Energy in pandemic. Refining and petrochemical activity in the first 9 months, perspectives.
Guest: Felix Crudu, General Manager of Rompetrol Rafinare
We have discussed in the first episode about the implications of the refining and oil industry in many areas and daily activities, without neglecting the need for change, for the transition of this industry to cleaner energies. Rompetrol owns two refineries, Petromidia and Vega, and the sole petrochemical division. Although the resulting products contribute to the development of many local and regional activities, the impact of the crisis has been strong on this sector. In an overview, what is the impact on our activities, further, on the local economy?
Felix Crudu: Oil refinery is one of the basic industries of our country and we also have a long tradition in this field. It is also necessary and mandatory for any industry to adapt to the market environment. We have the resources and specialists necessary to align with market needs, as well as the rules and laws in force. It is important that these manufacturers constantly provide the products, be it fuels or plastics, medical products, recently we have started to talk about Bitumen, so necessary for highways, infrastructure that we all want, solvents and many other products that we produce at the Petromidia Refinery.
We are contributing together with the other players on the market to the Energy Security of Romania. We have all heard about this concept and we have understood much better what this means lately, I am referring to the lockdown in March-April, the state of emergency, when the restriction of goods movement generated a collapse of products, fortunately, we managed to deliver these products and contributed to the local energy security.
I would also like to mention the fact that the contribution of this industry to the state budget, as far as we are concerned, amounted to 1.2 billion dollars/year. Money that helps during this period to consolidate the economy and get better after this critical moment. Romania is an oil-producing country, but we do not cover all consumption. That's why we import. Before the Covid crisis, the country imported about 8 million tons of crude, 5 million brought by Rompetrol through the marine terminal.
From these raw materials we manufacture value-added petroleum products and deliver it both to the domestic market and to the foreign market. Rompetrol is the largest exporter of petroleum products in the country and we are a top exporting company. It is very important for the economy that we contribute to the country's import-export balance through crude imports and exports of refined products. I could say that it represents more than 4% of the value of the export of the manufacturing industry in Romania. We are also the second largest holder of early storage reserves. That is why it will remain a strategic field for Romania.
The influences of 2019, respectively the geopolitical tensions, the overproduction of existing fuels on the market and then the pandemic significantly affected the oil and gas industry around the world. What is the connection between these external elements and how does it affect the activity of the Petromidia Refinery?
Felix Crudu: 2020 was an extremely difficult year for everyone and for all fields of activity. In terms of the oil industry, the events of 2019, as well as the pandemic at the beginning of the year, have placed us in a unique situation. The international events of 2019 led to massive fluctuations in international crude prices, each month, 7 and 20% between the lowest and highest price of crude.
It is very important to know where the pandemic caught us and that is why I would like to list some notable events in the oil & gas market in 2019: The United States maintained its positive trend in crude production and set new production records, putting pressure on other producing countries. Thus, OPEC and Russia agreed on a decrease in production to avoid a depreciation of the barrel, thus the lowest level of production in the last 4 years was reached; During April-May, the flow of crude through the Druzhba pipeline stopped due to the raw material contaminated with chemical compounds, resulting in high prices and supply difficulties of refineries for sour oil, specific to Eastern European consumption.
After the September 2019 drone attack on crude processing installations of the Saudi Arabia's state-owned company Aramco, the price of Brent oil rose to $ 68.2 / bbl from $ 61.1 / bbl before attack. At the same time, the United States launched sanctions against Iran and Venezuela, which limited supply on the market, and as a result helped, along with OPEC production cuts, to increase crude prices. Thus, the Urals-Brent differential has reached a historically high level, triggered by an extremely low availability of sulfurous oil.
It is worth mentioning that our refinery, Petromidia, was built to refine sulfurous crude oil, we have large investments in specific units for this activity, based on the fact that we can process this type of crude, historically being the cheapest, to obtain good quality products and Euro 5 fuels. The biggest problem occurred in 2019, that is why I want to explain something. Before 2019, for a period of 9 years (2010-2018), sulfurous oil was traded at a discount compared to less sulfurous oil - namely Urals was cheaper than Brent by 1.1 USD / bbl. For the first time since 2010, in 2019 Urals sulfurous oil was traded at a positive USD / bbl market price differential compared to Brent oil.
This means that the crude oil we relied on did not give us an advantage in terms of the purchase price, but on the contrary, a disadvantage. Thus, given that the Ural crude is more expensive than Brent, it significantly affects our refining margins. In terms of the market environment around refining margins, in 2019 it was registered the lowest levels in the last decade. The main reasons that generated such low levels were:
o The historically high Urals-Brent differential, triggered by an extremely low availability of sulfurous oil, as a result of the new US sanctions against Venezuela and the resumption of sanctions against Iran;
o Excess products on the market, with an impact in Europe mainly on diesel market margins;
o The global economic decline, accelerated by the US-China trade war
All these events produced extremely unpleasant and negative effects on European margins which decreased by about 6.4 USD / ton, a decrease of 15.8-16% compared to 2019. 2019 was an extremely hectic year and if I have to summarize, I would say that there have been massive fluctuations in oil prices, low availability of sulfurous oil that we are interested in, the Urals-Brent differential at a historical high level and European refining margins down by 15-16%. The most inappropriate context for what was to follow in 2020 with the occurrence of the pandemic.
How has the price of crude evolved in 2020? What elements influenced these fluctuations?
Felix Crudu: The year began with a significant rise in oil prices, caused by the conflict between the United States and Iran, followed by a dramatic drop in prices, intensified by Saudi Arabia, which started a price war against Russia, oversaturated markets and the unprecedented shock caused by the COVID-19 pandemic. Brent crude fell to $ 17.7 / bbl. - the lowest level since 2003 - and OPEC's proposal to reduce production was rejected by Russia.
Spot prices for crude fell sharply in April (-44%) due to a growing surplus of crude on the spot market. After that, in the second half of the second quarter, the price of crude rose slightly and ended the second quarter at a level of $ 42 / bbl., as OPEC + approved a reduction of 10 million bbl./ day since May. After the recovery in the second quarter, Brent oil was stable in the third quarter, as the market approached a balance following a gradual increase in demand, somewhat generated by an improvement in the situation at that time.
In July, OPEC and Russia agreed to ease record supply cuts as early as August, as the global economy appeared to be slowly recovering from the coronavirus pandemic, but in September concerns about a shift to oversupply began to grow. The Urals-Dated Brent differential ended the second quarter at + $ 2.5 / bbl, a fairly high level, which means 14 usd / bbl, or 7 USD / ton, as exports from Russia decreased by -20 %. Subsequently, by the end of the 3rd quarter it decreased to + $ 0.26 / bbl. Urals Vs. Brent due to declining demand for sulfur oil in Asia and increased flows to Europe.
How have oil products prices evolved in 2020?
Felix Crudu: Regarding the evolution of finished products, it is very important when we talk about the evolution of crude to talk about finished products. Here we must refer to the refining margins. In 2020 the refining margins started under pressure due to weak diesel and jet margins. I'll try to explain stept by step. Diesel margins increased in the first part of the first quarter based on the collapse of crude prices and the decrease of the Urals - Brent differential. They collapsed in the second quarter because storage capacity was almost 100%, the aggressive change in the yield of other products to diesel and especially large volumes of diesel from Russia and Asia.
Diesel margins have continued to fall to unprecedented low levels since 2008. Global stocks have continued to rise, jet demand has fallen in the aviation sector amid border closures and worldwide travel bans. Jet margins became negative in the second quarter, under strong contraction pressure due to Covid, on airlines. 70% of the jet volume yield was moved to diesel and 30% to gasoline, given that the jet volume was almost 0 due to the pandemic.
Refining margins fell in the second quarter due to high oil stocks and rising oil prices and returned slightly in the third quarter, following a slight increase in road fuel and after the refinery maintenance season. Under these conditions, gasoline margins increased in the third quarter, reaching 109 USD / ton, while gasoline exports to Africa increased and the regional one recovered slightly. Unfortunately, the diesel margins reached in the third quarter the lowest level of 2019, 18 USD / ton. Obviously, caused by oversupply, the Middle East's exports to Europe are constantly growing and weakning the regional demand. Jet consumption remains the most affected sector today, due to travel avoidance, restrictions. Overall, in 2020 the refining margin decreased by 40% in the first 9 months, if we refer to a similar period in 2019 and remained at 18.6 USD / ton.
Why is it so important to understand the factors that influence the evolution of crude oil and petroleum products prices?
Felix Crudu: Why is it important to understand these events? Because we operate in a market where the effect of oil prices and refining margins are essential for the economic result. That is, the refining margin is the income received from the sale of products, obtained by processing crude oil. If the refining margin is negative, it means that the sale does not even cover the purchase price of the raw material, in this case crude oil.
Moreover, if we take into account that we have to add the processing cost (salaries, utilities, maintenance), it is clear that the result is negative. In short, expensive raw material, product sold cheaply. Negative economic result.
Given the influence of external factors on the refining activity, what were the results of the two refineries in these 9 months?
Felix Crudu: If we refer to the results of the Petromidia refinery in 2020, I would start with the production level during the first 9 months of 2020. We have processed 3.5 million tons of crude oil, down 26% compared to last year, when we processed 4.7 million tons of crude oil. Refining capacity decreased to 68%, 30% less than last year.
The decline was generated by the general turnaround that began in March and continued in April, with 45 days of production shutdown, and low market demand given the context. Obviously, this decrease is also based on the reducered quantities of raw materials processed, at at an extremely low level of refining margins, we had 11 USD in the first 9 months, compared to last year when we had 37.6 USD.
All these details significantly affected the result and led to accounting losses of over 150 million USD. On the other hand, from an operational point of view, we had a very good performance in the first 9 months, white products yields of 86.4%, technological losses of 0.889, and, very important, an energy intensity index of 99.3%. Obviously, during this period of constant concern to counterbalance the effects of these negative elements, low refining capacity and low margins, we continued our optimization programs with the view to optimize product processes, raw material recipes, alternative feedstock and operating cost efficiency, from an energy and accounting point of view.
We have a program started in 2014, continued carefully and intensively in 2020 to counterbalance negative effects. If I were to refer to Vega only, where we no longer process crude oil and do not produce fuel, we managed to process 264 thousand tons in the first 9 months, a decrease of 18.5%. This decrease is explained only by the turnaround period, the demand for bitumen being at a satisfactory level this year. Infrastructure projects continued and the bitumen produced in Ploiesti, the only producer in the country, was sought after. Solvents were used and delivered locally and regionally as well.
Petrochemistry was another activity that saved the industry and the situation generated by the decrease in fuel consumption. How was the evolution of the petrochemical division in the first 9 months?
Felix Crudu: The activity in 2020 in the petrochemical area was not so severely affected by the pandemic and we managed to keep our facilities in operation at designed capacities. Both PP and LDPE. Thus, in the first 9 months, the production of polymers was 102 thousand tons, 11% more than last year when we had 92 thousand tons.
This growth was ensured by the constant and permanent maintenance of the 2 installations and the use of internal raw materials. The petrochemical division, and this is very important, has successfully developed a new product, MRB30H, which is a special type of polypropylene used for protective masks. We tested and homologated this product, we already supply it to local manufacturers, and it is useful for the middle layer of the mask, the most useful for filtering pathogens. This product is intended for obtaining filtering material, but also other elements in the medical area, as well as in the industrial area, for high absorption rate filters.
What did the general turnaround mean and what was its impact on the activity of the Petromidia and Vega refineries?
Felix Crudu: The 2020 turnaround was a success. Especially considering the context. I would like to point out several details about this activity. It was mandatory to have this turnaround, because the permits and the safe operation of the installations haы to comply with the legal requirements. We had to shut down the facilities and renew the permits.
Such a major turnaround means preparation well in advance. We started the turnaround on the first day of the state of emergency. Everything was planned and delivered. We had reached a situation where we had to continue and protect our people, our families, our operations. I had taken many steps and many measures. We closed the canteen, we separated the flows of employees coming to work in shifts, so that all companies, especially 90-95% from Romania, to carry out their activities to supply on time, because we had very large projects.
They understood that they had to comply with the authorities' and internal measures during the turnaround. This blockage meant that certain specialists could not come to Romania. We turned to our specialists and they changed the catalysts, we succeeded with our specialists in what we set out to do with foreign specialists. In addition to maintaining the facilities, we aimed for future investments. To have a great flexibility, adapt to market and environmental requirements. We had 21 investment projects, we changed the generator cover, we changed the reactor and the catalytic reforming unit, as well as many other distillation projects, delayed coking. These projects give us flexibility and the possibility to use diversified crude oil recipes and change the product mix, based on market demand.
How would you characterize the almost 11 months of 2020?
Felix Crudu: I think these months were the hardest, but because we're at the end of the year, we can draw conclusions. In the first phase, the preparation for the turnaround was a success, in the context of the pandemic. The repair and modernization of the installations had to be done in time to ensure energy security.
In a nutshell, there was a moment when people in front of the gates thought "should we go to work or go home?". There was such a moment. For contractors, partners. Covid was new to everyone. We completed this operation on time, without contamination and incidents. That was the most important thing for us – the safety of people and contractors. A case could have generated a closure. In the context of fluctuations and negative margins, we analyzed together with the group the opportunity to modify the recipe of raw materials, optimize yields, so as to get jet, to put it into diesel, sell and stay afloat.
The goal was to survive in the context of low demand and surplus of products. We sought to obtain an optimal run-rate. At the beginning of each month, we worked for days to find the optimal run-rate. We were in constant contact with the retail division in Romania and near abroad and we established this run-rate based on the request of our entities. Plus, we had to maintain our financing, because without money everything stops overnight. We also mentioned the optimization of operational costs, capital investments, projects carried out after turnaround, projects that we postponed for the following years and ensured a control of all internal processes so that human resources are used to the maximum in the context of work from home for administrative staff and work at the units for operational staff.
All these efforts were made in the hope that 2021 will bring, or bring back, the market, consumption and minimum margins for safe operation and a positive result. +1 at the end of the line. We are also preparing a worst-case scenario. I am optimistic, I hope there is no need to implement the last resort action plans.