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Highlights


Druzhba crude exports set to hit 1.8% sulfur

No plans to reduce crude flows to Europe

New high-sulfur blend could start after 2020

Russia expects to decide this year on a method of stabilizing the declining quality of its Urals crude oil headed to Europe as increasing volumes of the key export blend flow to more lucrative markets in the east.

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But Russia has no plans to reduce its Urals export volumes to Europe and is aiming to maintain its share of western crude markets even while exports to the East continue to climb, deputy energy minister Alexei Teksler told S&P Global Platts.

Following the launch of the East Siberia-Pacific Ocean (ESPO) pipeline in 2010, Russia has been increasing crude exports eastward by boosting crude production in East Siberia as well as redirecting some flows from the west.

The redirection of crude to the east has caused a cut in the westbound exports, which fell 4.5% on the year to around 2.79 million b/d in 2017, raising concerns that there may be a further cut in deliveries to western markets.

The shift has also seen more volumes of light, sweet crude being delivered to eastern buyers.



As a result, sulfur levels in Urals exports from Russia's western ports has been creeping up in recent years, forcing some regional refiners to revaluate their crude run slates.

According to Russian oil pipeline operator Transneft, the sulfur content of Urals from the Baltic port of Ust-Luga and the Druzhba pipeline running to Europe will hit 1.8% this year, a level considered the maximum allowable for Urals crude.

The current sulfur content in Urals produced by Tatneft and Bashneft, for example, is already more than 2%-2.3%, according to a recent report by Russian daily Kommersant.

"One should remember that we work in the market and spot volumes and other 'flexible' volumes can be redirected to higher premium markets, for example to the Asia-Pacific region, if there is a premium margin there," Teksler said.

"We constantly monitor the situation and study the issue in detail. In 2018, we expect to decide on measures to stabilize it, if needed," he said.


NEW URALS BLEND


Transneft has suggested several options to resolve the quality problem of Urals western flows.

The ministry, however, has been slow so far to take any decisions as the sulfur content has so far remained within the established range.

New oil fields in East Siberia expected to go online in the near-term could add sufficient volumes of low-sulfur crude to the mix and mitigate the problem, ministry's officials said earlier.

But the key question is how the suggested measures, if implemented, will impact the Russian oil sector's economy and Urals pricing on the international markets.

Transneft is also pushing to re-direct some crude volumes with high sulfur content into a separate flow, running to the Baltic port of Ust-Luga, in a move that could resolve the problem in the mid- to longer-term.

Transneft would need to separate around 30 million-36 million mt/year of high-sulfur Urals flows from the export system to maintain the quality of crude flows for up to 10 years, Transneft's vice president Sergei Andronov said last month.

In this case, sulfur content in the new blend, which could be dubbed Urals Heavy, would be an estimated 2%-2.7%, he said.

But Transneft believes it would need around 2.5-3 years to implement measures to separate high-sulfur volumes into the new blend, once the decision is taken.

The separation of higher-sulfur crude into a new blend, however, is not the only option which is being considered by Russian oil players.

Rising sulfur in Urals exports


LOCAL REFINING OPTION


Among other options is sending higher sulfur crude to domestic refineries-currently sulfur content in such deliveries is limited to 1.8% -- and redirecting some higher-sulfur barrels to the east, which Transneft believes would only be a short-term solution.

"It would remove the symptoms, rather than cure the problem," Andronov said.

If Russia redirects more high-sulfur crude eastward, sulfur content in ESPO, which currently remains at 0.5%, could grow to 0.6%, which is still within the established specifications.

ESPO crude exports have quadrupled since 2010 to nearly 1.2 million b/d in 2017, with Russia outperforming Saudi Arabia as the biggest crude supplier to China in the last couple of years.

ESPO deliveries are set to grow to around 1.6 million b/d in 2020, when the expansion of the ESPO pipeline network is completed.

These figures include long-term deliveries to China via the Skovorodino-Mohe pipeline offshoot from the ESPO trunk network as well as spot cargoes via the port of Kozmino on the Pacific Ocean.

Teksler said is confident, however, that Urals' quality will not deteriorate further, despite warnings from Transneft that, this year, the sulfur content in Urals is likely to reach the specs' ceilings for all key westbound exports.

--Nadia Rodova, nadia.rodova@spglobal.com