Investments in oil refining will not bring the prices down

10 august 2015 | IA REGNUM

Today Russia’s domestic oil refineries meet all of the domestic demand and, in addition, they also export large quantities of petroleum products, the Adviser to the Department for Fuel and Energy Sector of the Analytical Center Alexander Amiragyan told an IA REGNUM correspondent in an interview. According to the expert, this means there is no need to build new capacity; specifically there is no need for new refineries.

Alexander Amiragyan
Alexander Amiragyan
Department for Fuel and Energy Sector

The expert pointed out that the output of petroleum products has been on the rise in Russia in recent years: in 2010 through 2014 production of petroleum products in Russia went up by more than 40 million tons or about 16%, with the bulk of the added output having been exported. “The increase in production resulted from a large scale modernization of oil refineries that has been underway in the country since 2011 as part of quadripartite agreements between oil companies, the Federal Anti-monopoly Service, the Federal Service for the Supervision of the Environment, Technology and Nuclear Power and Russian Standard. Under these agreements, a modernization plan through 2020 was agreed. The modernization of oil refineries significantly increased output of Euro-5 environmental class petroleum products, up to 74% of total output for petrol and up to 58% of total output for diesel fuel in 2014. However, the main problem that remains is low depth of oil processing (72% in 2014) caused by a significant increase in the production of fuel oil, mostly in order to export it. At the moment the Government wants to increase the depth of oil processing while possibly reducing the amount of oil being processed and the big ‘tax maneuver’ that went into effect in 2015 is supposed to help make that happen,” Mr. Amiragyan explained.

The expert believes that construction of deep processing oil refineries is not an attractive project and oil companies are reluctant to invest their large profits in it. The expert sees two principal reasons for this. “On the one hand, building a new high tech oil refinery costs a lot of money that can only be recouped over a long period of time and a long term investment is a luxury many Russian companies simply cannot afford. On the other hand, and this is a more important consideration, there is currently neither domestic nor foreign demand that would justify putting new major deep processing capacity into operation. From the point of view of both technology and economics, modernization of existing capacity presents a more attractive option for companies and that is exactly what is being done in Russia today.”

Mr. Amiragyan also noted that “the margin in oil processing depends mostly on the price of oil that oil refineries have to pay, the price of processed petroleum products that they make and direct production costs. Oil companies cannot directly affect these prices as they are dictated by the market. Because of this the main methods companies use to maximize their margin is by modernizing their oil refineries in order to achieve deeper processing of the product and expand their product range. It should be noted that the tax maneuver has increased the price of oil for oil refineries as it has significantly increased the tax on extraction of natural resources that applies to oil production. However, oil refineries can partially compensate the losses they incur in the domestic market by exporting petroleum products because they can now get a higher margin on exports because the export tariffs on petroleum products have been reduced,” the expert said.

He went on to add that the domestic fuel prices in Russia depend on a number of parameters, the most important of which are the production and selling costs of petroleum products and the export parity for them. “The first parameter very closely correlates with the level of inflation for the economy as a whole while the second one can be regulated by adjusting the export tariff rate. The rise in domestic prices is primarily a result of the general inflationary pressure in the economy. This can be easily seen if you look at the statistics for recent years: the average annual increase in the prices of engine fuels has been within 5-8%, which was the same as the real rate of inflation. This investment in oil processing cannot bring about a reduction in prices because competition plays a minor role in the formation of fuel prices. Investments in oil processing can only have an effect in remote regions where currently there is no oil processing at all and transportation costs are high enough to have a significant impact on the final prices charged at filling stations,” the expert summed up.