Ukraine finds Russian weak spot with unrelenting refinery attacks: analysts

Russia's oil refineries are proving highly vulnerable to Ukrainian drone attacks, and the domestic oil and gas sector faces a formidable challenge as Kyiv's ambitions and capability increase, industry and defense sources in and outside Russia have said.

President Vladimir Putin on May 15 put his country on notice on the seriousness of its military situation with a forecast that defense and security spending could reach 8.7% of GDP this year; in the same week he replaced long-time defense minister Sergei Shoigu with an economist from a non-military background, Andrei Belousov.

While the reasons for those moves are complex, they come as Ukrainian drones have been penetrating much of western Russia. The Salavat oil refinery, 1,300 km from Ukrainian territory, was hit on May 9, and the Slavyansk refinery near the Black Sea was hit for a third time on May 18-19, taking refining capacity potentially affected by attacks to nearly 1 million b/d.

Some 16 Russian refineries have been hit -- some multiple times -- as well as the Ust-Luga condensate plant, numerous fuel depots, and parts of Novorossiisk port. Russian oil product exports hit a post-pandemic low in April, and diesel and gasoil exports have continued to shrink in May, averaging 686,000 b/d up to May 20 -- down 405,000 b/d from January, according to tanker tracking by S&P Global Commodities at Sea.

The drones used for such long-distance strikes differ from those on the battlefield and demonstrate "some kind of good guidance system," likely involving satellite technology or image-recognition software, a long-standing Moscow-based defense analyst told S&P Global Commodity Insights, requesting anonymity.

"The Ukrainians see what they're hitting [and] Russia does not have good ways of countering such attacks," the analyst said. "The Ukrainians can easily produce more drones than Russia can produce defensive measures. The geography of these attacks is going to spread."

Russian response

As Russia becomes increasingly accustomed to the threat from drones, it has managed to bring some refineries back on stream relatively quickly. Authorities insist fuel stocks are ample, with allied Belarus also able to provide supplies from its two refineries. If needed, Russia can also produce alternative forms of gasoline by adding octane-boosting additives to naphtha, although with implications for emissions, Russian media have noted.

Meanwhile, the response on international oil markets has been relatively mild compared with the initial aftermath of Russia's full-scale invasion of Ukraine and subsequent embargos on Russian oil, partly reflecting higher global inventories, and a tepid demand outlook.

"Doubts over supply have mostly faded as Russian outflows have proven adept at finding new markets, namely Turkey and Brazil, while key importing markets such as Europe have been able to backfill lost volumes -- from India, the Middle East, and the US," Rebeka Foley, senior oil markets analyst at Commodity Insights, said. Platts, part of Commodity Insights, assessed ICE low sulfur gasoil futures at $762.50/mt on May 17, up 7% from the start of 2022.

At home, Russia's energy ministry has also been working with the Rosgvardiya national guard on plans to protect refineries with Pantsir anti-aircraft missile systems, a senior energy ministry official, Artyom Verkhov, was quoted by Interfax as telling lawmakers March 19. Simple measures such as installing metal nets over refining facilities may already be providing protection, while Russian media have reported on new civilian efforts in drone detection development.

However, skeptics in Russia have questioned whether protecting refineries will be a high priority for the military, given other wartime needs. They highlight the significant expense involved, as well as potential complications associated with deploying military kit at refineries, such as interference with existing technology.

Neither does an absence of strikes by either side on some possible targets mean those targets are strongly defended. Both sides are thought to have shown restraint in respect of some possible targets. Some Ukrainian infrastructure that is still used for transiting Russian gas to Europe may have been subject to "gentleman's agreements," industry analyst and former Gazprom Neft head of strategy Sergei Vakulenko said.

Questionable defenses

The level of Russia's technical know-how when it comes to drone defenses is also questioned; a number of analysts expect at least some extension in the range of attacks, perhaps to the fringes of Siberia.

Ukraine remains an "industrial country" with a defense industry dating back many decades that can call into service numerous manufacturing sites, the Moscow-based defense analyst said. And in hitting refinery columns deep inside Russia, Ukrainian drones are showing an accuracy comparable to the world's leading militaries, the analyst said, adding that the attacks typically feature dozens of unarmed decoy missiles -- likely supplied by foreign allies -- deployed alongside the armored drones to confuse defenses.

"We're just at the beginning of the process and in very uncharted waters," the analyst said of the drone war, adding that the Russian government shake-up demonstrated "very serious problems [that] are mostly military-industrial."

As for the fate of Russian refining, analysts note technology sanctions targeting secondary refining processes may become a growing problem. And while there is spare capacity -- particularly for diesel production -- outages may strain a rail network that has been stretched by Russia's redirection of exports to the Asia-Pacific.

A March 20 article in Russian journal Energy Policy quoted an industry source highlighting the difficulty of defending refineries and calling for greater military involvement. Despite some success bringing refineries back online, more serious types of repair could take at least 18 months, in the context of labor shortages and sanctions, Professor Vladimir Kapustin of Gubkin Oil & Gas University in Moscow was quoted as saying.

The skepticism was echoed by Callum Fraser, research fellow at the London-based Royal United Services Institute, who went on to highlight the constraints on Russia's military. Fraser, as well as the Moscow-based analyst, played down any potential for Russia getting help from China on the issue. "Russia is prioritizing its limited sophisticated anti-drone technology for the frontline in Ukraine, especially during this new attempted offensive around Kharkiv... which limits how much they will be able to invest in air defense of critical infrastructure over such a dispersed industry," Fraser said.