European refiners ramp up runs on strong margins despite high gas costs

European refiners are ramping up runs, boosted by strong distillate and gasoline cracks and a dearth of diesel supply, despite the high natural gas and hydrogen costs.

According to S&P Global Commodity Insights, benchmark refining margins in Europe are robust amid very strong distillate and gasoline cracks.

ARA gasoline and ULSD cracks reached $26/b and $57/b, respectively, on April 29, while jet fuel cracks led the barrel at $69.37/b.

The FOB Rotterdam jet fuel barge crack versus Dated Brent was assessed by S&P Global at $59.26/b on May 5, with the ULSD barge crack at $46.08/b.

"There's a decent incentive to turn the black stuff into white stuff," a Med-based trader said.

The mood on the refinery front seems to be turning away from the doldrums that defined operations in 2021 and lasted for some of the start of the first quarter.

"Runs are being maximized across [Northwest Europe] at the moment," another source said. "There's a huge amount of downstream product demand and distillates and gasoline cracks necessitate it."

Plants eye full capacity in Q2

French oil major TotalEnergies reported 74% utilization rates across all of its refineries in the first quarter. However, CEO Patrick Pouyanne said during an earnings call that in view of the diesel tightness it was "even more important that our refineries in Europe are running," adding that all of TotalEnergies' refineries in Europe would be "running at full capacity" during the second quarter.

The company's Donges refinery restarted at the end of April after being shut for almost one-and-a-half years for economic reasons.

Spain's Repsol said first-quarter throughput rose 9% year on year due to improved margins and differentials between heavy and light crudes, which offset increased energy costs.

The company's Spanish refineries ran at 83% distillation rate in the first quarter, affected by planned maintenance, but still up from 76% in Q4 2021. After the completion of maintenance, the company's Spanish refining system is currently running at a 96% utilization rate, it said during a recent presentation.

Utilization in both Spain and Germany started to rise earlier than elsewhere, according to analysts.

Rates reached around 80% in Spain and Germany in the first quarter but were lower than that in France and Italy.

Indeed, Austria's OMV reported 94% utilization at its three refineries in Europe in the first quarter, "especially for the [German] Burghausen and [Austrian] Schwechat refineries."

Italian energy group Eni said that in the rest of the world in the first quarter it achieved 1% higher throughput at 2.57 million mt due to higher volumes processed in Germany. Eni owns shares in the Bayernoil and Schwedt refineries.

However, throughput at its Italian refineries in the first quarter was down 9% at 3.5 million mt, due to a "depressed refining scenario". Its Q1 margins continued to be hit by "exceptionally high prices for natural gas that have affected both the cost of processing and refinery utilities," it said.

Italian refineries ran at 65.4% in February and 65.5% in January, according to data released by industry group Unione Energie per la Mobilita.

Natural gas defines differences between refiners in Europe and US

Meanwhile, Finland's Neste has started to look for alternatives to natural gas. If proven successful, they will enable a "significant reduction of natural gas usage at the refinery," the company said. Neste raised its Q1 utilization to 92%, and reported a $10.28/b refining margin, but nonetheless said the total refining margin was supported by "exceptionally high product cracks, but on the other hand burdened by high utility costs driven by very expensive natural gas and electricity."

Natural gas prices have plagued the economics of European refiners since last year and are putting them in a more disadvantaged position compared to their US counterparts. While European refiners only recently started to raise runs in the 90%, US refineries have been running above 90%, largely benefitting from much lower natural gas prices.

Refineries in Europe are "hydrocracker-based, they use a lot of hydrogen, you got to buy a lot of fuel gas to make hydrogen," according to Bob Herman, who heads Phillips 66's refining segment.

Lane Riggs, president and COO of Valero Energy, noted that while natural gas prices in the UK, where the company operates the Pembroke refinery, are "roughly about $30 MMBtu, sort of look at the United States and we're currently paying somewhere between $5, $6, $6.5."

So for Pembroke to break even versus a US Gulf Coast plant, "you need about an $8/b higher heat crack," Riggs said.

Brian Mandell, executive vice president at Phillips 66, which operates the UK Humber refinery, concurred, noting that despite gas prices coming off in the UK, "our guesstimate is about $8 to $9 benefit" in the US versus the EU "given the price of natural gas here and the price of natural gas in EU currently."

For now, the robust distillate cracks and demand are encouraging refiners in Europe to run at higher runs. But another challenge might once again reverse the situation.

Supply woes may affect runs

Portugal's Galp said it went "full steam" at its Sines refinery in April, with refining margins "in the double digits." The FCC and the hydrocracker units have been at full rates to meet rising jet and diesel demand. The company aims to run Sines above nameplate capacity, but is meanwhile concerned it might have to limit throughput and reduce diesel exports from Sines in the coming months if it is unable to obtain sufficient vacuum gas oil, CEO Andy Brown said May 3.

Galp already suspended imports of Russian VGO in March and has been sourcing replacement supply from Europe and the Middle East.

Refineries in Central and Eastern Europe, which have been getting crude supplies from Russia's Druzhba pipeline, are concerned about sourcing potentially more expensive feedstock from somewhere else and also less suitable for their operations.

Slovakia's Minister of Economy, Richard Sulik, said the switch away from Russian supplies would affect production of diesel fuel at the country's Slovanaft refinery and likely lead to a domestic shortage.

Hungarian Prime Minister Victor Orban said his country needs up to five years to upgrade the country's refining and fuel network in order to buy alternative supplies.