US sanctions hamper Russian efforts to repair refineries: Report

When engineers at Russian oil firm Lukoil discovered a turbine had broken at their largest refinery on January 4, they quickly realised the problem was far from trivial, and the company that could fix the issue had withdrawn from Russia after the country invaded Ukraine in February 2022.

Moscow, London: When engineers at Russian oil firm Lukoil discovered a turbine had broken at their largest refinery on January 4, they quickly realised the problem was far from trivial.

There was only one company that knew how to repair the gasoline-producing unit at the NORSI refinery, located on the Volga River, some 430 km (270 miles) east of Moscow. The problem was that the company is American, according to five sources familiar with the incident.

The firm, petroleum engineering multinational UOP, had withdrawn from Russia after the country invaded Ukraine in February 2022.

"They (the engineers) rushed around to find spare parts and they couldn't find anything," said a source close to Lukoil, who asked not to be named because he is not allowed to speak to the media. "Then the whole unit just stopped."

Four other sources said the unit— a catalytic cracker used to convert heavier hydrocarbons into gasoline, has been out of production since January and it was not clear when it could be repaired due to a lack of expertise inside Russia. The KK-1 unit is one of only two catalytic crackers at the plant.

As a result, the NORSI refinery, the fourth-biggest in Russia has cut gasoline production by 40 per cent, according to two of the sources. Lukoil did not respond to requests for comment for this story.

The Lukoil refinery is an example of wider problems in Russia's energy sector where some oil firms are struggling in the face of Western sanctions to repair their refineries, built with the help of US and European engineering firms, according to at least 10 Russian industry sources.

The difficulties have been exacerbated by Ukrainian drone attacks that have struck at least a dozen Russian refineries this year, the industry sources said. The attacks forced Russian refineries to shut in some 14 per cent of capacity in the first quarter, according to Reuters calculations.

"If the stream of drones continues at this rate and Russian air defences don't improve, Ukraine will be able to cut Russian refining runs quicker than Russian firms will be able to repair them," said Sergey Vakulenko, an expert on Russia's energy industry and non-resident fellow at the Carnegie Endowment for International Peace, an international affairs think tank.

Russia's top energy official, Deputy Prime Minister Alexander Novak, said last week that the damaged NORSI facilities should resume operations within a month or two, as Russian firms were working to produce the spare parts needed.

He also said other Russian refineries have boosted production after the drone attacks and there was no shortage on the local fuel market.

Russia's energy ministry did not respond to a request for comment. Minister Nikolai Shulginov said on Wednesday all refineries would be fixed by June, without providing further details.

The NORSI refinery, near the city of Nizhny Novgorod, has a capacity of 405,000 metric tons a month of gasoline or 11 per cent of Russia's total.

The current outage would cost Lukoil nearly $100 million in lost revenues a month, based on an average Russian gasoline price of $587 per metric ton, according to Reuters' calculations.

Honeywell International Inc, the parent company for UOP, said in a statement to Reuters it had not provided any equipment, parts, products or services to the refinery at Nizhny Novgorod since February 2022, nor to the independently-managed Slavyansk ECO refinery.

The Slavyansk refinery was hit by a Ukrainian drone attack on March 18 and caught fire briefly.

"We are actively working to identify and interrupt any possible diversion of our products into Russia via third parties," Honeywell told Reuters by email. The company said it complies with all applicable export license requirements, sanctions laws and regulations. The United States and its allies have imposed sanctions on thousands of Russian targets since the invasion of Ukraine and around 1,000 companies have announced their departure from the country.

Russia's export-focused $2.2-trillion economy has proved more resilient to two years of the unprecedented sanctions than either Moscow or the West anticipated.

WAR OF ATTRITION

Western companies such as UOP and Swiss engineering group ABB have supplied technology and software to all the 40 biggest refineries in Russia over the last two decades, according to more than 10 Russian industry sources. Each refinery has a combination of Russian and foreign equipment.

ABB confirmed to Reuters it stopped taking new orders in Russia once the war broke out in February 2022, and has no plans to return to Russia once it has fulfilled its existing contractual obligations, a spokesperson said. The company did not provide details of those obligations.

None of the five sources suggested the turbine failure in January at NORSI was a result of drone attacks. But the sources said the problems at the plant only became worse after NORSI was hit for the first time by Ukrainian drones in February when other pieces of equipment were damaged, putting additional strain on the entire refinery.

As in the United States, the price of gasoline is a politically sensitive subject in Russia and authorities try to limit price rises. Recent measures included imposing a ban on gasoline exports for 6 months in February.

Ukraine says it attacks Russian refineries because it wants to undermine the Kremlin's war machine by reducing state revenues and cutting fuel to the army.

"Drones are tens, if not hundreds of times cheaper than the cost of repairs, which is important in a war of attrition," said Vakulenko, who was a former head of strategy at Russian energy major Gazprom Neft. He left the firm and Russia days after the start of the Ukraine war.

Russia is the world's second-largest oil exporter. It has rerouted most of its crude and products exports to Asia and Africa since Western nations imposed sanctions on Moscow.

Should Moscow face a steep decline in refinery output, it would be forced to cut fuel exports in favour of crude, according to more than 10 Russian oil traders.

Russia supplies crude to just a few large buyers, such as China, India and Turkey, but its portfolio of fuels buyers is comparatively broader as it can ship to smaller consumers without large refining systems in Africa and South America.

Russia's refining industry dates back to the 1940s, when the United States provided equipment under the lend-lease program during World War Two.

After the collapse of the Soviet Union, Russian oil firms invested tens of billions of dollars in upgrades with the help of firms such as UOP and ABB.

UOP helped upgrade Norsi and Slavyansk ECO refineries. It did not specify which other Russian refineries it has serviced, in response to Reuters' questions. The United States has imposed sanctions on companies around the world, including in Turkey, to prevent the transfer of technology to Russia.

Countries under Western sanctions such as Russia and Iran have long managed to find loopholes to obtain spare parts for Western-made equipment such as planes or cars.

But refining equipment is much rarer and more specialized; Western firms have tightened checks to prevent Russia from importing spare parts via third countries, one of the five sources said.

Two of the sources said Lukoil had asked Chinese companies to repair the KK-1 unit at Norsi. The sources didn't name the Chinese companies. Lukoil declined to comment when asked if it had approached China.

"China has got the technology. But very often it would mean a full costly replacement of the unit rather than a normal, cheap, regular repair," one of the sources said.