Russia is Late Coming to High Quality Petroleum Products Markets

03.09.2009 — Analysis

The commissioning of the second train of the Antipinsky Refinery (the Tyumen Oblast) has been postponed from August to December 2009 due to financial difficulties. Large oil companies currently building advanced processing capacities are reviewing their plans too. Experts surveyed by RusBusinessNews do not exclude the possibility that Russia may lose the battle for the world markets of high quality petroleum products.

The first train of the Antipinsky Refinery with the capacity of up to a million tons had been commissioned in 2006. By 2012 the company had planned to increase the production to six million tons with maximum advanced processing which makes it possible to produce petroleum products of the Euro-5 quality standard. The second technological train was planned to have been commissioned in September 2008, but this dead line is being pushed to an ever later date. The management of the refinery blames the suppliers who during the reform years have lost the skill to design modern oil refinery complexes. The Department for Subsoil Use and Ecology of the Tyumen Oblast, however, names the crisis affecting the funding of the project as the main cause for the postponement.

Economical difficulties do affect the oil processors' plans. The specialists tie the construction and commissioning of the third train of the Antipinsky Refinery to the results of work of the second train. The press service of the company made the following statement for RusBusinessNews that "It is too soon to make any comments regarding the third train of the project yet. ANPZ (the Antipinsky Refinery) is striving to achieve the highest level of world quality in the production of motor fuels complying with the Euro-5 standard. With further advancement of processing there will be the opportunity to not only increase the volume of light petroleum product but also to broaden the product range. Products conforming to the Euro-5 quality standards will not go unclaimed."

Experts, however, doubt that Russian refineries will be capable of making products confirming even to the Euro-4 standard by 2012. The refinery modernization projects being implemented at the moment are aimed at both the further advanced processing of oil (a rather costly part involving the construction of catalytic cracking and hydrocracking complexes, and plants for gasification of residues and coking) and the improvement of quality to reach the European standards (hydrofining, isomerisation, benzene extraction, alkylation, production of oxygenates) which also raises the need for sizeable investments.

According to the data from Mikhail Turukalov, a specialist from the Information Analysis Centre KORTES, the industry would need investments amounting to 35-40 billion dollars in order to be able to produce petrol and diesel fuel complying with the Euro-4 standard. Taking into account the lack of companies' resources and loans being very expensive we have to admit that the advanced oil processing complex construction projects will have to wait.

Yelena Chernysheva, a divisional manager from VNIPIneft (The Research and Design Institute of Oil-Refining and Petrochemical Industry), also claims that some companies, TNK for instance, have suspended the refurbishment of refineries due to the lack of resources. Only some of declared projects are being implemented.

LUKOIL is still carrying on with the projects in Perm, Nizhniy Novgorod, and Volgograd. The president of the company Vagit Alekperov said in 2008 that the start of work on the advanced oil processing complex at the Volgograd and Perm refineries, as well as in Bulgaria, will be postponed only if the price falls below 45 dollars per barrel.

Surgutneftegas is carrying on with the implementation in Kirishi of the advanced oil processing complex construction project on the basis of the hydrocracking of mazut and catalytic cracking. The investor estimates that by 2011 the advanced oil processing will reach 92-95%.

It was planned to spend around 2.9 billion roubles on the construction of TANECO refinery complex in August and another 5.8 billion in the next three months. However, the Tatarstan Government, financing the construction jointly with TATNEFT, says that the crisis forces to economise and this, obviously, will affect the projects implementation timeframe.

Yelena Chernysheva predicts that large oil companies will still manage to fulfil the plans of petrol and diesel production to the Euro-3 and Euro-4 quality standards, but it is not worth even mentioning Euro-5 yet. These projects will be implemented either in a remote future or in a much curtailed format.

The expert reckons that if the Nizhniy Novgorod and Kirishi projects do carry on then Russia will be able to carry out advanced processing of about 80% of oil no sooner than in 2015-2017. The 90% level of advanced processing will only be achieved by 2025-2030. The industry is faced with the need to first process all the vacuum gas oil and then tar oil. There are no technologies needed for this in Russia and the expert reckons that they will not be coming here too soon. There are neither up to date catalysts made in Russia currently, nor some complex equipment.

Mikhail Turukalov stresses that the processing level of 95% (like USA today) will be achievable by 2025 only having adjusted the taxation for oil processing industry (first of all export duties on petroleum products). Concessional loans will also have to made available to the amount of tens of billions of dollars and the "game rules" will have to be transparent and fixed for a long period of time (a decade minimum).

The system that exists in Russia currently does not at all promote the production of a higher quality product. The advanced processing level of oil in Russian refineries has been remaining at the level of 69.6-71.9% already for nine years (2000-2008) according to the data from the KORTES Centre. The output of furnace oil in this time has grown from 54.08 to 67.83 million tons.

As the domestic Russian market is not keen on products of the Euro-4 or, more so, Euro-5 quality, it is not produced in large quantities. According to the data from the Russian Fuel Union less than 25% of all petroleum products made in Russia are of Euro-3 quality; oil companies under any pretext are trying to delay the deadlines for the transition to the higher quality standards. At current volumes of oil processing the production of mazut and diesel fuel at Russian refineries significantly exceeds the domestic consumption of these products.

Oil processing, as is well known, is profitable when it is done next to the regions where petroleum products are consumed. This is why Russian oil companies have recently been actively purchasing refineries abroad. Exporting petroleum products out of Russia, not having concessional export tax, is possible, in Mikhail Turukalov's opinion, only from plans located next to see terminals. For instance, the best market for Kirishinefteorgsintez (Rus. abbr. for Kirishi petroleum organic synthesis) is the North-West Europe, for the Tuapse Refinery - Mediterranean countries, a refinery in the Russian Far East - Asian-Pacific countries.

The expert reminds, however, that there are many projects on advanced oil processing being implemented around the world - in the Middle East, India, China etc. Many refineries being built will be export-oriented. Russia might not be able to find the room in the high quality petroleum products sales markets. The reduction of Russian oils companies' investment resources makes this threat even more real.

Vladimir Terletski