At least three Russian oil refineries have been forced to halt or scale back production due to significant losses and now face the risk of closure, Reuters reported on Nov. 15, citing five undisclosed sources.
“We expect that the actual (plant) closures may take place at the beginning of next year,” one of the five sources said.
The Russian fossil fuel industry is a key economic driver of Moscow’s full-scale war against Ukraine. In response, Ukraine has targeted Russian oil production with long-range drone strikes.
The Russian oil refining sector, hit by Ukrainian drones and Western sanctions, is now selling fuel at a discount and charging high interest rates. As a result, three plants — Tuapse, Ilyich, and Novoshakhtinsk — have either suspended or reduced production in recent months, according to Reuters.
This crisis has led to a drop in fuel exports and lower revenues for companies, which in turn reduces state budget income amid high inflation and uncertainty in energy markets.
According to Reuters, oil refiners posted record profits in 2021 and 2022, driven by a post-pandemic surge in travel demand and economic recovery. However, margins sharply declined as large refineries reentered the market and demand growth slowed, partly due to the gradual phase-out of fossil fuels.
In this context, low-tech refineries have been hit hardest, suffering losses of up to 10,000 rubles ($102) per metric ton for several months in the second half of 2024, two sources told Reuters.
State-owned Rosneft, Russia’s oil giant, has been forced to suspend refining at its Tuapse plant on the Black Sea multiple times this year due to low profitability, sources said.
The Ilyich and Novoshakhtinsk refineries in southern Russia have been operating at half capacity for several months, processing about 70,000 and 60,000 barrels per day, respectively, due to unprofitable conditions, four sources confirmed.
All three refineries were struck by Ukrainian drones earlier this year, resulting in reduced refining volumes, according to sources.
Russia’s central bank raised interest rates to 21% from 19% last month, making it more difficult for many plants to survive.
Another issue is the rising cost of oil, which in October traded at 50,000 rubles ($502) per ton on the domestic market, exceeding the required maximum price of 35,000 rubles ($351) per ton for independent refiners to turn a profit, Reuters reported, citing its sources.
Dominic Culverwell