Russian-owned refineries add to EU energy headache as Germany braces for fuel stop

Germany and Italy consider future of plants operated by Russian companies

The Schwedt oil refinery in Germany is majority-owned by Russian company Rosneft. Bloomberg

Moscow’s energy stand-off with its European neighbours has turned the spotlight on two Russian-owned oil refineries in Germany and Italy that are complicating Europe’s efforts to purge Russian fuel from its power grid.

With Chancellor Olaf Scholz saying on Thursday that Germany could "only speculate" whether Russia would cut off fuel exports, a refinery at Schwedt near the Polish border is seen as a weak link in Germany's oil supplies because Russian company Rosneft is the majority shareholder.

“If I call them up and ask them what they’re doing to become independent of Russian energy, they won’t even pick up the phone,” said German Economy Minister Robert Habeck.

In Italy, Russian company Lukoil is the sole shareholder of the ISAB refinery in Sicily, which produces diesel, gasoline and other fuel products and employs hundreds of people.

But Europe’s scramble to rid itself of Russian energy, in order to stop financing the assault on Ukraine and remove a geopolitical weapon from the Kremlin’s hands, has led to suggestions that both plants could be nationalised.

Germany opened the door to that possibility this week when Mr Scholz's ruling coalition proposed legal changes which would allow critical infrastructure to be seized by the government.

Mr Habeck, who said it was hard to understand in hindsight how Rosneft had been allowed to control 54 per cent of Schwedt’s shares, did not commit to taking it over but said ministers were preparing for “all imaginable scenarios”.

He said preparations were being made with Poland, which is partly supplied by the plant in the former East Germany, for “the event that Rosneft is no longer the operator of the refinery”.

This could include replacing Russian oil imports, which come to Schwedt through the Druzhba pipeline, with shipments from elsewhere via the Baltic port of Rostock. Mr Scholz said on Thursday that Germany "has to prepare" for the possibility of Moscow turning off the tap.

Rosneft is a sore subject for Germany because its former chancellor, Gerhard Schroeder, is a member of the oil company’s board and has frequently caused embarrassment in Berlin with Kremlin-friendly remarks.

Mr Schroeder and his successor Angela Merkel are now blamed for letting Germany become dependent on Russian imports for coal, oil and gas. It is unwilling to stop them immediately for fear of economic chaos.

But other oil shipments down the Rhine in western Germany have already been replaced, and a second French-owned refinery in the east is in the process of replacing its Russian contracts, meaning Germany’s reliance on Russian oil has fallen by about two thirds since the invasion.

This means an oil embargo would no longer be a “national economic catastrophe”, said Mr Habeck, although it could still lead to local power disruptions and a spike in already alarmingly high fuel prices.

The European Union, urged on by members including Poland, has agreed an embargo on coal and is discussing a potential ban on oil, but has not found consensus on the gas imports it most relies on.

The situation was given greater urgency on Wednesday when Russian gas supplier Gazprom cut off exports to Poland and Bulgaria for refusing to pay for it with roubles, a demand made by the Kremlin which western powers say is a breach of contract.

Despite the scramble for alternatives, a tracking group, the Centre for Research on Energy and Clean Air, said on Thursday that the EU had sent 46.6 billion euros ($49.1bn) in energy payments to Russia during the two-month war in Ukraine.

Germany provided 9.1bn euros of this, making it the largest European importer, followed by Italy with 6.9bn. A quarter of Russian imports arrived at the ports of Rotterdam, Maasvlakte, Trieste, Gdansk and Zeebrugge.

Italy, like Germany, is trying to diversify its power supply with gas deliveries from outside Russia and investments in renewable energy, but the future of the Lukoil refinery in Sicily remains uncertain.

A spokesman for Minister of Economic Development Giancarlo Giorgetti told Reuters that the ministry was examining the situation, but that there was “concern about the social implications for the area” if Russian oil is stopped.

At least 1,000 people work at the ISAB plant and the three jetties that handle oil imports, and Lukoil may be unable to source oil from elsewhere because lenders are unwilling to provide it with funds.

Diego Bivona, the head of an industry lobby group in Sicily, has cautioned against what he described as the “demonisation of anything attributable to Russia” in the multiple rounds of sanctions imposed by the EU.

Although Lukoil has distanced itself from what it called the “tragic events” in Ukraine, its president Vagit Alekperov last week resigned after being hit with western sanctions.

Mr Alekperov, worth an estimated $22.5bn, was sanctioned by Britain in a sweep of 206 oligarchs, Kremlin-friendly figures and separatists in breakaway regions of Ukraine.

The research centre’s report on Thursday, written by analysts Lauri Myllyvirta and Hubert Thieriot, said the EU’s measures so far were not cutting Russian revenue because increasing fuel prices were offsetting lower volumes.

“Europe’s desire to keep the door open to fossil fuel shipments and payments for them has prevented more comprehensive sanctions on Russian banks, financial institutions and trade,” the analysts said. “It's time to stop supporting Putin's war crimes.”