Europe's refiners struggling to maintain high runs despite strong margins

Some European refiners are grappling to keep run rates elevated in order to meet resurgent oil demand, exacerbated by a lack of investment and expensive feedstocks despite very high margins, industry executives said June 7.

These refineries, which were until recently, very reliant on Russian crude and feedstocks, were also having to look farther, which was further complicating the situation.

Russian refineries are major producers and exporters of diesel and fuel oil. These fuel oil feedstocks are crucial for processing in the secondary units of complex refineries.

Since Russia's invasion of Ukraine, European refiners have ramped up runs, boosted by strong distillate and gasoline cracks and a dearth of diesel supply, despite the high natural gas and hydrogen costs.

However, Marco Schiavetti, chief commercial officer at Italy's Saras, said many plants were struggling to keep its utilization rates despite very strong margins.

"We are having serious difficulties to keep up with demand after a few difficult years," he said at the Global Executive Petroleum & Energy Conference from S&P Global June 7.

"We have been cutting investment costs and now is difficult to maximize our jet and diesel ratio. $50/b margins are great, but we are facing serious difficulties in increasing runs."

Italian refiner Saras operates the 300,000 b/d (15 million mt/year) refinery located in the island of Sardinia in Italy.

Product tightness

Refining margins in Europe have been exceptionally strong in recent months amid expectations of a drop in refined product imports into Europe due to sanctions and the boycotting of Russian-sourced products, according to analysts at S&P Global.

Gasoline and diesel cracks have soared over $30/b and $60/b, respectively, while jet fuel cracks led the barrel at close to $70/b, over the past month, according to S&P Global data.

But the self-sanctioning of Russian product imports by many European oil companies and trading houses meant many of these plants were finding it tough to replace these Russian barrels.

Achilles Kyrtsis, head of group strategic planning & intelligence at Hellenic Petroleum, said the shortage of feedstocks like Russian vacuum gasoil were problematic for the industry, and things could worsen due to the recent EU oil ban which will come into effect later this year.

"We are also seeing a deficit of 800,000 b/d middle distillates because of Russian production coming down," Kyrtsis added.

Russian refineries are major producers and exporters of diesel and fuel oil. These include ultra-low sulfur diesel, high sulfur fuel oil, high sulfur vacuum gasoil, low sulfur vacuum gasoil, high sulfur straight run fuel oil and low sulfur straight run fuel oil. These fuel oil feedstocks are crucial for processing in the secondary units of complex refineries.

Inefficiency

Schiavetti also said Europe's key refineries were now having to buy its crude from far-flung regions like West Africa and US to avoid Russia's Urals crude.

He said that as a result refineries were facing more logistical delays, which was causing "inefficiencies."

Several European refiners have started buying crude cargoes from as far afield as Abu Dhabi and Angola as well as additional North Sea barrels, in a trend that will accelerate after EU leaders May 30 agreed a deal to ban Russian oil imports by sea.

Many refineries in Europe had cut investment costs in the past few years, which meant these plants cannot process at their full capacity for a long period of time.

"We have been cutting maintenance of tanks and now we need more tanks ... to keep up with demand. But we are enjoying the very good margins," Schiavetti added.