UPDATE 2-Russia sees oil quality normalising in late May after contamination, output drops

The quality of Russian crude is gradually improving after a contamination scandal that rocked oil markets, buyers said on Tuesday, but Russia's energy minister cautioned that it will take until the second half of May to fix the problem.

A long outage could force refineries in Eastern Europe and Germany to cut operations and prompt Moscow to reduce oil production. It could also trigger claims by Western oil buyers against Russian producers and pipeline monopoly Transneft for lost profits as they struggle to sell contaminated oil. Russian oil production in early May dropped to 11.19 million barrels per day (bpd) from an average 11.23 million bpd in April, an industry source said, pushed down in part by the contamination debacle.

Another industry source said Russian oil producers reduced their supplies to the Transneft network by some 650,000 bpd on May 1-6 in comparison to April. Transneft handles around 85 percent of all Russian oil. The tainted oil, detected late last month, has forced Russia to shut the Druzhba pipeline to Central Europe and Germany. As of Tuesday, the line had been closed for almost two weeks and it was unclear when normal operations would resume.

Energy Minister Alexander Novak told a televised government meeting that he expected clean oil to reach the Baltic Sea port of Ust-Luga on Wednesday, a delay of one day compared with previous plans. He said the "situation" had not affected oil exports or production as flows had been redirected.

"As far as normalisation of the situation is concerned, we expect that to happen in the second half of May. Work in this direction continues," he said, adding that "normalisation" meant cleaning both legs of the Druzhba pipeline. The Russian government had initially promised to fix the problem by May 7 after buyers discovered large volumes of Russian crude had been contaminated with organic chloride, a chemical compound used to boost oil extraction.

"It is improving although it is still not up to normal standards," one buyer said. For a factbox on Russian oil flows to Europe, click on

The problem with oil quality in the Druzhba (Friendship) pipeline emerged when Belarus, through which the link is routed, complained about high levels of organic chloride. Druzhba pumps around 1 million barrels of oil per day, or about 1 percent of global demand.

Tests by Belarus on oil from Druzhba showed organic chloride levels of 150-330 parts per million (ppm) between April 19 and 22, according to documents seen by Reuters, well above the maximum 10 ppm allowed by Transneft. The quality of oil from Ust-Luga fell to between 200 and 300 ppm. However, in the last few shipments it has improved to 60-75 ppm, three trading sources said.

Pipeline operator Ukrtransnafta said on Monday that clean Russian oil had started flowing from Belarus towards Ukraine and it was ready to resume oil exports to the European Union. Novak also said on Tuesday that clean oil had started to flow to the Brody station in Ukraine for transit to Europe.

(Reporting by Dmitry Zhdannikov, Olga Yagova, Gleb Gorodyankin and Olesya Astakhova, writing by Vladimir Soldatkin; Editing by Dale Hudson and Louise Heavens)

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