South Korea's SK Innovation to raise Q4 crude runs but still cautious on fuel demand, margins

South Korea's SK Innovation plans to raise run rates and crude throughput in the fourth quarter of this year as the country's top refiner expects oil product cracks to remain healthy, though macroeconomic challenges pose a threat to domestic and regional fuel demand outlook, company officials and fuel marketing managers said over Nov. 9-17.

SK Innovation refineries' average run rate in the third quarter was 84%, up from 80% in Q2, a company official said.

Q3 run rates averaged 81% at its Ulsan complex and 86% at the Incheon complex, compared with 89% and 73% average rates respectively, a year earlier. Ulsan's run rate averaged 77% and Incheon was 88% in Q2.

The refiner indicated that it may slowly raise crude throughput in Q4 as refining, sales and export margins are forecast to stay strong.

Asian crack spreads improved significantly since Q2 and margins should hold at reasonably healthy levels heading into peak winter season, with stockpiling requirements, improvement in Chinese demand, year-end holidays and winter power consumption expected to support the gasoil and jet fuel/kerosene complex, middle distillate marketers at the company and other major South Korean refiners told S&P Global Commodity Insights.

Platts assessed second-month gasoil crack spread against Dubai crude swaps at an average of $24.49/b to date in Q4, compared with $25.70/b in Q3 and $16/b in Q2, S&P Global Commodity Insights data showed. The second-month jet fuel/kerosene crack against Dubai crude swaps averaged $23.26/b to date in Q4, largely stable from the Q3 average of $24.40/b and up sharply from the Q2 average of $15.30/b.

Jet fuel demand, especially, may outperform as the services sector is the bright spot across East Asia, middle distillate marketers at three major South Korean refiners and traders based in Singapore, Seoul and Tokyo said.

South Korea's flag carrier Korean Air for one, recently indicated it will expand operations for the winter season to meet resurgent travel demand by increasing operations to China, Japan, Southeast Asia, North America and Oceania.

SK Innovation said its Q3 net profit jumped to Won 729.6 billion ($551.9 million) from Won 175.2 billion a year earlier on the back of strong refining margins. It logged an operating profit of Won 1.56 trillion in Q3, more than double the Won 704 billion profit a year earlier.

Still, SK Innovation would remain cautious and not boost crude runs abruptly due to lingering uncertainty in the global oil and financial markets, the company official and middle distillate marketers said.

High interest rates and inflation as well as tepid consumer sentiment and fragile demand is a concern, the company official added. The Q3 average crude run rate was still well below pre-pandemic levels of around 90%.

Operating conditions in the South Korean manufacturing sector remained muted at the start of Q4 with manufacturers signaling an eighteenth consecutive monthly decline in production volumes, according to latest S&P Global South Korea Manufacturing PMI report.

"On the price front, South Korean goods producers signaled an acceleration in input price inflation. The rate of inflation was robust and the strongest seen in the year to date amid reports of higher raw material prices, notably those linked to oil," said Usamah Bhatti, economist at S&P Global Market Intelligence.

"Firms also mentioned that unfavorable exchange rate movements led to higher costs on inputs from abroad," Bhatti added.

Refinery operations

SK Innovation has no plans to shut CDU units for maintenance in Q4 but the refiner will shut its 80,000 b/d No. 2 residue hydro-desulfurization unit at the main Ulsan complex for several weeks of maintenance. The exact timeline for maintenance could not be immediately ascertained.

SK Innovation's refining subsidiary SK Energy operates the Ulsan complex that runs five CDUs with combined capacity of 840,000 b/d on the country's southeast coast, while its other complex in Incheon on the west coast operated by refining subsidiary SK Incheon Petroleum runs two CDUs with 275,000 b/d capacity. This puts SK Innovation's total refining capacity at 1.115 million b/d in addition to a 100,000 b/d condensate splitter.

The refiner kept the run rate of its heavy oil upgrader at 85% in Q3, up from 82% in Q2, but lower than 93% a year earlier. The run rate of its two RFCCs were 87% and 99% in Q3, up from 79% and 97%, respectively, in Q2. However, still lower than 90% and 100% a year ago.

Upstream performance

SK Innovation's upstream production averaged 51,500 boe/d in Q3, compared with 43,800 boe/d a year earlier and 54.900 boe/d in Q2.

In September, SK Innovation started crude production at China's offshore Block 17-03, which would pump up to 29,500 b/d.

SK Innovation, through upstream subsidiary SK Earthon, is currently involved in 14 oil and gas upstream projects in eight nations, including six blocks under production such as Block 17-03 in China and Block 15-1 in Vietnam.

The 14 projects also include four LNG projects including Oman LNG and Qatar's Ras Laffan LNG.