ANALYSIS-Europe refiners look to Russia as N.Sea oil fades

LONDON Tue Dec 18, 2007 1:19pm GMT

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LONDON Dec 18 (Reuters) - Europe will buy more Russian crude as North Sea oil output drops, prompting heavier investment in high tech refineries that can turn the higher sulphur content crude into greener, ultra-low sulphur fuels, analysts say.

That may also make Russia's Urals crude more expensive for European buyers.

North Sea oil output, mostly from Britain and Norway, will fall from 4.88 million barrels per day in 2007 to 3.66 million bpd in 2012, according to the International Energy Agency.

Damian Kennaby, analyst with energy consultancy Purvin and Gertz, forecasts North Sea production will have fallen even further to about 2.7 million bpd by 2020.

"The main alternative crude sources in Northern Europe are Russian and African," he said. "As North Sea production declines we expect that demand will be met by more Russian exports."

High sulphur crude, such as Urals and most grades from the Middle East, is dubbed "sour". Low sulphur crude, such as most of North Sea oil, is "sweet".

"We are already seeing investments in refineries, such as upgrading and desulphurisation units so they can run more heavy sour crude," said Laurence Eagles, the head of the IEA's Oil Industry and Markets division.

Sour barrels will increase their long term share of global supply. Russian output will rise from 9.95 million bpd in 2007 to 10.53 million bpd 2012, according to the IEA.

Finland's Neste Oil (NES1V.HE), running two refiners with combined capacity of 260,000 bpd, epitomises the trend -- buying more Russian crude and building new plant to deal with it.

It is increasing its intake of Urals crude to 82 percent of its total crude purchase volumes from 36 percent previously with a new hydrocracker at its Porvoo plant.

Neste's intake of North Sea and other grades have dropped to 18 percent of its total. North Sea crude used to account for 47 percent and the other grades 17 percent, its report shows. Total crude intake is unchanged.

Austrian refiner OMV (OMVV.VI) plants to build a thermal cracker at its 210,000 bpd Schwechat refinery by 2009.

"The aim is to use more heavy crude and at the same time to reduce the amount of heavy fuel oil in the product slate. We are always optimising our crude supply sources," an OMV spokesman said.

Royal Dutch Shell (RDSa.L) is looking to invest 1 billion euros ($1.43 billion) in its Dutch Pernis plant, the largest refinery and one of the most complex in Europe, including the potential construction of a desulphurisation unit.

COSTLIER URALS?

Urals crude is usually cheaper than North Sea benchmark Brent and the price gap between the two has been seen as a tool to drive profitability for complex European refiners.

However, Goldman Sachs said in a research note the Urals-Brent differential will narrow, making the Russian grade more expensive.

Goldman narrowed the average discount of Urals against Brent to $3.30 a barrel for 2007 from its previous estimate of $3.50. That would hold for 2008-2010, compared with its previous estimates of $4.50-discounts for the three year period.

Russia's quarterly export schedule, obtained by Reuters on Tuesday, showed the first exports via pipeline to China [ID:nL1883784]

China, the world's second largest energy user, has boosted its 2008 term oil purchase from Saudi Arabia and Iran and that will tighten global sour crude market, crude oil traders said.

(Reporting by Ikuko Kao, editing by William Hardy)