Now It’s Gone, Gone, Gone, Part 2 — To Replace Russian Products, Europe Turns to Asia, Mideast

Russia has long been a significant supplier of refined intermediates and finished products to Europe, just as it has been of crude oil. That changed, however, in the wake of Russia’s invasion of Ukraine in February 2022 as the European Union (EU) implemented a formal embargo on imports of Russian crude oil in December 2022, followed by refined products in February 2023. In today’s RBN blog, we review the reduction in imports of Russian refined products and intermediates into Europe and the specific replacement sources.

As we described in Part 1 of this series, Russia supplied about 25% of all crude oil and refined products to Europe and accounted for about 38% of EU imports before the embargo. The total volume was about 4.7 MMb/d, of which crude oil comprised more than 3 MMb/d. Total refined products supplied by Russia to Europe were around 1.5-1.6 MMb/d before February 2023, when the volume slumped to less than 500 Mb/d (multicolored bar to far right in Figure 1).

The EU ban on Russian refined products took effect on February 5, 2023, leading to significant reductions in diesel/gasoil, fuel oil/refinery feedstocks, and naphtha/gasoline. Diesel and gasoil (dark-green bar segments) contributed about one-half of Russian refined products imported by the EU with just under 800 Mb/d in 2021 and 2022, declining to 264 Mb/d in February-March 2023 (time period represents the 40 days after the embargo came into effect). Fuel oil and refinery feedstocks (yellow segments) had been trending in the 400-500 Mb/d range before falling to 153 Mb/d. Finally, naphtha and gasoline (blue segments) declined from 310 Mb/d to 65 Mb/d.

Figure 1. European Imports of Russian Refined Products. Sources: Baker & O’Brien, KPLER

Before we get going, it is worth putting the ~1 MMb/d fall in European imports of Russian products into some context. European refining capacity was approximately 15 MMb/d at the beginning of 2022. In recent years, refining throughput ranged from a low of 11.2 MMb/d (during the Covid nadir in 2020) to as high as 12.7 MMb/d (2019). European refinery utilization (~80% in non-Covid years) is typically less than in the U.S. (~90%), reflecting some non-competitive capacity. In 2019, European refined products demand was about 14.8 MMb/d. So, the decline in Russian supplies was in the order of 7% and 8% of demand and refining throughput, respectively. Europe’s relatively low historical refinery utilization suggests that European refineries had some potential to make up for the shortfall from Russian supplies, provided profit margins could support the increased run rates. Alternatively, Europe can tap into the global refining industry and vast waterborne supply options for other sources of refined products.

In the following sections, we review the impact of sanctions on product import volumes and how supplies were able to be maintained. Given diesel’s large volume and relatively tight supply-demand balance in the region, plus the fact that it is a strong determinant of overall refining margins, we’ll focus on it first.

Europe has been historically short on diesel. European diesel demand is far greater than European refinery diesel production, resulting in large quantities of imports. Russia has been the main supplier to fill the shortfall. In the past, Russia supplied high-sulfur diesel intermediates (gasoils) for European refineries to finish into ultra-low-sulfur diesel (ULSD). Over time, as Russia upgraded its refineries, Russian exports to Europe have transitioned from gasoil to ULSD.

Before diving deeper into how Russian diesel was replaced, it helps to quickly examine how Europe has typically received it. Figure 2 below provides a simplified diagram showing the major flows of Russian diesel and gasoil to Europe and the volumes supplied in 2021 and February-March 2023. Russian diesel is delivered to Northwest Europe, primarily through Baltic Sea ports, which account for about two-thirds of European imports. Significant volumes in the Mediterranean (about one-third of the total) are sourced through Black Sea ports. Finally, some refined products are also transported by rail from Russia. These are usually specialized petroleum products or transport fuels railed to parts of Eastern Europe.

Figure 2. Russian Diesel/Gasoil Exports to Europe: 2021 and February-March 2023. Sources: Baker & O’Brien, KPLER

The Russian ports (Primorsk, Vysotsk, Ust Luga and St. Petersburg) that provide access to the Baltic Sea are located on the Gulf of Finland. Diesel supply to Primorsk is primarily through the Sever Pipeline, a products system that runs in the same corridor as the Baltic Pipeline System for crude oil movement. Another relatively short-run pipeline transfers diesel from Primorsk to Vysotsk. St. Petersburg is supplied mainly by the Kirishi refinery, located about 50 miles southeast.

On the Black Sea, diesel loadings primarily come from the Sheskharis terminal at Novorossiysk and nearby Tuapse. The Sheskharis terminal receives piped diesel (Yug Pipeline) from the Ufa refining complex, more than 1,000 miles northeast of the terminal. Tuapse is supplied primarily from nearby refineries in the Krasnodar region. Diesel (ULSD) represents a dominant portion of exports that serve Northwest European markets (Baltic Sea), whereas in the Mediterranean (Black Sea) it makes up only slightly more than half of total exports. Before the sanctions, a diverse range of EU countries imported Russian diesel. In 2022, France was the largest consumer (17%), followed by Turkey (15%) and Germany (14%), with Belgium, the Netherlands and Greece all at 8%. The shift in diesel volumes by product mix and load-port region after implementation of the embargo is shown in Figure 3 below.

Figure 3. Change in Russian Diesel/Gasoil Movements to Europe. Sources: Baker & O’Brien, KPLER

We are still in the early stages of this Russian reset, but what has happened so far? Europe imported more than 800 Mb/d of Russian diesel/gasoil in 2022. Most recently, imports had declined to about 265 Mb/d in February-March 2023. The 560-Mb/d decline in Russia’s waterborne diesel was replaced by a mix of sources, with Asian and Middle Eastern refineries dominating (see Figure 4 below). The biggest increase has been from China (83 Mb/d), sourced from various refineries, followed by the UAE’s mega export refinery at Ruwais (67 Mb/d). Kuwait’s Mina Al Ahmadi refinery was the primary source of 50 Mb/d in increased diesel imports and, with the startup of the giant Al Zour refinery (now ramping up to full capacity after starting up last year), it is likely that more diesel from Kuwait will head to Europe. Singapore, Malaysia, Saudi Arabia and India round out the largest increase in diesel sources. Also of note is that it was recently reported that Saudi Aramco’s large Jizan export refinery is getting close to increasing output of ULSD, with production said to be approaching 250 Mb/d at full capacity. In addition to Arabia’s Jizan refinery and Kuwait’s Al Zour refinery, a third new import source will likely be Oman’s Duqm refinery project once it starts up later this year. Surprisingly, European diesel imports from the U.S. fell slightly from 2022 to early 2023, with most U.S. exports (1.3 MMb/d overall in 2022) continuing to head to Latin America.

Figure 4. Shifts in Diesel/Gasoil Imports Into Europe. Sources: Baker & O'Brien, KPLER

Of particular note is the doubling of Russian diesel volumes routed to Turkey (248 Mb/d in February-March 2023 compared to 120 Mb/d in the whole of 2022), including movements from the Baltic Sea ports, which are much more distant than the Black Sea. Further clouding this activity is that many shipments are indicated as ship-to-ship transfers. Therefore, the volumes reported as received by Turkey are very likely overstated.

The Fuel Oil/Feedstocks category represents a mix of two product classes: (1) finished “fuel oils” — high-sulfur fuel oil (HSFO), low-sulfur fuel oil (LSFO) and very-low-sulfur fuel oil (VLSFO) — that are used in ship engines or land-based power generation plants; and (2) refinery feedstocks (straight-run fuel oil, or SRFO, and vacuum gasoil, or VGO) that are typically further processed in a refinery.

Total European imports in 2022 were about 600 Mb/d (on top of intraregional movements of about 1 MMb/d) with Russia accounting for two-thirds of that volume (401 Mb/d; see Figure 5 below). The Russian grade mix was 40% VGO, 20% SRFO and 40% fuel oil. The major destinations were Greece, the Netherlands, Turkey and Estonia, which accounted for more than 70% of all imports. The biggest Russian fuel oil export ports for Europe are Ust Luga, St. Petersburg and Vysotsk (Baltic Sea, destined for Northwest Europe) and Tuapse, Taman, and Novorossiysk (Black Sea, destined for the Mediterranean). After early February 2023, the total volume supplied to Europe (intraregional and imports) shrank by 11%, with Russian volumes declining by 250 Mb/d to 153 Mb/d. Russian flows continue to Turkey, Greece and Romania; most of it is high-sulfur feedstock going to Turkey.

Figure 5. Fuel Oil/Feedstock Supply to Europe. Sources: Baker & O’Brien, KPLER

Unsurprisingly, European refineries have been able to adapt to the loss of Russian “black oil” supplies. The overall system adjusted with higher intraregional supplies from the Netherlands and Italy, among other European countries, and no large changes in imports from non-European countries. As trade shifts go, the change in fuel oils/feedstocks has so far been uneventful, a proverbial “nothingburger” compared to diesel, albeit likely reducing profits from processing Russian refinery feedstocks.

As Europe is long on gasoline, exporting volumes to other regions, naphtha for European ethylene plants (naphtha crackers) accounts for 80% of naphtha-gasoline imports. Naphtha is supplied to crackers in Belgium, the Netherlands, Germany, France, and the U.K. (and, to a lesser extent, crackers in the Mediterranean — Italy and Spain). Intraregional trade movements and imports totaled more than 1.3 MMb/d in 2022 (see Figure 6 below), with Russia supplying just under 25% of that volume.

Figure 6. Naphtha/Gasoline Supply to Europe. Sources: Baker & O’Brien, KPLER

The biggest ports for Russian naphtha going to Europe are primarily those that use the Baltic Sea (Ust Luga, Sibur Ust Luga and Vysotsk), which account for almost 90% of exports to Northwest Europe. As noted above, most ethylene plant capacity (which predominantly uses naphtha as feedstock) is concentrated near terminals in Antwerp, Rotterdam and Amsterdam (ARA), making those locations the primary destinations. With the start of sanctions, imports of Russian naphtha declined by 245 Mb/d — from 310 Mb/d to 65 Mb/d. The February-March volume of European imports, 65 Mb/d, is overstated and misleading, however, as most of that appears to be ship-to-ship transfers to unknown destinations.

Lower European cracker production and higher European refinery naphtha output appear to have offset lower Russian naphtha volumes, as total imports have fallen with Russian supplies. Several regional supply sources (e.g., Italy, Greece) have increased production. At the country level, imports declined by 40% in France (41 Mb/d), 30% in the Netherlands (115 Mb/d), and 13% in Belgium (34 Mb/d), which might reflect reduced cracker utilization or certain crackers taking advantage of feedstock flexibility and switching partly to LPG (e.g., propane). Increases in imports were seen primarily from Algeria (Skikda refinery/splitter) and the UAE (Ruwais refinery), offsetting other smaller volume declines.

All-in-all, European markets appear to be adjusting to the significant reduction in Russian refined products following the start of EU sanctions. European refineries have increased their output to replace some of the lost Russian supplies, with imports from the Middle East and Asia replacing the remainder of the lost Russian products.

Tightened supply in the region is likely a substantial cause of continuing strong overall diesel crack spreads (and elevated global refining margins, in general) — pleasing to refiners yet disheartening to fuel consumers. The diesel supply situation is likely to improve in the short- to medium-term, with new refineries in Saudi Arabia, Kuwait and Oman ramping up and capturing a more significant market share. As such, global refining margins might start to decline from the record highs that have been seen since the start of the Ukraine invasion. On the other hand, reduced refinery feedstocks (heavy intermediates) and cracker feedstocks (naphtha) are likely to result in more muted supply effects, hurting the profitability of some refineries and crackers due to capacity underutilization.

Note: The article was authored by Kevin Waguespack of Baker & O’Brien and published on RBN Energy’s Daily Energy Post on April 18, 2023.

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