Russian Surgut boosts cleaner fuel sales to Europe

By Maxim Nazarov

MOSCOW, Feb 12 (Reuters) - Russia's largest export refinery is redirecting heating oil with 0.1 percent sulphur towards Europe, trade sources said on Tuesday.

The owner of the 400,000 barrels per day Kirishi refinery, Surgutneftegaz (SNGS.MM), has not confirmed the sales, which would make it among the first Russian producers to supply Europe with the continent's new, cleaner heating oil.

But since the European Union imposed a limit of 0.1 percent sulphur content in heating oil on January 1, traders report low sulphur material has been redirected from industrial customers in the northwest Karelia and Murmansk regions, as well as the Leningrad region, while the refinery is offering more 0.2 percent sulphur material to its Russian buyers.

Amid a nationwide shortage of winter grade gas oil in January, Kirishi, which prices its products against export netbacks, often above other Russian producers, suddenly dropped the refinery price of winter grade 0.2 gas oil some 9.5 percent, making Kirishi material some of the cheapest in Russia. Low-sulphur gas oil practically disappeared, local traders said.

"It has been more difficult to get "green" gas oil from the refinery, and sometimes there is none at all," one of Kirishi's buyers said.

The domestic market offers refiners little reward for producing cleaner fuels. In some of Russia's regional markets, 0.1 material carries no premium at all.

Sales from Kirishi offer further evidence that Russian refiners are technically able to supply cleaner fuels to Western markets and take advantage of substantial premiums for low sulphur material, but face obstacles from export infrastructure.

DEDICATED PIPELINE

Most Russian refineries export the bulk of their product through the state-controlled Transnefteprodukt pipeline system, which has said it cannot guarantee 0.1 percent sulphur until the second half of 2008 at the earliest.

Kirishi, on the other hand, moves product to the St Petersburg Oil Terminal through a dedicated pipeline, which is formally part of the Transnefteprodukt system but operates separately from the rest of the network.

Port sources told Reuters that Kirishi gas oil from the pipeline contains no more than 0.05 percent sulphur, meeting European standards with room to spare.

That pipeline is working at full capacity of 2.5 million tonnes per year, the port sources said, whereas Kirishi produces around 400,000 tonnes of gas oil per month, 75 percent of which meets European spec.

Pipeline constraints mean the recent increase in export volumes may have been dispersed not only to St Petersburg Oil Terminal, but to the Baltic ports via rail, making it difficult to determine how much more 0.1 is flowing to northwest Europe, traders said.

Surgutneftegaz is upgrading the refinery to make more high-spec fuel available both for abroard and Russia, where the number of private cars is multiplying rapidly and includes many imports that require European standard fuels.