Russia's downstream: Old Problems and New Reality The CIS Downstream Summit Yakov Ruderman Director General Baku, Azerbaijan December 3, 215
Table of Contents Effects of low crude prices and tax reforms on oil production Effects of low crude prices and tax reforms on refining Motor fuel demand and supply
Effects of low crude prices and tax maneuver on crude oil production
In 215, crude oil and gas condensate production in Russia will reach approximately 534 MMT (1.7 BPD) million BPD Crude oil and gas condensate Production in Russia in 21 215 Oil including gas condensate Oil without gas condensate 11 1 9 8 7 1.1 9.71 1.23 9.8 1.34 9.89 1.47 9.96 1.53 1.1 1.2 1.66 million BPD Crude oil production, including gas condensate, in Russia in 21 215 (by region) Other Sakhalin East Siberia (with Vankor) 11 1 9 8 7.3.39.55.61 2.25.3.56 2.31.28.71.54 2.34.28.81.54 2.39 Timano-Pechora Ural-Volga Region West Siberia.29.88.56 2.46.33.93.6 2.48 The actual production growth in 9 months of 215 vs. last year 1.4%, including: gas condensate 26%, crude oil.1%. The core production growth regions are below: East Siberia (+6.4%), Sakhalin (+14.2%) Timan-Pechora (+7.4%) Regions that mostly receive oil for refining are noted to either cut down production (West Siberia, -.2%), or experience a relatively weak growth (Urals-Volga, +.9%) 6 6 6.46 6.43 6.4 6.37 6.26 6.25 5 5 21 211 212 213 214 9 months 215 21 211 212 213 214 9 months 215 A 4
Income of oil producing companies in 215 dropped vs. 214 in terms of dollars. However, income has grown in terms of rubles USD/MT Contributing factors to USD netback change215 Contributing factors to USD netback change vs. 215 214, vs. 214 estimates in 214 USD. estimates in 214 USD 18 12 6-6 -12-18 171 294 Netback 215 Tax maneuver 76 Price Urals 174 4 RUR devaluation 1 Transneft tariff 15 3 USD inflation Export duty in 214 MET 214 134-22% Netback 8 months 215 RUR/MT Contributing factors to RUR netback change 215 vs. 214 estimates in 214 RUR 8 6 4 2 6 581 Netback 214 1 335 Dollar netback 2 657 RUR devaluation 1 1 RUR inflation 6 92 Netback 8 months 215 +5% Tax maneuver contribution in netback fall is only 3%. It was assumed when the tax maneuver was introduced that it would reduce tax burden for oil producers, rather than making it heavier. However, this assumption was made for Urals price of about $1/bbl. Analysis has been performed for the crude oil produced in West Siberia and exported via Primorsk port. Annual averages in 214. Urals price $97.3/bbl USD exchange rate 38.5 RUR Averages for 8 months of 215. Urals price - $57/bbl USD exchange rate 58 RUR A 5
Low crude oil prices erode prospects for developing new fields From the presentation to the report by RF Energy Minister Alexander Novak 6th OPEC Seminar, Vienna, June 215. Production in Russia will be stable and diversified even in the turbulent environment of the world oil market Oil production structure BPD by types of resources Shelf Hard-to-recover reserves New fields by regions East Siberia and Russian Far East West Siberia The drop of production margin "in terms of dollars" affects the prospects for developing new fields (especially with hard to recover reserves and offshore fields). Technologies and services need to be imported for complex projects. Foreign investors and currency loans can only be attracted if projects are efficient in currency terms. Producing fields European part of Russia RUSSIA AIMS AT RETAINING THE CURRENT PRODUCTION LEVEL IN THE LONG TERM DECREASED PRODUCTION AT EXISTING FIELDS WILL BE SET OFF BY GROWING PRODUCTION IN EAST SIBERIA AND PROGRESSING PRODUCTION OF HARD-TO-RECOVER RESERVES, AND AFTER 22 - FAST-GROWING PRODUCTION ON CONTINENTAL SHELF DIVERSIFIED PRODUCTION HELPS RUSSIA BE FLEXIBLE IN THE TIMING OF PRODUCTION OF THE MOST CAPITAL-INTENSIVE AND SOPHISTICATED DEVELOPENT PROJECTS, REDUCING ITS DEPENDENCE ON THE MARKET CONDITIONS A 6
Effects of low crude prices and tax maneuver on refining
Russia's refining industry lost incentives for unrestrained growth Refining in Russia and Russian crude export beyond CIS in 21 215 million BPD Refining Export to West Export Export to East 6 5.16 4.99 5 4.42 4.25 4 3.65 3.37 3 2 1.77.88 5.33 4.22 3.35.88 5.54 4.13 3.15.99 5.82 3.99 2.78 1.22 5.7 4.42 3.6 1.36 For ten years since August 24, high margin was stimulating refining volume growth (except during the 29 crisis), but it was also eroding incentives for refinery upgrades and development. During this time, crude distillation capacities were being built up. At the beginning of 215, total refining capacity in Russia was about 6.3 million BPD, capacity utilization reached 92%. In 214, crude oil refining volume in Russia reached a record high, 5.82 million BPD. Refining growth past 21 outpaced production growth, so it could only be possible by exporting crude oil. This trend was broken in 215 when refining volumes reduced and export grew. 21 211 212 213 214 9 months 215 B 8
Falling margins are becoming critical to simple refineries. An export-oriented refinery located near sea terminals still can generate some profit,.. Contributing factors to USD netback change215 Contributing factors to gross margin change for vs. Afipsky 214, Refinery. estimates 215 in 214 vs. 214 USD. estimates in 214 USD USD/bbl 12 9 6 3 7.7 Europe margin 3.2 7.3 1.1 Duties (subsidy) Tax maneuver.5 Transport 3. USD/bbl Evaluation of tax maneuver effect on Afipsky Refinery gross margin with average prices and USD exchange rate in 214 and 215 6 5 4 3 2 1 8 months 215 214 In 215, the tax maneuver "eats away" 28% gross margin of a "near-shore" export-oriented simple refinery. In 216 217, if crude oil prices do not fall below the 215 level, the "near-shore" refinery has some hope to survive. The analysis has been performed with the following assumptions: Annual averages in 214. Urals price - $97.3/bbl USD exchange rate - 38.5 RUR Averages for 8 months of 215. Urals price $57/bbl USD exchange rate 58 RUR Gross margin 214 Gross margin 8 months 215 EP 215 EP 216 EP 217 B 9
but simple refineries located deep inland are doomed. Upgrade is the only alternative to closures Contributing factors factors to gross USD margin netback change for Afipsky change215 Refinery vs. at 214, the site estimates of Ryazan in Refinery. 214 USD. 215 vs. 214 estimates in 214 USD USD/bbl 9 6 3 4. Europe margin 3.2 7.3 1.1 Duties (subsidy) Tax maneuver 1.6.4 USD/bbl Evaluation of tax maneuver effects on gross marginfor Afipsky Refinery at the site of Ryazan Refinery with average prices and USD exchange rate in 214 and 215 2 1-1 8 months 215 214 In 215, the tax maneuver "eats away" 73% gross margin of a simple "continental" refinery, if the refinery is oriented solely to export. In 215 margin will practically drop to zero, in 217 such refinery will yield losses even if prices come back to the 214 level. In reality, simple "continental" refineries can only survive by using different sorts of "loopholes" the domestic market can provide. The resource of using such tricks is not endless. Eventually, "loopholes" will be stopped and the only alternative to closure for a simple "continental" refinery, when export duty subsidies are reduced, is a radical upgrade. Transport - 3 Gross margin 214 Gross margin 215-2 EP 215 EP 216 EP 217 B 1
Russia's leading refiners are gradually adapting to the new environment... Average gross refining margin in Russia averaged for 15 major refineries in the European part of Russia USD/bbl 14 12 1 8 Yields of some products in Russian refining industry 35% 3% 25% 2% Motor gasoline, Class 5 Diesel, Class 5 Bunker fuel Heating oil A more complex refinery has more opportunities to maintain an acceptable level of margin even with reduced export duty subsidies in 215, by: adjusting feedstock loading improving product mix optimizing logistics to export and domestic markets 6 15% 4 1% 2 5% % Dec Jan Feb Mar Apr May Jun Jul Jan Mar May Jul Sep Nov Jan Mar May Jul 214 215 214 215 B 11
nevertheless, deteriorated refining economics affects the pace of upgrading Russian refineries Capacity Contributing additions factors by to process USD netback change215 Russia vs. 214, cumulative estimates total in 214 USD. Projects as of 1.1.212 Actual, and projects as of 1.1.215 VGO hydrocracking VR hydrocracking MTPA 4 MTPA 15 3 1 2 1 5 212 13 14 215 216 217 218 219 22 212 13 14 15 16 17 18 19 22 MTPA 15 Cat cracking MTPA 2 Delayed coking and Flexicoking 1 15 1 5 5 212 13 14 15 16 17 18 19 22 212 13 14 15 16 17 18 19 22 B 12
Motor fuel demand and supply
Economic decline results in shrinking motor fuel demand Motor gasoline demand forecast (July 215) Russia Diesel fuel demand forecast* (July 215) Russia MMT 39 38 Base-case scenario Worst-case scenario 37.4 MMT 39 38 Base-case scenario Worst-case scenario * Total fuel demand for all civil land vehicles with diesel engines 37.6 38.2 38.8 The base-case scenario assumes GDP drop in 215, followed by a growth from 216. The worst-case scenario assumes a deeper economic decline in 215, followed by continuing recession in 216 with resumed economic growth in 217. 37 36 36.2 36.3 35.3 35.9 36.3 35.2 36.7 35.4 37.1 35.6 35.8 37 36 36.1 37. 37. 35.8 35.5 36.4 35.5 35.9 36.3 36.7 37.1 The actual GDP trends are still close to the worst-case scenario, while other macroeconomic parameters driving the demand seem to belong to the base-case scenario. 35 34.8 35 34.6 34 213 14 15 16 17 18 19 22 34 213 14 15 16 17 18 19 22 C 14
Quality of motor fuels produced by Russian refineries substantially improved in 215 Motor gasoline production Russia Diesel fuel production Russia Share of Class 4 and 5 Share of Class 4 and 5 Share of Class 5 Share of Class 5 1% 96.6% 1% 9% 89.8% 9% 86.3% 8% 8% 74.8% 7% 7% 6% 6% 5% 5% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 214 215 214 215 C 15
Russian refineries produce enough Class 4 and 5 motor fuels to rule out critical shortages on the domestic market this year... thousand MT Domestic market motor gasoline (MG) proficit/deficit in Russia production of on-spec MG less total demand for MG 8 6 4 2-2 -4 37-5 19-152 58 258 142-26 -81-134 -236 225-121 thousand MT Domestic market gasoil fuel (GOF) proficit/deficit in Russia production of on-spec diesel fuel less total demand for GOF 2 4 2 1 6 1 2 8 4 1 281 81 673 827 53 498 1 448 938 2 298 2 253 1 687 1 31 1 711 1 47 918 Gasoline deficit in summer months of 215 was not a threat because refiners and regional sales organizations of the Vertically Integrated Oil Companies (VIOC) maintained stocks of onspec fuel above 1.4 MMT. Production of on-spec diesel fuel in 215 is much above consumption of all land and water vehicles equipped with diesel engines. -6-8 -517-476 -551-737 -768-4 -9-131 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Fev Mar Apr 214 215 May Jun Jul Aug Sep Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 214 215 Apr May Jun Jul Aug Sep C 16
but banning motor fuels below Class 5 on domestic market from January 1, 216 may cause a deficit of motor gasoline Production and demand for motor gasoline on domestic market in Russia in 214 216. Class 5 Class 4 Other 214 215 216 MMT 4 38.3 MMT 4 39-4 MMT 4 39-41 3 3 3 28.4 31-32 2 36.5 2 35 2 33-35 35-36 1 1 1 4. 5.9 Production Demand 4.1 Deficit 5-6 2-3 Production Demand Deficit 2-3 2-3 Production Demand -3 Deficit C 17
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Thank you BC Palmira Suite 3, 75-11, Friedrich Engels Street, Moscow 1582, Russia Telephone and fax: +7 (495) 38-4-45 ruderman@petromarket.ru www.petromarket.ru