How is the Russia/Ukraine war impacting the refining industry, specifically the production of crude and natural gas? Are there any specific factors that this war is impacting besides feedstock? How can refiners pivot their operations to combat fluctuating supply and demand?
JL: With limited feedstock available to the refining industry due to the Russia/Ukraine conflict, the US has been offering millions of barrels of oil from its Strategic Petroleum Reserve. However, the reserves’ releases are scheduled to stop at the end of October, at which time the reserve will shrink to a 40-year low. Obviously, the world can’t keep relying on the US strategic reserve to keep oil prices in check and meet demand. We have a finite amount of available crude oil, and the depletion of the reserve poses a risk to our national security. It’s also worth noting that while any barrel of crude is better than no barrel of crude, not all crude is the same. What has been sold off from the reserve is mostly what is known as medium-sour crude, a fan favorite for domestic refiners. Russia was a major contributor of this medium-sour crude, and this type of crude could run out in the next four to five months if we keep selling it at the current rate beyond the October threshold. Without the reserve or Russia to supply this type of crude, refiners could be left with heavier, albeit cheaper, crude. With a steady diet of heavier, cheaper crudes, refiners will have to pivot by potentially investing in upgrading their processes to produce the same higher-value products they can get from using the lighter crudes. The costs and payback period for these upgrades can potentially be offset by improving the overall reliability of the assets by increasing availability and throughput. While many refiners have perfected reliability in their traditional forms to maximize asset performance and life cycle costs, a new evolution in reliability is warranted – one we’re calling data-driven reliability. This approach to reliability offers facilities a framework that can help them achieve additional performance improvements and pivot to meet demand utilizing a less than perfect feedstock.
JT: The price of petroleum products has, as drivers are well aware of every time they fill up their gas tanks, steadily increased since November 2020. Increasing consumer demand and overall economic inflation were the root causes of higher prices; when Russia invaded Ukraine in February of 2022, the global trade flow for crude oil was disrupted. Russia is a significant exporter of crude oil and natural gas, contributing 8.3% of crude exports in 2021 and 8.2% of liquified natural gas exports in 2020 (Statista, BP World Factbook). In response to the military action, foreign governments and oil corporations responded by imposing sanctions on Russia and ceasing operations in the state. Some countries banned the imports of Russian oil products. This impact on the global oil trade added tailwinds to already increasing crude and natural gas prices, and refineries have been forced to pay higher prices for crude feedstock. Interestingly, even though refiners are forking over more cash for their feedstock, higher petroleum derivatives pricing and demand have led to wider margins and larger profits. Outside of the fact that refineries have been paying higher prices for crude, procuring barrels of oil has been more of a challenge. Import restrictions in the US and other countries have forced refineries to rethink their crude purchasing strategy. For example, refineries on the west coast of the US have historically imported Russian crude; they are now shifting their purchases to Canadian and Latin American imports. The opposite problem is actually occurring in Russia; refineries in Russia have ramped down production because of a supply gut of domestic crude oil.
The current energy market conditions are incentivizing refineries to maximize utilization and production. The past three years, however, have been turbulent for oil supply and demand; having reliable operations can help refineries combat lower and higher demand. Being able to reliably and efficiently turn production up and down based on market conditions will allow refineries to minimize expenses and capture wide margins.