Russia Seeks New Products Buyers as Ban Comes In

As the clock on the EU's Feb. 5 embargo runs down, no clear picture is emerging as to where Russian oil companies intend to export approximately 1.4 million barrels per day of petroleum products that Europe bought last year.

The uncertainty is weighing on both global markets, which fear a short-term deficit of diesel supplies, and Moscow, which needs to safeguard revenues from oil products exports at a time when it needs to finance its war effort in Ukraine.

Russian refiners have had eight months to plan for the new reality, and information about a handful of provocative deals is beginning to emerge.

For instance, the Orsk refinery on the Kazakhstan border, operated by Russian independent holding ForteInvest, will send a small cargo of gasoline to Pakistan, while Gazprom Neftekhim Salavat, in the Russian autonomous republic of Bashkortostan, has begun exporting gasoline to Iran, Energy Intelligence has learned.

Gazprom Neftekhim Salavat was scheduled to send 34,000 barrels of gasoline by rail via Central Asia to Iran in January, followed by another 60,000 barrels in February.

North Korea was also slated to import 55,000 barrels of gasoline over the same two months, a source familiar with rail deliveries told Energy Intelligence. Russia began shipping coal and petroleum products to the neighboring country in the fourth quarter.

Shipping data, meanwhile, indicate other out-of-the-ordinary destinations such as Ecuador, slated to receive 350,000 barrels of diesel from Lukoil, and Ghana, which in February will offtake 240,000 barrels of gasoline out of Russia's Baltic port of Primorsk.

Among large purchasers, the United Arab Emirates is tagged as the final destination for 180,000 b/d of various clean and dirty products dispatched in January, while Turkey was poised to import 285,000 b/d of products exported last month, according to vessel tracker Kpler.

Diesel Outlook

But even though new clients have surfaced, it is still entirely unclear whether Russia can find enough buyers to sustain the 2.75 million b/d of products it exported last year and what kind of discounts oil companies are forced to offer. The issue is of paramount importance since petroleum product exports have historically been the second largest source of export income after crude oil, according to customs data.

Discounts will be key. If they are below the price cap, products could still use Western tankers and shipping services, easing an anticipated deficit of clean tankers. But if they are too low, the export netback, and hence, overall refining margins, will deteriorate and potentially lead to large reductions in refining runs.

Diesel is front and center in this dynamic. Russia exported an average 700,000 b/d of diesel last year, or about one-fourth of all products exports, and slightly over half of these were shipped out of Primorsk. In this sense, the fate of Russian diesel could well shape the fate of the country's entire refining industry.

Fresh data from Argus indicates that diesel out of Primorsk was discounted at $250 per metric ton, pricing a ton at around $700, or $94 per barrel, a reflection of the vast distances the product must sail to reach potential markets in Africa or South America. Importantly, this is just below the $100/bbl price cap threshold that the EU is considering for Russian diesel.

In other words, at this rate the diesel could conceivably be handled by Western shipping services — although Poland and the Baltic states are attempting to negotiate a lower cap that would restrain flows.

Some analysts say that Russian oil companies can still make money exporting diesel at $700/ton out of Primorsk. However, the discount, which was recently $200/ton, could continue to widen.

Diesel out of the Black Sea is discounted far less, to the tune of $125/ton. This is granting regional refiners, such as Lukoil’s Volgograd facility or Rosneft’s Samara group, a much more attractive netback, and they will likely find eager buyers in Turkey and Northern Africa.

Year of Flux

Even assuming that Russia’s refineries, which processed 5.45 million b/d of crude last year, down by 170,000 b/d from 2021, can market their diesel — a product in tight supply globally — they are left with the daunting challenge of finding buyers for about 1.5 million b/d of dirty products.

The reality is that, given the industry’s relatively low conversion yield, it cannot help but produce about one barrel of fuel oil and other dirty products for every two of various transportation fuels and naphtha. Finding countries to soak up the fuel oil, which can be stuffed in hydrocrackers, will be difficult. Russia cranked out an average 725,000 b/d of fuel oil (mazut) last year, of which 575,000 b/d was exported.

Already the netback on fuel oil is abysmal. Lukoil’s Nizhny Novgorod refinery, for instance, can fetch about 2,800 rubles for a ton of discounted mazut, or $6 per barrel, exported from the Baltic outlet of Ust-Luga. For other, even remoter facilities the netback is even lower.

At the lighter end of the barrel, products like gasoline and naphtha will also pose a headache.

In the wake of Moscow’s call-up for military service in September, domestic gasoline consumption plummeted by about 100,000 b/d, forcing refineries to look for export options. Fourth-quarter exports of gasoline, as a result, averaged 170,000 b/d, compared to just 100,000 for the first three quarters of 2022.

Naphtha is an even greater challenge. Exports of this product range, favored for petrochemical steam crackers, averaged about 485,000 b/d last year, most of which went to Europe.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact >