Commodities 2021: Russian refining volumes set to increase amid upgrades

Moscow — Russia's refining sector is looking to 2021 with renewed optimism, after the crash in demand for oil products in 2020, with completion of plant modernization in the new year and state support measures set to boost refining volumes.

However, refiners in the country will still face challenges, with global demand remaining 7-8 million b/d down against pre-crisis levels and government estimates suggesting that it will take two to three years for pre-pandemic levels to return.

Refining volumes in Russia fell by 5.4% on the year to 270 million mt in 2020. Throughput was especially impacted during the nationwide lockdown in the spring, when run cuts resulted in product shortages and pushed gasoline prices up to record highs.

Additional coverage

Commodities 2021: Global oil supply set for shake-up in 2021 as crude, refining squeeze resumes

Video: Five commodity themes for 2021

Commodity markets in 2020: A year in nine infographics

As a result, the government has now asked refineries to keep processing higher to ensure sufficient supply of motor fuel for domestic consumption despite poor economics.

"Refineries have been reducing throughput throughout the year yet fulfill their obligations to supply the fuel to the domestic market. A very difficult year," according to Anton Rubtsov, the energy ministry's director of oil refining and gas processing.

However, Deputy Premier Alexander Novak said Dec. 25 that refining companies can expect demand to pick up by 5-6 million b/d next year.

"There is a trend that in 2021 refining in Russia will significantly increase," Russian pipeline operator Transneft's Vice President Sergey Andronov said.

The growing availability of COVID-19 vaccines and an increase in business activity across Russia are likely to support a further boost to refining.

State support

Modernization of refineries remains a key point in the diversification of the Russian domestic market and is being overseen by President Vladimir Putin himself, who has approved additional measures stimulating investments in the refining sector.

While the COVID-19 pandemic led to worldwide delays to upgrade projects, Russia's refineries seemed to proceed with their own modernization plans and in the summer the Moscow refinery launched its long anticipated Euro+ complex.

Tax amendments that come into force in January will also bring Russian refiners further resources to complete upgrades.

"This program is important in order to have a competitive configuration, taking into account Russian logistics, quality of oil, market specifics and sales in the domestic market," Rubtsov said.

The energy ministry has said it hopes the modernization program will offset any pressure on product prices in the future.

In addition to tax rebates on ethane and LPG, the government is also considering implementing more stimulating measures in the refining sector in 2021.

This could form part of a new strategy for the development of the Russian oil and gas industry that is currently being worked out by the energy ministry.

Overall, Russia's support measures for refiners are expected to increase the share of light oil products, including gasoline, kerosene and diesel fuel from 65% to 75%-76% in the next five years, according to the energy ministry.

Production boost

While Russia's oil output fell by 8.4% to average 10.29 million b/d in 2020, volumes in 2021 are likely to be higher due to improving demand and easing of production restrictions under the OPEC+ deal.

The OPEC+ grouping of producer nations begins a gradual increase of production in January and Russia is set to see a boost of 125,000 b/d in January.

It is not yet clear how much of this will go to the export market, but the last time OPEC+ eased its output restrictions -- in August -- the authorities asked producers to direct more of the extra crude to domestic processing.

At present, Transneft expects 2021 loadings to remain flat on the year, at around 9 million b/d, but it may revise deliveries upward depending on Russia's production levels.

However, volumes of oil products will increase in any scenario, Andronov said.

"The growth of refining in Russia will be significant, including the volume of transportation of oil products," Andronov said.