Operations at damaged Russian fuel complex seen resuming within weeks, say analysts

Firefighters work to extinguish fire at the Novatek terminal in the port of Ust-Luga, Russia, January 21, 2024. Leningrad Region’s Governor Alexander Drozdenko Telegram channel via REUTERS

MOSCOW/NEW DELHI (Reuters) -Russian energy company Novatek is likely to resume large-scale operations at its Ust-Luga processing complex and Baltic Sea terminal within weeks, following a suspected drone attack seen disrupting naphtha flows to Asia, analysts said on Monday.

The tightening of supply from Russia, following fears of disruption in European naphtha exports to Asia from Yemeni Houthis’ attacks on ships in the Red Sea, are driving up naphtha prices and refining margins in Asia.

The profit margin for making naphtha in Asia jumped by about $6 to $91.70 per metric ton over Brent crude on Monday after four straight sessions of losses.

Novatek said on Sunday it had been forced to suspend some operations at the huge Baltic Sea fuel export terminal and “technological process” at the complex due to a fire, started by what Ukrainian media said was a drone attack.

Kommersant newspaper also said on Monday, citing local authorities, that two storage tanks and a pumping stations were damaged due to the incident.

“We believe the plant is likely to return to significant capacity within weeks or, at worst, months,” analysts at Moscow-based BCS brokerage said in a note.

Novatek declined to comment.

Kremlin spokesman Dmitry Peskov said on Monday that Russia’s military and other government agencies were taking the necessary measures, including when it comes to air defences, after the suspected Ukrainian drone attack on the terminal.

The complex gets gas condensate, a type of light oil, for processing some 7 million metric tons per year from Novaket’s Purovsky plant in Western Siberia for further production of oil products, such as naphtha, jet fuel and gasoil.

Analysts also said that Novatek will now be forced to export more gas condensate instead of high-marginal fuel via other terminals.

Sinara Investbank said a quarter of Novatek’s revenues could be affected due to the incident.

Novatek also exports gas condensate from the Arctic port of Sabetta. The exports grew by around 20% last year to 960,000 tons from 800,000 tons in 2022.

NAPHTHA

Russia exported a record volume of naphtha, used to manufacture petrochemicals that end up as plastics and polyester fibres, to Asia in the past year following a European Union embargo introduced in February on Russian oil products aimed at reducing Moscow’s revenue in funding its military campaign in Ukraine.

“Novatek exports quite a bit of light and heavy naphtha, about 2 million metric tons each … a lot of that ends up in Singapore Straits, Taiwan and China,” said Armaan Ashraf, global head of NGLs at energy consultancy FGE.

According to LSEG data, 5.2 million tons of naphtha were shipped to Asia in 2023 from the port of Ust-Luga, which hosts several outlets for exports of commodities, of which 2.8 million tons originated from Novatek’s terminal.

Between two and four lots of naphtha/light condensate cargoes totalling up to 250,000 tons have been loaded from the terminal in January and are heading to Asia, Kpler and LSEG data showed.

Despite the potential disruption, Brent crude futures edged down on Monday while ICE gasoil and U.S. heating oil futures prices have also slipped.

(Reporting by Vladimir Soldatkin in Moscow, Mohi Narayan and Trixie Yap in New Delhi; Editing by Alex Richardson)