Refining in Russia: Any Light at the End of the Tunnel?

Transcription

1 Refining in Russia: Any Light at the End of the Tunnel? 2th Anniversary CIS Downstream Summit 216 Yakov Ruderman General Director Vienna, Austria ember 29, 216

2 Contents Refining: In Search of Optimal Capacity Utilization Motor Fuel Demand and Supply: Deficit or Surplus

3 Refining: In Search of Optimal Capacity Utilization

4 Russia s refining industry lost incentives for growth Refining in Russia and Russian crude exports beyond CIS in million BPD Refining Exports to the West Exports Exports to the East For ten years since ust 24, high refinery margin was stimulating the refining volume growth (except during the 29 crisis), but it was also eroding incentives for refineries upgrade and development. During this time, the CDU capacities were being built up. At the beginning of 215, the total CDU capacity in Russia was about 315 MTPA, with capacity utilization reaching 92%. In 214, the crude oil * refining volume in Russia reached a record high, 29.8 MMT. The refining growth past 21 outpaced crude production growth, so exports were going down. In 215 the trend was broken: now refining has been falling while exports have been on the rise months 216 * Here and elsewhere, including gas condensate A 4

5 The decline in world oil prices coupled with the tax reforming, degrades the economics of Russian refineries and affects their throughput Crude oil throughput vs export price for Urals Russia, Refineries export duty subsidy Russia, KTPD Throughput Throughput (linear trend) Price for Urals, CIF USD/bbl USD/bbl Simple refinery Deep conversion refinery In 215, the crude oil refining volume decreased by 2.4% down to MMT. Expected level of refining in 216 is MMT, i.e. minus 1-2% compared to the last year. The main reason behind the fall in refining is the decline in world oil prices that automatically resulted in lower refining industry subsidy. Russian refineries have a bad configuration. To optimize the margin, they have to sacrifice their throughput A 5

6 In the low oil price environment, the impact of the tax maneuver on the refining margin turned out to be more sensitive for businesses than expected Impact of tax maneuver on the gross margin of a simple refinery (with Afipsky Refinery as an example) Average export prices, logistics and USD exchange rate under the conditions of 215 USD/bbl The tax maneuver law was adopted in ember 214. The impact of the reforms on refining was assessed following the oil prices at around 1 USD/bbl. The reality proved different. In 216, export-oriented coastal refineries were on the brink of unprofitability or crossed this line. Unless oil prices rise, all these enterprises will become loss-making in 217. The situation involving simple continental refineries is even worse. They would have become unprofitable as early as 216, had they acted within legal boundaries..5. Gross margin Duties lagged effect Tax maneuver (before corr.) Gross margin (before corr.) Tax maneuver (corr.) Gross margin (corr.) Tax maneuver Gross margin A 6

7 The trend towards lower refining has affected all major Russian vertically integrated oil companies Refining Russia, KTPD (estimated) In the first 9 months of 216, the total crude distillation capacity utilization in Russia was about 84%. Against the notable decrease in oil processing by the major vertically integrated oil companies, the stable refining level of a group of independent refineries and, in particular, mini-refineries, looks like a paradox. But only at first glance. Most of them have low process complexity but effectively use the holes in the market regulation Rosneft LUKOIL Gazprom Neft Bashneft Tatneft Gazprom NOVATEK Independent Minirefineries A 7

8 The decline in refining is accompanied by an increase in the conversion rate and the yield of most valuable products Average yield of some petroleum products at refineries Russia, % Motor gasoline, Euro 5 Diesel fuel, Euro 5 Fuel oil Gains in capacity of main oil conversion processes Russia, million tons H % 2% 24,8% 2,9% Hydrocracking Cat cracking Visbreaking Coking Alkylation Isomerization Gasoline hydrotreating Diesel fuel hydrotreating 15% 14,1% Share of oil refined in conversion process Russia, H % 25% 2% 15% 1% 5% % 5% Hydrocracking Cat cracking Visbreaking Diesel fuel hydrotreating Alkylation Isomerization A 8

9 Expected total abolition of the export duty subsidy will result in the closure of some Russian refineries and reduced capacity utilization for most of those remaining afloat Evaluation of EBITDA for the major Russian refineries Omsk refinery Ufa Group refineries Nizhegorodnefteorgsintez Volgogradneftepererabotka Permnefteorgsyntez Moscow refinery Yaroslavnefteorgsintez Khabarovsk refinery Ryazan refinery TANECO Angarsk NHK Gazprom Neftekhim Salavat Ukhtaneftepererabotka Orsknefteorgsintez Usinsk refinery Krasnodarekoneft Yaya refinery Ilsk Refinery Afipsk refinery Achinsk refinery Tuapse refinery i refinery oshakhtinsk refinery Komsomolsk refinery TAIF-NK Saratov refinery Kirishinefteorgsintez Antipinsk refinery Samara Group refineries Under the conditions of Billion rubles -49 The same, net of duty subsidy Without the duty subsidy, EBITDA becomes negative Billion rubles In 215, the vast majority of Russian refineries generated profits thanks to export duty subsidy alone. Without the subsidy, the same volume of refining would have brought losses to almost all the refineries. The abolition of export duties on crude and petroleum products expected in the next few years will lead to the closure of some refineries and notably reduced volumes of crude refining and petroleum products output in Russia, unless the government reimburses refineries for the loss of duty subsidies. The abolition of refining subsidies is inevitable. However, to save a refinery, this process should be synchronized with efficient upgrade of refineries, whereas the upgrade itself should be made the condition for granting subsidy. Source: study by Petromarket RG A 9

10 Motor Fuel Demand and Supply: Deficit or Surplus

11 Share of Euro 5 Gasoline in the total output of gasoline at Russian refineries has come close to 95%, while the share of Euro 5 Diesel in diesel fuels output has leveled out above 8%,.. Motor gasoline production Russia, % Euro 5 share Diesel fuel production Russia, % Euro 5 share 94.7% 9% 9% 89.3% 8% 8% 7% 7% 6% 6% 5% 5% B 11

12 ... meanwhile, significant motor gasoline and diesel (gasoil) fuel volumes not conforming to the Technical Regulations are still traded on the market Demand for motor gasoline and non-tr MG share* in it Russia, Land-borne transport and machinery demand for gasoil fuels and non-tr GF share* in them Russia, Demand for MG Non-TR MG share in it Demand for GF Non-TR GF share in them million tonnes % 14% 12% % 4% 2.4 1% 2.4 3% 8% 1.8 6% 1.8 2% 1.2 4% 1.2 1%.6 2%.6. %. % million tonnes * non-tr MG - motor gasoline that does not conform to the Technical Regulations * non-tr GF - gasoil fuels that do not conform to the Technical Regulations for diesel fuels B 12

13 Sales of surrogate fuels save the market from deficit, but have a depressing effect on the prices of quality product manufacturers. The latter concerns both the motor gasoline market... Motor gasoline market balance* Russia, months 216 (Euro 5) million tonnes TR MG deficit.6 TR MG net import -.1 TR MG reserves rise -.8 Rated TR MG volume for bootleg gasoline 4.4 Non-TR MG consumption million tonnes million tonnes TR MG surplus TR MG net import TR MG reserves rise Rated TR MG volume for bootleg gasoline * TR MG- motor gasoline that conforms to the Technical Regulations Non-TR MG consumption -1.5 TR MG surplus TR MG net import TR MG reserves rise Rated TR MG volume for bootleg gasoline Non-TR MG consumption B 13

14 ... and diesel fuel market Diesel Contributing fuel market factors balance to USD netback change215 Russia, vs settlements in USD as of months 216 (Euro 5) million tonnes million tonnes TR DF surplus 23.4 TR DF surplus TR DF net import TR DF net import TR DF reserves rise -.2 TR DF reserves rise 14.8 Non-TR DF consumption 1.2 Non-TR DF consumption million tonnes TR DF surplus TR DF net import. TR DF reserves decline 7.3 Non-TR DF consumption * TR DF - diesel fuel that conforms to the Technical Regulations B 14

15 Unlikely risks (the horror stories of consultants): a dramatic drop in demand for motor gasoline in and its critical overproduction after 216 Forecast for motor gasoline demand in Russia Baseline scenario, y 216 million tonnes Motor gasoline export from Russia Average exports per day as converted to the number of days in the year. MTPA Total Class 5 Motor gasoline market European Union, 215 Exports ~45 MMT Demand ~75 MMT The baseline scenario, in its essence, is consistent with the ideas that the Russian economy will crawl out of recession in 216 and transit to a slow economic growth starting 217 In 216, the surplus of motor gasoline in Russia will be ~4.5 MMT (including ~.8 MMT Euro 5). Whether there is a substantial MG surplus in the future will depend on the tax reform conditions. In case of full abolition of the duty subsidy in the next few years, there might be deficit in MG. The surplus in MG per se does not bring serious difficulties to Russian producers, if they maintain a competitive profile on the European market *. To look for ways how to build a competitive refining industry is what we need. And they do exist. 2 * The same logic is valid for any other surplus products , FuelEurope Statstical Report 215 B 15

16 Russian refineries have significant competitive resources that can be mobilized by the government for the benefit of industry and economy as a whole The publication by Petromarket RG Backward Russian Refineries: Shutdown or Upgrade will offer you answers to the following questions: Is the vision of fatal unprofitability of backward Russian refineries and, particularly, export-oriented ones, fair? Do these businesses need to be closed as quickly as possible to eliminate the permanent damage they cause to the Russian economy? And if not, how can the domestic refining be transformed to contribute to the country s economy to the fullest? What should the government do to advance the industry in the right direction? For more details: B 16

17 RESTRICTIONS ON USE This presentation is intellectual property of Petromarket Research Group LLC and intended to be used solely for information purposes of the conference participants: CIS Downstream Summit 216 Any distribution of the information contained herein or commercial use of such information is only allowed with a written permission of Petromarket Research Group LLC. Page header 17

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