Are refiners prepared for a reduction in Russian heavy feedstocks?

September 2015 | Patrick Green, Alan Martin


Refiners in both Europe and North America have long benefitted from a steady supply of straight-run heavy feedstocks from the relatively simple configuration Russian refineries. However, a combination of factors will likely reduce these exports significantly in the next few years leaving any refiners dependent on these volumes to fill their conversion units with a business challenge.  Those refiners most impacted by this market change will need to consider a number of strategic options.

Russian exports of feedstocks have increased recently

The past few years have seen a rise in crude throughputs through Russian refineries of nearly 20%, increasing from just over 5,000 kbpd in 2009 to just over 5,900 in 2014 with a corresponding rise in exports of both finished fuel oils and straight-run feedstocks, including vacuum gasoil and atmospheric residue.  Finished fuel oil exports increased by over 50% over this period to 467 kbpd in 2014.  Refinery feedstock exports also increased significantly to 594 kbpd by 2013, but then dropped back to average 465 kbpd in 2014. 

About half of these feedstock volumes ended up being processed in European refineries, while the other half crossed the Atlantic to help satisfy the need for heavy molecules as feedstocks for the significant conversion unit capacities in the US, in both PADDs 1 and 3.  The US heavy molecule supply has been pressured with the increased production of unconventional Shale Oil. These Light Tight Oils come with a price advantage for local refiners, but also have lower resid content, exacerbating the need for heavy feedstocks to keep conversion units full.  This picture of a tightening in the supply situation for heavy hydrocarbon molecules is occurring globally as increased conversion unit construction meets lighter crude and increasing NGL type feedstocks, but the situation in the Atlantic Basin is most pronounced.

Exhibit 1


The coming reduction in Russian feedstocks exports

The next 5-6 years will see two significant factors impact the available export volumes of straight-run feedstocks:

  • Russian product export duties on resid streams will rise from 65% of the crude export duty level in 2014 to 100% of the crude export duty level by 2017.  Meanwhile product export duties on light product exports will fall from the 2014 level of 65% of the crude export duty level to only 30% of the crude equivalent level by 2017.  These export tax adjustments were confirmed in November 2014 and should progressively remove the historic incentives to run simple refining capacity in Russia, create straight-run resid feedstocks and export them at a duty discount to crude exports.  There will be a simultaneous increase in the incentive to produce light products and export them at progressively lower export duties than for crude exports.  Furthermore, as all of these export taxes are calculated relative to crude prices they have already seen reductions since mid 2014, squeezing the incentives to run simple refining capacity and the decline in exports of straight-run feedstocks seen in 2014 may already be an outcome of this impact.  It is likely that this squeeze in runs of the simpler configurations within Russian refining will continue over the 2015/16 period.
  • Russian refiners are currently investing significantly in additional conversion units in order to respond to this changing duty situation, but also to comply with the tightening product quality specifications that will be required in Russia.  We review these upgrade projects biannually with the last review in June 2015.  It appears that most of the VGO consuming units are underway and while there could still be delays on some of the projects, it appears that most will come on-line within the forecast period.  The vac-resid consuming cokers may be subject to a higher degree of constructions delays, but so far we do not see any evidence of project cancellations.

Exhibit 2


  • Over 500 kbpd of VGO consuming conversion units are likely to come onstream between now and 2020, with the biggest share happening in 2018
  • Furthermore, just under 400 kbpd of vacuum resid consuming conversion units, mostly cokers, are planned to start-up by the end of the decade, although some of these projects may be delayed

The net impact of these changes is likely to be a significant reduction in exports of heavy straight-run products from Russia.  In the specific case of VGO, we believe that export volumes could be decline by more than 60% between 2015 and 2021.

Exhibit 3


What can refiners do?

Those refiners with a need for additional heavy feedstocks to keep their conversion units full will be faced with tighter supply availability in the Atlantic Basin over the next few years.  However there are some actions that players in this situation can take to protect their position.

Look to increase the portion of heavy crudes in the crude slate.  This may result in the need for investment in reconfiguration of crude and vacuum units plus debottlenecking hydrotreating capacity and may require significant investment, but could help ensure full conversion unit utilisation.  Unfortunately, refiners are also likely to face difficulty in finding supply availability of heavy crudes so securing access to these grades may also require some effort.  European and other Atlantic Basin refiners already able to handle increased heavy crudes instead of straight-run heavy feedstocks may want to consider helping promote the development of the Energy East pipeline project in Canada that will allow West Canadian heavy grades to access the Atlantic Basin more cheaply than via the USGC.

Consider options to make their refinery configurations more internally balanced. This may involve boosting distillation capacity within the refinery or considering closing or downsizing the least profitable conversion units.

Review possibilities, if they exist, to integrate refineries within the portfolio so that one of them supplies any excess VGO or atmospheric residue to its partner facility to make up their conversion unit needs.  In essence one of them is becoming a feed prep unit for the other with the combination achieving internal balance.

Continue to rely on heavy feedstock supply availability from the market while recognising that the relative values of these feedstocks may rise relative to light product prices in the future environment described above.  This may reduce margins for any conversion capacity dependent on external feedstock volumes.  Lower utilisation of some facilities may result and refiners in this situation will need to ensure their planning processes are flexible enough to allow for these periods.  Refiners may also want to consider the merits of securing term access to the heavy feedstock volumes they require, although this may come at the cost of a security of supply premium for the volumes.

Russian refineries are upgrading progressively and future exports of heavy straight-run feedstocks from this supply source is very likely to decline significantly in the coming years.  Any refiners exposed to this supply squeeze should consider their options available to mitigate the impact or they could suffer progressive margin decline relative to the rest of the industry.

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About the authors

Patrick Green is a Knowledge Expert and Alan Martin is a Senior Expert, both in McKinsey's London office.