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Russia eyes sulphur stream

The government is considering supplying high-sulphur crude in a separate stream to improve Urals export quality

Talks involving the Russian energy ministry have resumed over the creation of a separate 2.3% sulphur crude stream out of the Ust-Luga oil terminal on the Russian side of the Gulf of Finland. It's a move that has been mooted for some time, aimed at making Russian oil more attractive to international buyers.

Alexey Rybnikov, president of the St. Petersburg International Mercantile Exchange (Spimex), told Petroleum Economist last year that Urals' greater sulphur content compared to Brent, has become a major headache for the Kremlin's drive to gain international recognition for the Urals contract. Stripping out the higher sulphur stream from Urals—which is derived from a mix of various oil qualities—would make it cheaper to refine and thus more competitive on export markets. Urals was trading at more than $2 a barrel lower than Brent in early March.

Privately-owned oil producers Lukoil and Russneft support the proposal, while state-run Rosneft, which controls Bashneft, and Tatneft, is lobbying against the plan. Bashneft and Tatneft are the largest producers of high-sulphur sour crude in the country, and so could see lower returns, if the sulphur is stripped out into a separate stream. They could face an additional $0.2-0.4 b/d price discount to Urals at best.

"Tatneft would be the company most affected by the creation of a separate sour crude stream," Kirill Tachennikov, oil analyst at BCS Financial, said. "If this information is confirmed, it may be a reason to take profit in Tatneft, especially given that its recent rally was mainly driven by inflows into index-based funds."

Russia's oil pipeline monopoly Transneft has been speaking out about the deterioration of the quality of oil being exported westwards for years. The weighted average value of sulphur in oil reached 1.58% last year compared with 1.55% in 2016, according to Transneft's figures. The level of sulphur via the Druzhba pipeline is expected to reach 1.7-1.8% this year.

Urals' sulphur content has become a major headache

Transneft has claimed the degradation in oil is occurring mostly in supplies from the Tatarstan, Udmurtia and Bashkortostan regions of Russia. Tatneft is based in the republic of Tatarstan, while Bashneft is from Bashkortostan. The annual high-sulphur flow may total 24m tonnes a year, according to Transneft's estimates.

European refiners are now threatening to cut Russian oil purchases due to worsening quality, after Moscow re-routed large volumes of crude to China, according to a Reuters report in February. The refiners allege that Russian producers are using better quality types of oil for the ESPO (Eastern Siberia-Pacific Ocean) blend exported to Asian markets.

Oil shipped to China has an estimated sulphur content of about 0.5%. This puts it in the sweet crude category, which is much easier for refineries to handle.

Officials from the energy ministry acknowledged the deterioration in European supply, but insist that is has been caused by depleting oilfields, rather than a policy decision.

Trading sources claim the level of sulphur in Urals' content often exceeds the 1.8% level permitted by Russia's national standard, while the Ministry of Energy last year received official letters of complaint from European consumers, including Hungarian oil and gas company MOL. "Both oil producers and foreign consumers have repeatedly flagged the deterioration of Russian Urals crude for export quality via the International Association of Oil Transporters [IAOT]," Transneft vice-president Sergey Andronov told the Interfax news agency late last year. "Two complaints were forwarded on behalf of IAOT to the Russian Energy Ministry, regarding the deteriorating quality of the crude oil exported to Europe over the Druzhba pipeline."

There are no legal consequences for the supplies' quality falling below certain standards, but buyers could choose to cut purchases of the blend or haggle for lower prices.

The energy ministry has been kicking around several solutions for the past few years, including equal distribution of sulphurous oil to all export routes, refining of such oil at refineries located at the places of production and the creation of a separate oil flow. The latter has gained the most traction, if only because it is the least costly.

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