London — High sulfur gasoil exports from Russia and the Former Soviet Union have dwindled in recent months following a series of refinery upgrade projects that have lowered the sulfur content of fuel, traders said Wednesday.
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Production of the key 1,000 ppm gasoil specification -- used for heating in some Western European countries and driving and power generation in North Africa -- is now almost non-existent, forcing traders and importers to rely more heavily than before on blending.
This, traders said, could lead to the phasing out of the specification in Europe and North Africa over the next few years.
"There is no more pure 1,000 ppm available in the Baltics, you need to blend low and high sulfur to meet the specification," said one trader.
Russia has been for many years one of the main sources of gasoil exports to Europe and Africa, but the quality of its output is changing fast.
The country exports refined products from its terminals in the Baltic Sea and the Black Sea, and from neighboring countries such as Latvia.
Over the last few years, Russian refiners have built desulfurization units and hydrocrackers to lower the sulfur content of their fuel, boosting the output of diesel with maximum 10 ppm sulfur.
For example, Latvia's Ventspils has historically exported the largest chunk of high sulfur gasoil in the Baltics, along with Latvia's Riga, with the majority of the volumes heading to Northwest Europe and the Amsterdam-Rotterdam-Antwerp hub, as well as West Africa and South America.
Ventspils is the end point of the Russian gasoil pipeline and also receives gasoil and other oil products by railcar. It is the largest gasoil exporter in the Baltics with about 900,000 mt available each month.
The Ventspils pipeline used to ship 2,000 ppm, then it switched to 1,000 ppm, 500 ppm and 350 ppm gasoil until late last year.
In the fourth quarter, traders said sulfur levels from the pipeline were routinely below 200 ppm and in December, Transneft, the Russian pipeline operator, said it started shipping 10 ppm specification on it.
Currently both 10 ppm and 50 ppm are being pushed through the pipeline, although the majority of volumes is still 50 ppm, trading sources told Platts.
Cargoes from Ventspils containing as low as 15 ppm sulfur were offered by trading house Vitol in the market during the second half of March, and at the beginning of April some 10 ppm cargoes were seen, said traders.
"Anything in between 10 ppm and 50 ppm comes out [of Ventspils]: 15, 20, 30, 40 ppm," said a second trader.
Of the 900,000 mt of gasoil available from Ventspils each month, about 600,000 mt will eventually meet the 10 ppm diesel specification once all Russian refinery upgrades are complete.
The main stumbling block has been the Samara group of refineries, owned by Rosneft, which haven't yet switched entirely to 10 ppm. A project to lower the sulfur content of their gasoil is taking more time than expected and could be delayed, according to traders.
They have started producing 10 ppm, but in small volumes, with 50 ppm remaining the bulk of output.
The remainder of the volumes exported through Ventspils, or about 300,000 mt, tends to arrive by railcar and currently consists of higher sulfur gasoil streams such as 4,000 ppm and 7,000 ppm specification, market sources said.
The other major Latvian terminal Riga is exporting both 10 ppm diesel and higher sulfur gasoils, although details were scarce.
In addition, in the Amsterdam-Rotterdam-Antwerp region, about 200,000 mt of 1,000 ppm specification gasoil is still produced each month.
Western European refineries have chosen to focus a larger part of their production on marine gasoil, or DMA, of which about 600,000 mt a month is produced in ARA, following the start of the Sulfur Emission Control Areas for ships sailing in Northwest European waters last January.
BLACK SEA BARRELS
Russia's refinery modernization program means the sulfur content of gasoil coming out of ports in the south, in the Black Sea, has also been falling recently and is set to fall further, according to market sources.
Traders said that, just like in the north of Russia, there was little if any 1,000 ppm gasoil exported from the Black Sea now.
"There isn't 1,000 ppm from the Black Sea anymore, we're talking anything between 50 and 200 ppm from Novorossiisk plus some 2,000 ppm that's still coming out," said a third trader. The trader added that higher sulfur gasoil such as 5,000 ppm, 6,000 ppm and 7,000 ppm was still produced.
But many countries in the Mediterranean basin including Algeria, Libya, Tunisia, Egypt and Italy still consume 1,000 ppm gasoil specification, forcing traders and importers to adapt to meet their needs.
The most notable example in the Mediterranean is VTTI' new oil products terminal in Cyprus, which has helped to redraw flows in the region.
The terminal began supplying 1,000 ppm gasoil into Europe and North Africa at the end of last year, beginning to establish itself as a significant new hub in the Mediterranean and taking advantage of changes to traditional trade patterns out of the Black Sea.
Vitol, which jointly owns VTTI with Malaysia's MISC, is also using the terminal to blend high and low sulfur gasoil streams from various locations, to try to maximize profitability in light of changing supply flows from the Black Sea, according to market sources.
The Cyprus terminal provides an advantage to the Black Sea as the logistics of blending are particularly difficult in that area due to strict terminal rules restricting part cargo loadings.
BLENDING AT CORE
Blending activities have now become even more important in the European gasoil market as it allows traders to bridge the discrepancy in specification between supply and demand.
Traders can often supply lower sulfur gasoil streams, but blending is often seen as more economic as higher sulfur gasoil typically trades at a discount to lower sulfur gasoil.
Some European countries such as Germany and parts of Switzerland have mostly moved away from 1,000 ppm specification in favor of 50 ppm gasoil.
Other parts of Northwest Europe such as France, Belgium and the rest of Switzerland have been slower to follow suit and still consume 1,000 ppm gasoil for heating -- although Belgium is planning to move to a lower sulfur heating oil specification next year.
In the Mediterranean region, Algeria, Libya and Egypt have the largest requirements for 1,000 ppm gasoil and have not shown signs of lowering their sulfur specifications, even if sources in those countries said traders do sometimes supply lower sulfur gasoil.
Finally, West Africa, a major outlet for Northwest European gasoil volumes, typically imports 2,000 ppm gasoil, supporting the need for blending.