S&P Global Offerings
Featured Topics
Featured Products
Events
S&P Global Offerings
Featured Topics
Featured Products
Events
S&P Global Offerings
Featured Topics
Featured Products
Events
Solutions
Capabilities
Delivery Platforms
News & Research
Our Methodology
Methodology & Participation
Reference Tools
Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Featured Events
S&P Global
Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
S&P Global Offerings
S&P Global
Research & Insights
S&P Global
Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
About Commodity Insights
Solutions
Capabilities
Delivery Platforms
News & Research
Our Methodology
Methodology & Participation
Reference Tools
Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Featured Events
S&P Global
Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
S&P Global Offerings
S&P Global
Research & Insights
S&P Global
Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
About Commodity Insights
S&P Global Offerings
Featured Topics
Featured Products
Events
Support
25 Jul 2022 | 13:02 UTC
Highlights
State subsidies, renewed export flows boost processing economics
Legislation changes, sanctions could pose new challenges
Russian refineries are reaping the benefits of state subsidies for domestic production coupled with strong summer demand, but the threat of a tougher winter and a heavier EU sanctions burden now looms.
Refinery runs are increasing for now and most plants, apart from those undergoing maintenance, are ramping up gasoline and diesel production as Russians opt to head for domestic holiday destinations after many international airlines suspended flights to and from Russia following Moscow's invasion of Ukraine.
According to Kommersant daily, Russian refinery throughput could reach 24 million mt in July as oil companies restore runs to last year's levels.
In July 2021, Russian refineries processed 23.51 million mt, according to energy ministry data. Recent data has been unavailable as Russia stopped publishing it shortly after it invaded Ukraine.
Apart from strong summer domestic demand, partially restored product exports to new destinations in Africa and the Middle East have also helped support refinery operations.
Russian refineries were hit hard at the start of the war in Ukraine as their typical export routes to Europe gradually closed because of sanctions and self-sanctioning.
Refinery throughput slumped in March due not only to falling exports but also tumbling domestic demand and acute economic uncertainty -- interest rates at the time soared and the ruble weakened significantly. With high levels of oil in storage, a number of refineries fully or partially halted operations.
The situation was considered especially challenging for simple small and medium-sized refineries that typically produce feedstocks such as naphtha, VGO and fuel oil, which head to the export markets.
Subsequently, domestic demand has started to recover alongside a stronger ruble and lower interest rates, but demand is still lower than it was a year ago. However, export flows remain low since the invasion as international oil companies and buyers have taken steps to cut ties with Russia.
However, run cuts bottomed out in April and since May refineries started to raise throughput, according to market sources.
Processing in June rose 8% month on month to 5.4 million b/d, according to the Russian Center for Energy Development, although it was below the June 2021 level.
According to Moscow-based consultancy Petromarket, Russian refinery margins in June sharply exceeded the level seen at the beginning of 2022, thanks to rising state subsidies as well as the wider difference between the price of crude and products, known as crack spreads.
As of June 30, complex refining margins increased 160% from February 22 to Rub21,000/mt ($382/mt), while simple refining margins quadrupled, reaching Rb5,000/mt over the same period, Petromarket told S&P Global Commodity Insights July 19.
However, while Russian crude oil and products can still be exported to the EU, those flows are about to stop under the EU's sixth sanctions package adopted in early June, which involves phasing out Russian crude imports in six months, and other refined products in eight months.
Russian oil refineries are receiving two types of subsidies, both paid monthly: a refundable excise tax on oil and a compensation under the so-called damping mechanism.
"The government subsidies, in particular, the damping surcharge, paid when supplying motor gasoline and diesel fuel to the domestic market, has primarily contributed to the [rise in] net margins of oil refineries," Petromarket said.
Simple refineries, however, are hardly eligible for the damping mechanism compensations for gasoline and diesel, as they produce only a limited amount of finished grade products.
However, they can benefit from the refundable excise tax on crude oil, even though payments have declined since February due to the falling crude prices, the consultancy said.
Petromarket has estimated that the refundable excise tax for a gasoline refinery amounted to Rb3,500/mt in June compared with Rb5,400/mt in February. For a diesel refinery, it stood at Rb4,000/mt in June from Rb5,600/mt in February, and for simple refineries, Rb3,000/mt in June from Rb4,600/mt in February.
On the other hand, damping compensations between February and June surged 26% for gasoline and 23% for diesel fuel to Rb34,900/mt and Rb28,300/mt, respectively.
The reason for the soaring compensations, which refineries get for gasoline and diesel they supply to the domestic market, have been strong export netbacks compared with relatively weak domestic prices.
The damping mechanism was introduced in 2019 to compensate producers when domestic motor fuel prices are below export netbacks, but it requires them to pay into the budget when the spread flips. It is used to ensure stability in the domestic market when international prices surge.
Furthermore, low domestic crude prices have provided an extra advantage.
As of June 30, Russian refineries were estimated to be paying Rb25,000-25,400/mt for crude oil compared with Rb46,400-46,800/mt on Feb. 22.
Russian oil refineries have also seen an improvement in net margins thanks to oil product exports, despite significant sanction-related discounts on the European market.
Petromarket estimated the discount for Russian gasoline on the European market at an average of $270/mt compared with products of non-Russian origin; at $240/mt for naphtha, $110/mt for diesel fuel and middle distillates and $50/mt for fuel oil. But despite the discounts, the spread between the price Russian refineries pay for crude oil and the export product prices continues to secure high profitability, according to Petromarket.
Underpinning the improved economics, in early June the Tuapse refinery on the Black Sea resumed operations after halting them in March, as it couldn't ship ready production, according to S&P Global.
For moment the fortunes of Russian refineries appear to be out of the doldrums.
Finding alternative outlets for fuel oil and the switch to bitumen production in the summer months has also provided a relief to less complex refineries whose storages were flooded with fuel oil as international buyers avoided taking it, according to market sources. However, the situation might reverse again as the road repair and construction season ends with the advent of cold temperatures, and refineries increase fuel oil production.
The situation appeared to improve in May as the bitumen production season started, helping to reduce the residual fuel oil yield, according to a recent report by S&P Global.
However S&P Global analysts expect the "next hit" to come when 700,000 b/d of diesel that typically flows to Europe will have to be rerouted.
The EU ban on Russian oil imports takes effect in early 2023.
While some of that flow can be redirected to Africa and Latin America, there will be logistical challenges that are likely to force Russian refiners to cut runs once again, according to S&P Global.
Meanwhile, a recent amendment to the gasoline damping formula will reduce the compensations paid to refiners between September and December. The amended formula, which takes into account the discounts for Russia's Urals crude, will make gasoline production less profitable and dent refining margins.