Oil refineries processing Urals likely to lose margins

Oil processing plants running Russia’s Urals and Saudi Arabia’s Arab Light grades are facing a slump in their margins. In addition to higher crude prices, refineries are expected to suffer from a change in ship-fuel regulations if they fail to avoid making non-compliant fuels.

Two of the world’s most important grades of crude — Saudi Arabia’s Arab Light and Russia’s Urals — are likely to lose oil refineries money in key processing regions, claims Bloomberg citing data from Oil Analytics Ltd, a company that tracks refineries’ activity and profitability worldwide. All refinery configurations in Singapore and South Korea would currently generate negative margins in case of processing purely Arab Light crude. As for Urals, only one of seven refining facilities in the Mediterranean would generate positive returns from it. Plants in Northwestern Europe got similar estimates.

Relatively high prices for the two crudes are one of the reasons for a slump in margins. Arab Light has been at the highest for the time of year since 2013, as Saudi Arabia raised prices for November oil sales to Asia after a plunge in production caused by attacks on its key oil facilities in September. Urals prices are also high due to a global surge in freight costs, according to Jan-Jacob Verschoor, an analyst at Oil Analytics.

The current price volatility might give refineries hope of restoring their margins. However, the downturn is also fuelled by a plunging market for high-sulphur fuel oil that normally gets consumed by ships. From 1 January 2020, most of the maritime industry will have to switch to lower-sulphur alternatives due to environmental reasons. The IMO 2020 ship-fuel rules are expected to favour low-sulphur crudes, while both Urals and Arab Light have a relatively high sulphur content. This month, high-sulphur fuel oil for December has traded at a discount of almost $30 a barrel to Brent, compared to $13 of discount in June.

The Oil Analytics data shows what refineries would earn if they process just one oil grade. Meanwhile, plants normally process a mix of crudes to avoid overproduction of unwanted fuels. At the same time, Urals and Arab Light are among the largest streams in the world, so refineries have to be especially careful managing the intake of sour crudes as the new rules approach.

According to data from Rystad Energy, Russia produces about 7,7 million barrels a day of Urals crude. Most of it is consumed domestically, while the rest flows through Russia’s western ports to be processed in Europe. Urals’ sulphur content is about 1-1,2 per cent, which is relatively high. Arab Light, Saudi Arabia’s main export grade, has an even higher sulphur content of almost 2 per cent. According to IMO 2020, ships that don’t have on-board equipment to curb sulphur emissions will be obliged to use fuel with no more than 0,5 per cent of the pollutant, down from a current average ceiling of 3,5 per cent.

By Anna Litvina