Russian sanctions reshuffle crude, VGO supply chains

HOUSTON (ICIS)–US refiners will take time to adjust to reshuffled supply chains caused by the embargoes imposed on Russian exports of crude and vacuum gas oil (VGO), a consultant said on Monday.

However, US refineries will ultimately make the adjustment, and the embargoes should not cause them to lower utilisation rates, said John Auers, executive vice president of the US energy consultancy Turner Mason. He made his comments during a conference call hosted by the American Fuel & Petrochemical Manufacturers (AFPM), a trade group that represents refiners and commodity chemical producers.

The US is banning imports of crude oil and refined products from Russia in response to its invasion of Ukraine.

In 2021, Russia exported 199,000 bbl/day of crude and 473,000 bbl/day of VGO and other petroleum products to the US, according to the AFPM. The Russian crude amounted to just 3% of US oil imports. By contrast, Canada and Mexico account for 71% of US oil imports.

Imports in general provide US refineries with less than half of the oil they process, the AFPM said. The majority – 60% – comes from domestic oil production.

Refiners will have a more difficult time finding alternatives to VGO imports.

Russia exports VGO and other unfinished heavy gas oils because its refineries lack the complex units to handle those products, the AFPM said.

Gulf Coast refineries have such units, making them a natural destination for such shipments.

Auers expects trade routes for VGO will ultimately adjust to the US ban. Russia will redirect its shipments to other countries that have not imposed sanctions. VGO shipments destined to those countries will become redirected to the US.

Gulf Coast refiners regularly shuffle their sources of raw materials in response to prices and supply disruptions, Auers said. The Russian sanctions are no exception. “In the end, I don’t think it will have an impact on capacity utilisation.”

As it is, utilisation rates at US refineries are running above 90%, close to pre-pandemic highs, Auers said.

PROPOSALS TO REDUCE DISRUPTIONS
The US could adopt policies that would make the adjustments to higher energy prices less disruptive to consumers and the nation’s economy.

The East Coast of the US relies on imports of gasoline and diesel because several local refineries have shut down over the years and because pipelines from the Gulf Coast are nearly maxed out, Auers said.

Most marine shipments from Gulf Coast refiners are uneconomical because of the Jones Act, which requires goods shipped within US ports to be transported on ships that are owned, built and operated by US citizens or permanent residents.

Shorter term, the US could temporarily suspend the Jones Act to make it easier to ship gasoline and diesel from the Gulf Coast to the East Coast.

Longer term, the US could adopt polices that would make it easier to expand refining and pipeline capacity.

On the West Coast, refineries import light sweet crude from Russia because of a lack of pipeline capacity and logistics, according to the AFPM. That Russian oil arrives to the West Coast from that country’s port of Kozmino via the Eastern Siberia-Pacific Ocean (ESPO) pipeline.

Upstream, the US could encourage more domestic production of crude. Grissom noted that oil production has yet to return to its pre-pandemic peak.

Auers warned about policy-makers adopting short-term fixes to address rising energy prices.

These include subsidies, export bans, price controls, fuel-tax suspensions and releases from the strategic petroleum reserve (SPR), he said. None of these address the supply shortfall that is the fundamental reason behind the rise in energy prices.

Long term, policies need to increase oil production in a sustainable way, said Susan Grissom, chief industry analyst for the AFPM.

Auers did note some expansions in the industry. There is some movement to increase pipeline capacity from the mid-continent of the US to the East Coast.

In 2019, ExxonMobil announced it will add a new crude distillation unit at its refinery in Beaumont, Texas. The addition will increase the site’s crude refining capacity by 250,000 bbl/day.

Valero is building a 55,000 bbl/day delayed coker at its refinery in Port Arthur, Texas. It should start up in 2023.

Among the recently shuttered refineries, Auers said the one with the best prospect of restarting would be the St Croix refinery in the US Virgin Islands. The owner had filed for bankruptcy protection.

Without more supply, markets will resolve the energy shortfall by high prices that would lower demand, Auers said. Such demand destruction would come about by slower economic growth. A recession would be the quickest way to lower energy prices.

“We’re hoping that doesn’t happen,” he said.

Auers does not expect the US could address the supply shortfall by increasing production of ethanol. The US makes most of its ethanol from corn, increasing the danger of diverting food to fuel production.

Plus, many service stations are not equipped to handle fuel blends of 15% or 85% ethanol, known as E15 and E85, Grissom said. Those stations would need upgrades before they could handle fuels with higher blends of ethanol.

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