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Delayed effect of COVID-19 in oil handling business

This commentary first appeared on the website of KN.

Record low oil prices due to the extremely low demand for oil products and falling refining margins are delayed results of the COVID-19 pandemic, which does not pass the oil and oil product handling business. The warm winter and the failed negotiations of OPEC+ format have also had an unbalancing effect on the markets. The handling volumes of Baltic region terminals have not dropped drastically, but Klaipėda Oil Terminal has maintained a sufficiently high operational efficiency, however, everyone is inevitably facing shrinking handling volumes. This uncontrollable process leads to the search for alternative products and increasing the efficiency of business processes and flexibility for customer needs.

KN operated Klaipėda Oil Terminal is the second among the 13 main terminals in Lithuania, Latvia and Estonia in terms of cargo handling and in the first four months of this year it cut itself about 24 per cent of the Baltic Sea Region terminal cargo handling pie. The efficiency of Klaipėda Oil Terminal, measured in terms of the volume of production available for handling and actual cargo handling, also remained in the first place on the competitive scale – the relative utilisation of the terminal transhipment capacity reached about 62 per cent when in comparison most of the main Latvian or Estonian terminals were filled only to 1-22 per cent. The total transhipment of oil and oil products from terminals in the Baltic States to tankers decreased by 18 per cent in April alone (compared to March). This was due to both the fierce negotiations on oil prices between Belarus and Russia and the global COVID-19 pandemic.

Oil crisis in Belarus

At the end of last year and at the beginning of this year, the eyes of economic and political observers were focussed on the negotiations between Belarus and Russia on the supply of crude oil. Due to the inability to reach an agreement for a long time, the Belarus oil refineries, for example, the main customers of the Baltic oil product handling terminals, were operating at the lowest capacity until the supply was resumed. Belarus has set itself the strategic goal of diversifying stocking of its energy supply and strengthening its energy security, which includes the geography of different sources of oil import. This situation has created additional opportunities for KN to connect energy markets, since the beginning of the year, Belarus has imported about 0.59 million tons of crude oil through Klaipėda Oil Terminal. A total of eight oil tankers with oil for Belarus came to Klaipėda. The most recent, 8th cargo of imported oil arrived on 5 June: the tanker NS Captain delivered about 77,000 tons of oil from the US intended for Belarus.

The origins of both import of crude oil from the US and import of liquefied natural gas from the US show that we are on the right track and that efforts to enable our customers to choose suppliers of energy resources from around the world are not in vain. In total, about 0.9 million tons of crude oil have been loaded into railway tank cars and about 1.567 million tons of oil products from railway tank cars at Klaipėda Oil Terminal operated by KN, since the beginning of the year. However, the repairs that began at the Mozyr plant in May is going to drag the cargo handling curves down. Theoretically, up to three million tons of crude oil per year could be transshipped through Klaipėda Oil Terminal.

A challenge for oil refiners and cargo handling terminals

From the broader perspective, global crude oil prices are balancing at record lows, making competition in both the energy resource trading and handling markets fiercer than ever. In comparison, in the US in May the oil demand was at its lowest level in 25 years, and the effects of the global pandemic are still impacting economies of the countries, leading to the declining consumption of energy resources and putting pressure on prices of oil product refining. This also affects the refiners of oil products, whose main challenge is to ensure the sales of products at attractive prices.

Are there any good news in this situation of unfavourable circumstances? The volumes of fuel loading into tank trucks for domestic consumption at Klaipėda Oil Terminal have not decreased since the beginning of the year, and in March-April the growth is observed when compared to the indicators of the beginning of the year: in January – February 2020, about 61,100 tons of fuel were loaded into tank trucks and in March-April 72,200 tons were reached.

The business of long-term storage of oil products also shows good results: Subačius Oil Terminal operated by KN is filled almost “to the top” with oil products intended for long-term storage for both commercial needs of customers and fuel for the state reserve. The market situation is indeed intense and it is difficult to predict how strongly and for how long a pandemic will affect the global economies and consumption.

Thus, the main focus of KN’s operations in the oil segment is on the diversification of services. Since the beginning of the year, KN has handled approximately ten different products at its terminals in Klaipėda and Subačius. We set the goal for ourselves to look for opportunities in the market and handle even more different products, for example, to offer our customers the widest possible range of services. By continuing to increase investments in the development of Klaipėda Oil Terminal and expanding the cargo portfolio, we hope to maintain our market share even during this difficult time.

KN is constantly investing in the development of Klaipėda Oil Terminal and expanding the range of products handled. In the near future investment perspective – a multifunctional continuous quay, a new two-way railway overpass. In order to give the terminal more flexibility, Klaipėdos Nafta has invested almost 45 million euros in its development over the last three and a half years.

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