The Jamestown Foundation
Eurasia Daily Monitor
Vladimir Socor
July 15, 2008

On July 8 in Prague the United States and the Czech Republic signed an agreement on a U.S. radar system on the Czech Republic’s territory as part of the antiballistic missile shield. On July 10 Russia’s oil pipeline monopoly Transneft announced that oil deliveries to the Czech Republic were being cut from the contracted volume of 500,000 tons down to 300,000 tons for the month of July. Transneft did not mention the reasons for this deep cut and did not specify whether supplies would fully resume after July (Interfax, July 10).

Whether the signing of the Czech radar agreement triggered Russian retaliation through the oil supply cut is a matter of conjecture. In any case, maintaining uncertainty about the reasons behind supply cuts and forcing the target country to guess is a key element in Russia’s misuse of energy supplies as a political instrument. This uncertainty provides deniability for Russia and delays an effective response from the target country and its European partners. Even if the cut turns out not to have been politically motivated, it introduces an element of intimidation into the relationship by reminding the target country that Russia can use this instrument politically next time.

The Czech government’s inquiries in Moscow remain unanswered thus far. Russian diplomats in Prague are giving enigmatic responses to local inquiries. The relevant Czech ministries, the state-owned oil transport company MERO, and the refineries’ shareholders are all in the dark about Moscow’s and the Russian oil companies’ intentions. Prime Minister Mirek Topolanek and Minister of Foreign Affairs Karel Schwarzenberg have told the Czech and international media that they are awaiting a Russian response to their requests for an explanation (Pravo, July 12).

Russia failed to inform the European Commission about the supply cut. Moscow is obligated to provide such information in a timely manner, in accordance with an early warning procedure regarding oil and gas supplies. Russia agreed with the European Union to institute that procedure in 2007, following supply cuts through the Druzhba system that affected Germany and several new member countries of the EU in Central Europe. In that incident (January 2007), Transneft suspended oil deliveries to Belarus, where the Druzhba system originates, causing supply shortfalls to six European countries farther downstream.

On July 14 Transneft vice-president Mikhail Barkov invoked “technical and commercial reasons” for the supply cut. In his version, two Russian producer companies, which he did not name, have decided that their crude oil can be processed more profitably in Russia. Another Russian company might, however, step in to compensate for the supply shortfalls, Barkov said (Interfax, July 14).

The Czech Republic is 100 percent dependent on imported oil, 70 percent of it from Russia through a branch of the Druzhba pipeline system. Other branches of the Druzhba system supply several Central European countries and Germany. As the Czech government’s special envoy for energy affairs, Vaclav Bartuska, observed, the cut to the Czech Republic was unlikely to be a mere technical problem, since the other Central European countries were not affected (Lidove Noviny, July 14). Moscow’s move seems suspiciously to single out the Czech Republic.

The Czech Republic is storing oil reserves for 95 days of average-level usage, amounting to almost 1 million tons. In the event of longer-term shortfalls in supplies, Prague can activate supply agreements for increased deliveries through the Trans-Alpine (TAL) pipeline, which runs from Trieste (Italy) via Austria to the refining center at Ingolstadt, Bavaria. That line has a continuation line from Ingolstadt to Kralupy and Litvinov (IKL pipeline). The Czech Republic made agreements for both regular and contingency oil deliveries through the TAL-IKL pipelines already in the 1990s, as part of a foresighted policy to diversify supplies. However, switching the flow of supplies even partially can be a costly move (Hospodarske Noviny, July 14).

The main consumers of Russian oil in the Czech Republic are the Kralupy and Litvinov refineries, owned by the Ceska Rafinerska consortium. Its shareholders are the Polish PKN Orlen (via its Unipetrol group) with 51 percent, Italy’s ENI-Agip with 32.5 percent, and Royal Dutch Shell with 16.5%. Shell, however, looks to sell its stake to some other company, which remains publicly unnamed but was known last year to have been Russia’s Lukoil and this year Russia’s Transneft.

Meanwhile, Polish majority control of the consortium is a bulwark against a partial Russian takeover. PKN Orlen rescued Lithuania’s Mazeikiai refinery in 2006 from a takeover by Lukoil or Rosneft. These, along with Transneft, had earlier cut deliveries of oil by pipeline to Mazeikiai to force it to surrender and have stopped all deliveries to Lithuania through the Druzhba system since 2006 in retaliation for the Lithuanian-Polish agreement.

In recent days, Rosneft president Sergei Bogdanchikov and board chairman Igor Sechin, who is deputy prime minister of Russia, have declared an interest in acquiring refining capacities in EU territory, specifically in the Czech Republic and Hungary (RossBusinessConsulting, July 1; Vilaggazdasag, July 8; Reuters, July 11).