S Korea's dismal jet fuel, diesel demand to keep SK Innovation's crude runs low

Seoul — South Korea's ailing aviation sector and a slowdown in new construction activity will likely continue to weigh on domestic jet fuel and diesel consumption for the rest of the year, putting pressure on the country's top refiner SK Innovation to cut run rates further in the fourth quarter.

South Korea's Incheon international airport is one of the largest and busiest airports in Asia, but a more than 84% drop in passenger traffic over the first nine months of the year saw the country's jet fuel demand in January-September plummet 43% at 16.31 million barrels, according to latest data from state-run Korea National Oil Corp.

Jet fuel consumption is expected at around 4.1 million barrels in Q4, down 60% from 10.33 million barrels in the same period a year earlier, according to South Korean middle distillate marketing managers surveyed by S&P Global Platts.

Industrial diesel demand has also been hit hard by the tepid economic activity caused by the coronavirus pandemic as the number of new construction projects dropped sharply, while manufacturing output was impacted amid a slowdown in international goods and services exports, the survey participants said.

Diesel consumption fell 3% year on year at 40.3 million barrels in Q3 and demand for the fuel is expected to fall to 39 million barrels in Q4, down 13% from a year earlier, the survey showed.

As a result, major South Korean refiners are in no hurry to revamp their operating rates in the coming months.

SK Innovation will lower its average refinery run rate in Q4 to under 72% -- which was the Q3 average -- and the company would not raise crude throughput in the first half of 2021, a company official said Nov. 2.

"The decision was driven by sluggish demand of oil products due to the protracted coronavirus pandemic, which has led to poor refining margins," the official said.

"Product crack, mainly middle distillates, is expected to remain weak as stock levels remained high," he said, noting market conditions are unlikely to improve until the first half of next year.

The FOB Singapore jet fuel crack against front month cash Dubai averaged minus 77 cents/b in Q3, down sharply from the minus 2 cents/b average in Q2 and $8.46/b in Q1, Platts data showed. The benchmark FOB Singapore gasoil crack spread against cash Dubai averaged $6.6/b to date in 2020, down 55% from the 2019 average of $14.67/b.

Due to the faltering demand and tepid margins, SK Innovation suffered a net loss of Won 16.14 billion ($14.21 million) in Q3, compared with a net profit on Won 174.26 billion a year earlier.

EXTENDED MAINTENANCE

SK Innovation's two refining subsidiaries of SK Energy and SK Incheon Petrochem, have long maintained a strategy to run their crude distillation units at full capacity, but "under the new policy, the company will keep the crude run rate low and will raise it only when market conditions improve," the official said.

SK Energy's crude throughput dropped to 76% in Q3, which marked the lowest-ever level and compared with 94% in the same period last year, according to the company official.

SK Incheon's crude run rate averaged at 60% in Q3, down from 78% a year earlier and 76% in Q2, which makes SK Innovation's combined average run rate at 72% in Q3, down from 77% in Q2 and 89% in Q1.

As part of efforts to cut its crude run rate, SK Energy has shut its No. 3 CDU with a capacity of 170,000 b/d since late September. The refiner originally planned to shut the No. 3 CDU for maintenance for several weeks in Q4, but instead shut the CDU earlier than scheduled to cope with weak refining margins and tumbling oil product demand and exports, a refinery operation source with knowledge of the matter told Platts.

The source refused to provide details on when SK Energy will restart the No. 3 CDU, but indicated that the shutdown is likely to be longer than usual as the refiner is seeking to keep its crude run rate lower amid the pandemic.

SK Energy has also shut its 80,000 b/d No. 2 residue hydro-desulfurization unit since mid-October for maintenance for about a month, according to the source.