A. or Hungary's MOL in the past 10 years. As Fitch notes in its previous reports refineries in the CE region are highly reliant on supplies of oil and gas from Russia. Pipeline deliveries from Russia meet most of the crude oil demand in regional refineries, for example to PKN Orlen S.A. (rated 'BBB-' (BBB minus), Negative Outlook), Grupa Lotos S.A., MOL's refineries in Hungary and Slovakia and Lithuania's Mazeikiu Nafta AB (rated 'B+', Positive Outlook).

Nevertheless, Fitch views that the recent supply disruptions do not currently warrant a negative rating action for CE refineries given the obligatory inventory of crude oil and fuels in European Union countries in the CE region (80 days of fuel consumption in the case of Poland). In addition, CE refineries have alternative routes of supplies (for example Polish refineries can use the Gdansk terminal on the Baltic Sea). However, if supplies are not resumed in the long run, Fitch may review the ratings as a deficit in pipeline supplies from Russia would have to be met with seaborne imports of Russian crude oil, resulting in additional transportation costs or more expensive crude oil from the North Sea or the Middle East. Such a scenario would considerably affect CE refiners' margins, which are currently some of the highest in Europe thanks to a steep discount of Russian Export Blend crude oil to Brent (USD4/bbl in Q106-Q306).