European refiners eye higher runs as margins soar, but face issues securing feedstocks

Surging refining margins and strong demand for fuels could see European refineries try to increase run rates, but the unprecedented issues with securing crude and feedstocks amid the fallout from Russia's invasion of Ukraine mean some may end up having to lower runs, according to oil market watchers.

European refining margins have spiked amid extreme volatility in the wider oil complex in the wake of Russia's invasion of Ukraine. Notably, European diesel crack spreads have soared to record highs as demand remains stable while buyers are looking for alternatives to Russian diesel. Helped by strong diesel cracks, margins for Russia's key Urals export grade, Nigerian Bonny Light, US WTI and North Sea Forties have all jumped sharply following a collapse in demand for Russian crude.

Although Western sanctions on Russia have sidestepped energy flows so far, fears of tougher curbs, a UK ban on Russian-affiliated shipping, soaring transport costs, and "self-sanctioning" are combining to limit shipments. S&P Global Commodity Insights estimates dislocations on Russian crude alone could reach 1-2 million b/d in March.

"Refinery operations in Western Europe and FSU have not been severely affected so far by the Russia-Ukraine conflict, as many refiners begin to shift from Russian crude to alternative sources," analysts at S&P Global said in a note.

So far in March, there appears to have been no disruption to Russian diesel exports, but question marks remain over where the cargoes might find homes.

Meanwhile, demand has also been boosted by panic buying in Germany, as buyers fear further price rises, while in the Mediterranean availability has been tightening, with one trader noting that "Greece and Turkey are meant to be exporters, but they are buying diesel."

Gasoline supply is also tight, and while it's easing, demand remains strong, according to market sources.

Crude, feedstock supply

Decisions to alter runs -- whether up or down -- will be made by each individual refinery depending on its exposure to Russian feedstocks and how profitably it can run secondary units, according to traders. For those that can secure sufficient crude supply, the decision seems to be obvious -- runs are expected to remain high.

Azerbaijan's Socar said that its Star refinery in Turkey "produces with different types of oil," adding that "currently there is no issue on our agenda regarding the reduction" of the refinery's production.

For some European refiners, however, securing alternative supply of crude and feedstocks as they are turn away from Russian material is posing challenges.

Shell, which was one of the first to stop all spot purchases of Russian oil and products, warned that the decision would lead to reduced throughput at some refineries as it adjusts its crude sourcing.

"We are changing our crude oil supply chain to remove Russian volumes. We will do this as fast as possible, but the physical location and availability of alternatives mean this could take weeks to complete and will lead to reduced throughput at some of our refineries," Shell said.

Shell operates close to 1 million b/d of European refining capacity, including Germany's biggest plant, and is a major player in the spot market for Urals crude, a mainstay of European refining.

But none of its refineries are linked to Russia's Druzhba crude pipeline to Europe as the company sold its stake last year in Germany's Schwedt refinery, which is linked to the pipeline.

A company spokesperson declined to comment March 11 if any of its European refineries are currently being affected by a shortage of Russian crude or feedstocks.

BP, TotalEnergies, Italy's Eni and Saras, Spain's Repsol and Cepsa, and Portugal's Galp have also suspended all new purchases of oil and oil products from Russia, raising the prospect of crude or fuel supply shortages.

Some feedstock traders have been concerned that the market will struggle to secure sufficient alternatives for Russia's VGO, which secondary units process to get light products.

Furthermore, running of units such as hydrocrackers, that use hydrogen, continues to be costly on surging natural gas prices.

Yet, according to S&P Global, margins for refiners reliant on purchasing spot natural gas "have also been pulled up due to the oil price spike." Despite high natural gas prices, runs in Western Europe "held up" in the last quarter of 2021, and "currently good prospects for demand recovery and stronger margins will encourage refiners to run."

Maintenance to increase downtime

Meanwhile, heavy maintenance in Europe is expected to increase downtime in Europe.

Outages, which have so far remained relatively flat, are "expected to increase more significantly" as new planned turnarounds begin, according to S&P Global.

A host of refineries across Europe have started or are about to start planned maintenance.

Shell Energy and Chemicals Park Rotterdam -- formerly known as the Pernis refinery -- started major maintenance at the end of January, although the refinery will continue operations as the works will be staggered.

A number of other plants in the Amsterdam-Rotterdam-Antwerp region are set to undergo works, as well as several German refineries, including Heide, Lingen and Ingolstadt, Denmark's Fredericia, France's Gravenchon plant, Poland's Gdansk. In the Mediterranean, Spain's Bilbao and Coruna, and Greece's Elefsina, Turkey's Izmir and Izmit, Croatia's Rijeka and Israel's Haifa are also undergoing full or partial works.

Against that background refineries that can up their throughput are likely to reap the benefit from strong margins.

According to S&P Global, "ARA gasoil stocks are extremely tight, and potential supply disruptions, backwardation in the gasoil market, and upcoming maintenance season all point to more tightness going forward. This will support cracks further and encourage some refiners to keep running to capitalize on robust diesel cracks in Europe."

And meanwhile, France's Donges appears on track to resume operations by the end of March after being idle since November 2020, initially for economic reasons and then for planned maintenance.