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FEATURE: Excess fuel oil weighing on Russian refinery runs

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FEATURE: Excess fuel oil weighing on Russian refinery runs

Highlights

Export outlets drop after Russia's invasion of Ukraine

Upgrades that will cut fuel oil output facing delays

Rising stockpiles of fuel oil in Russia, as international buyers shun the country's hydrocarbons, were set to weigh on refinery runs in April, according to market sources.

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"There is a problem with fuel oil," one source said, with another concurring, saying there was an "abundance of fuel oil".

That has taken its toll on domestic prices which have started tumbling after being relatively steady for much of March. Fuel oil basis FCA Ufa traded on the St. Petersburg exchange at around Rb15,000/mt ($179/mt) on April 1, or about half the level at the end of February.

Russian refineries have been carrying out large-scale upgrades in recent years aimed primarily at reducing fuel oil output in favor of higher yields of lighter products.

Some, including Perm, have managed to completely halt fuel oil output while others had expected to do so in coming years, with others lagging.

As a result, output has halved over the past 10 years to about 40 million mt/year. That output relies on export outlets, save in winter months when utilities use it as reserve fuel during the heating season. River navigation over the summer provides an extra and cheaper outlet for exports.

Thus, Russia's invasion of Ukraine came at a time when the peak domestic demand season was winding down and export markets were expected to take up the slack, which has not happened.

Also, river navigation, which started earlier than planned in southern Russia in late March will face difficulties as the Azov Sea, the first place to provide access to barges carrying fuel oil and vacuum gasoil, is closed for navigation.

According to sources, some grain was being shipped through the waters of the Azov Sea but the potential for shipping oil products seemed slim.

With domestic fuel oil consumption accommodating "15% of what is produced", refineries will have to start cutting back processing, one source said.

Lower throughput

Throughput has already dropped due to the start of spring maintenance.

Several refiners are carrying out planned works, including Saratov in the south, as well as the Moscow, Ryazan and Yaroslavl refineries in central Russia. There are also limited works in the Samara and Ufa refinery hubs and at the Omsk refinery.

Otherwise, "refineries will reduce throughput. Some will bring their maintenance forward," a trader said.

Smaller refineries, which predominantly produce feedstocks such as fuel oil for export, were expected to run at around 50% in April.

Some still exporting small batches were facing surging crude oil costs which will make their economics unfavorable.

Meanwhile, bigger refineries, which have been relying on domestic sales, were also expected to feel the brunt of diminishing exports.

Such concerns were echoed in recent remarks by Russian deputy prime minister Alexander Novak. Refiners continued to supply all markets and maintained normal production in March, Novak said, but looking to April and May "there are difficulties. Our companies are deciding how to deal with logistics, payment."

Stronger domestic demand for diesel and gasoline was expected to provide some cushion in April, meaning that run cuts at bigger refineries which have reduced their fuel oil output were estimated at around 15%-20%, but could reach as much as 40% for less complex sites.

Further out, processing could fall "by at least 50%", another trader said.

Upgrades

Meanwhile, the planned upgrades reducing the level of fuel oil production seemed set to be delayed by Western sanctions on technology.

The US said March 2 it was imposing export controls on technology that Russia could use to modernize its refineries.

EU energy sanctions also aimed at hampering upgrades to Russia's refining sector have been given preliminary approval by member states.

Japan said March 8 it will ban exports of refining units to Russia.

As a result, Russia's energy ministry has proposed deferring the planned completion date for upgrades by two years to 2028.

Three delayed cokers, units that cut output of fuel oil, were due to come online in 2022.

Taneco launched its delayed coker in test mode at the end of 2021, but there has been no recent update about the expected launch of delayed cokers at the Norsi and Omsk refineries. Furthermore, the delayed coker at the Antipinsky refinery has been offline following an incident at the start of the year.

Meanwhile, the prospects for the completion of upgrades, such as the deep processing complex at Moscow refinery which will allow it to halt fuel oil output, look increasingly slim.