By Dmitry Zhdannikov, Olga Yagova and Gleb Gorodyankin
LONDON/MOSCOW (Reuters) - The bills are due for millions of barrels of contaminated Russian oil that have been stuck for weeks in pipelines from Belarus to Germany - but no one wants to pay.
Western oil companies and European refiners that bought the oil a month ago, before discovering it was unusable, have so far refrained from freezing payments as they are keen to maintain good long-term relations with the world's second biggest oil exporter and avoid protracted legal battles in Russian courts.
Instead, several Western buyers have asked Russian producers if they can postpone payments for the tainted crude while buyers and sellers agree how to resolve the mess - and how to share the costs, four traders involved in Russian oil trading said.
For the buyers of an estimated 19 million barrels of contaminated crude stuck in the pipeline and loaded on tankers, it's a $1.2 billion (930.02 million pounds) question.
The buyers want Russian producers to give guarantees in the form of bank deposits that they will contribute to the clean-up, or delay payments due this week until the crisis is resolved, said a source at European refiner, who declined to be named.
"There's around 0.8-0.9 million tonnes of dirty oil sitting in the pipelines between Belarus and Germany that no refiner wants to take," he said. "This oil needs to be evacuated somewhere to restart the pipeline. But it would be wrong for Russia to assume European refiners will bear all costs."
The refiner said Russian oil producers had yet to respond to the proposals made by major European buyers.
"We are ready to help sort out the problem and find solutions for the dirty oil. But we want Russian producers to come up with financial guarantees that they will help cover the costs," said a second buyer of Russian oil in Europe.
Russian state-owned oil producer Rosneft said it was too early to comment on the issue. Lukoil declined to comment and Surgutneftegas said it was holding normal commercial talks with its buyers.
International oil companies and trading houses have not commented publicly on the contamination crisis.
State Russian pipeline monopoly Transneft declined to comment on the issue of compensation. It said on Tuesday it was not to blame for the organic chloride contamination because it could only have been added by producers.
MAY DEADLINES
It has been three weeks since Belarus told oil refiners and pipeline operators in Europe that the crude heading towards them down the 5,500 km (3,400 mile) Druzhba pipeline network was heavily contaminated with organic chloride.
Russian oil flows via Druzhba were halted, sending crude to a six-month high above $75 a barrel and tarnishing Russia's reputation as an exporter at a time of rising competition with U.S. and Middle Eastern oil sales.
Russia has since said the oil was contaminated deliberately by an unnamed local producer while Belarus said it would take months to restore clean oil supplies to Europe via Druzhba.
Organic chloride is used to clean oil wells and accelerate the flow of crude but it should be removed before the oil enters the supply chain as the compounds can damage refining equipment.
To get the pipeline working again, the tainted oil needs to be removed and stored somewhere so it can be diluted with clean oil - in some cases in proportions of one to 30 - to bring the organic chloride down to safe levels.
Traders estimate the process for all the contaminated oil in Druzhba would cost tens of millions of dollars.
In the meantime, the question of who should pay for the contaminated oil when the bills come due this week remains.
$1.2 BILLION QUESTION
Exports to Europe via Druzhba are fairly complicated because they involve dozens of sellers, buyers and banks. Normally, contracts are rolled over and letters of credit renewed as payments are made via intermediaries - and the oil keeps flowing.
But the contamination has thrown a spanner in the works.
Russian producers sell oil to European refiners along the Druzhba pipeline in Germany, Poland, Slovakia, Hungary and the Czech Republic. Those refineries are owned by companies such as PKN Orlen, Grupa Lotos, MOL, Total, Eni and Shell (LON:RDSa), among others.
Once the Russian oil producers have transferred their crude to Transneft, it effectively becomes responsible for delivering the right quality of crude to pipeline companies in Europe.
As soon as those companies, such as Poland's PERN or Slovakia's Transpetrol, acknowledge receipt of oil from Transneft, the ownership of the crude passes from Russian sellers to European buyers.
But no money changes hands at this point as payment is usually due in the middle of the next month, meaning the bills for oil exported via Druzhba in April should be paid by mid-May.
According to trading sources, at least 19 million barrels of contaminated crude, worth $1.2 billion at current market prices, has yet to be paid for.
That includes 8 million barrels in the Druzhba pipeline and another 11 million barrels loaded onto tankers at Ust-Luga port in the Baltic. Those vessels are now anchored off Europe because the trading houses that took on the oil are struggling to sell it to refiners.
Russian producers, meanwhile, have already paid taxes to the Russian state for the oil they sold in April - such as export duties and mineral extraction taxes - putting them under pressure to recoup money owed by the buyers.
'EXPENSIVE EXERCISE'
With payment deadlines looming, none of the Western oil buyers has yet instructed their banks to withhold funds as that could have significant repercussions, according to traders.
"You can of course say that I won't pay because I didn't get the right quality oil," said an executive at a major commodities trading house. "But no one wants this nuclear option. We prefer responsible dialogue."
Another source with a major buyer said the money it owes for Ust-Luga cargoes will be paid on time but it will be accompanied by claims for damages against the sellers for poor quality.
Further complicating talks between buyers and sellers is the fact that the various oil contracts in question fall under different legal systems.
Most sales along the pipeline are governed by Russian law - which leaves issues of oil quality open to interpretation. Sales from Ust-Luga, meanwhile, are mostly governed by English law, according to traders familiar with the contracts.
"We expect a complicated claim handling through the whole supply chain of Russian crude oil," said Swedish refiner Preem.
Belarusian refiner Naftan said it had filed claims against unnamed Russian suppliers for delivering low quality oil during April.
For now though, until buyers and sellers can agree how to get the tainted oil out of Druzhba - and who will foot the bill - the pipeline is set to remain shut.
"Based on Druzhba's normal throughput, every new day of stoppage costs Russia $80 million in lost revenue. That is an expensive exercise," said the trader with a European refiner.