Beyond Reach: Ukrainian Drone Hammers Russian Oil Giant

A drone struck Gazprom’s Salavat refinery in Bashkortostan, damaging its crucial gasoline-producing catalytic cracking unit.

I published the image attached above on April 3rd, following Ukraine’s successful targeting of a Russian Shahed drone facility in Yelabuga. This facility was located in Russia’s Tatarstan Republic, over 1,200 kilometers away from the Ukrainian border.

Yesterday, Ukraine launched a drone that traveled 1,500 kilometers to target a Gazprom refinery in the Russian republic of Bashkortostan.

1,500 kilometers.

That is the distance between Chicago, Illinois, and Houston, Texas. It takes two to three hours for a flight to travel that distance. A drone, moving far slower, over such a long distance, managed to cover it without interruption and then found its target.

And the directive wasn’t just to drop the drone somewhere near one of Russia’s top ten largest refineries. It was specific: find the oil catalytic cracking unit of Gazprom Neftekhim Salavat, situated in the Russian republic of Bashkortostan.

The catalytic cracking unit of a petrochemical plant plays a very important role in the refining process. According to Set laboratories:

Catalytic cracking breaks complex hydrocarbons into simpler molecules in order to increase the quality and quantity of lighter, more desirable products and decrease the amount of residuals. This process rearranges the molecular structure of hydrocarbon compounds to convert heavy hydrocarbon feedstock into lighter fractions such as kerosene, gasoline, LPG, heating oil, and petrochemical feedstock.

For a considerable time, I kept wondering how Ukraine manages to transform its drones into long-range precision weapons. The video evidence of the drone attack on the Gazprom facility isn’t very clear.

However, I’ve seen several videos of Ukraine’s drone attacks in March when they targeted the highly critical atmospheric distillation units of Russian refineries. The drones often seemed to hover for a few seconds above the intended target, as if ensuring they were at the correct location before initiating their dive.

They were spot on.

Ukraine is using artificial intelligence to help its drones successfully navigate long distances and deliver the payload to the intended target.

“The AI guidance also delivers strike precision, maximizing the impact of the strikes by targeting specific areas like distillation towers, repairs of which requires Western technology. This makes the repairs costly and often require equipment that the country is not able to produce,” Natasha Kaneva, head of global commodities strategy at JPMorgan, told the bank’s clients in April.

On one hand, Ukraine’s drones are becoming increasingly precise in their targeting and penetrating deeper into Russian territory. On the other hand, the Russians remain unaware that a drone is freely roaming their territory, unimpeded for hours.

Where are the surveillance systems? Where are the early warning tools? Why couldn’t Russia scramble one of its fighter jets, idling in hangars, to shoot down the drone? Why was a petrochemical facility, crucial for the domestic market, left unprotected despite producing more than 150 types of products and having a capacity of 10 million metric tons of oil per year?

Gazprom Neftekhim Salavat is not one of the petrochemical companies in Russia. It is one of largest companies manufacturing 150 products including diesel fuel, oil fuel, fuel oil (mazut), road bitumen, road bitumen feedstock, sulphur, low-density polyethylene, slurry high-density polyethelene, ethylene, urea and ammonia. According to the company document, these products are shipped to all federal subjects of Russia.

Russian refiners under continued threat

On April 5th, following Ukraine’s effective drone strikes within a 1,200 km range, Sergey Vakulenko, a nonresident scholar at the Carnegie Russia Eurasia Center, highlighted that almost “forty percent of Russian oil refining facilities lie outside the reach of Ukraine’s recently deployed weaponry.”

Three weeks ago, The Economist reported that Ukraine had developed drones with a range of 3,000 kilometers, granting them the capability to reach as far as Siberia. Half of my heart wanted to believe it, while the other half doubted it, considering Ukraine was still around the 1,000 kilometer mark. However, observing the trajectory of Ukrainian drone development, expanding from a range of a few hundred kilometers to over 1,500 kilometers, I find it increasingly plausible to trust The Economist’s report.

Ukraine continues to bring more and more Russian refining capacity under their drones range.

The Misplaced Fear of the American Administration

In the last week of April, diesel and petrol prices in Russia experienced a sharp increase. While the diesel price skyrocketed by almost ten percent in one week, petrol prices soared by 20% for the year. Politico attributed the price increase to a tightening supply.

For a while, I wrote that Ukraine should heed American advice and refrain from targeting Russian refineries, urging instead for a bolstering of their air defense by the Biden administration.

As the consequences of Ukrainian attacks on Russian refineries unfolded, it became clear that their aim wasn’t to disrupt Russian crude oil production but to strategically target refining products. This tactical approach led to an increase in pump prices and sparked inflationary pressures. These developments prompted me to reconsider my position.

Ukraine’s actions were not going to significantly impact global oil prices. There would be some shocks, but they would be muted and fixable. The loss of Russian refining capacity would not hurt oil prices in the long term; instead, it would incentivize non-Russian refiners to take on additional loads and increase their capacity. These high-margin products would entice any refiner to step in, expand, and profit further.

There are a few factors that are in play.

If Ukraine continues to intelligently target the refiners and avoid crude oil production, they may actually end up exerting downward pressure on oil prices.

Due to the loss of refining capacity, Russia, already pinching pennies and watching its rainy day fund depleted by tens of billions due to the war, will have no choice but to find some other avenue to make money. To compensate, they will pump more crude oil and export it to global markets.

This will add more barrels of crude oil to the global market, while reducing the amount of refined products in the Russian market. Russia will make less money than before, as they are selling a higher quantity of lower-margin products.

But the domestic market, hungry for high-margin refined products, will feel the pressure. Reduced supply will increase the price at the pump, adding inflationary pressure. The Kremlin will have no choice but to either import refined products from outside or absorb the price increase through subsidies.

Ukraine’s drone attacks barely scraped the global oil markets

At the beginning of April, Russia lost approximately 15% of its refining capacity. However, the Brent crude oil price did not reach the highs seen in September 2023. On top of this, we should also consider the ongoing conflict in the Middle East, which recently teetered on the brink of a full-blown confrontation between Israel and Iran.

Somehow the Brent Crude escaped the wrath of the twin wars.

Why?

Because the supply of brent crude did not decrease.

Bob McNally, president of Rapidan Energy, told CNBC in mid April that “the drone strikes are not a major issue for oil prices right now because the attacks on refineries are primarily affecting Russia’s production of diesel at a time when the market is already glutted”.

Yup…

The fear of the Biden administration that drone attacks will increase oil prices is seriously misplaced. I hope they give their blessing to Ukraine, as the data sets are clearly pointing in the other direction. These attacks hurt Russia’s ability to wage the war and are achieving the same effect that the failed Western oil embargo sought to achieve.

What can Russia do to stop this?

It’s evident that Russia cannot allow the long-range drone attacks to continue indefinitely. However, their options are extremely limited.

The long range ATACMS missiles provided by the United States to Ukraine has decimated a large swath of air-defense systems stationed in Crimea. S400 launchers, S300 launchers, and even a bunch of Iskander launchers were turned into scrap metal in the last few weeks. The steady erosion of long-range systems in occupied territory leaves the invaders with only one choice: they need to protect their assets with medium and short-range air-defense systems against the F16s.

I anticipate that Ukraine will introduce the F16s onto the battlefield within the next two months. The strain on Russia’s medium and short-range air-defense systems has significantly increased compared to where it stood two months ago. Consequently, if Russia had any plans to allocate its short-range protection to its largest refiners, they will find themselves lacking in sufficient defense capabilities.

It’s a choice they’ll be compelled to make. They must decide between protecting their military assets in Crimea or safeguarding their refineries. If I were in their position, I would prioritize the defense of Crimea, leaving the refineries vulnerable. I would then instruct the refiners to deploy armed personnel to shoot down the drones.

Ukraine should then say,

Oh, very, well then..

This story is accessible to all, free for non-Medium users. Feel free to share it with anyone.