Experts Discussed Modernization of Russian Oil Refineries

12 april 2018

"Experience shows that state regulation plays a huge role in the modernization of oil refinement. In recent years the industry has made significant progress thanks to the incentives that have been introduced. Today we need to decide where we want to go next," said Analytical Center expert Alexander Kurdin opening a round table on whether new incentives are needed to promote modernization of oil refineries in Russia.

Deputy Head of the FAS Anatoly Golomolzin noted that the modernization of oil refineries had been going on with the prodding and encouragement from the state. "Speaking of incentives, first of all we need a system of differentiated excise as well as four-party agreements between the FAS, oil companies, the Technical Supervision Service and the Federal Standard Service," he pointed out. It took a long time to get the oil refining modernization processing going in the direction envisioned for it in Russia's analytical strategy. And it was only thanks to the use of both these measures that the processes got underway, Mr. Golomolzin noted. "Since the start of the modernization differentiated excise rates have been used. Lower rates were applied to more environmentally friendly fuel and higher rates were used for poorer quality fuels. This practice had been followed for the first several years. But then it was abandoned," Mr. Golomolzin reported. As for the four-party agreements, they were a part of the proposals submitted by the oil companies themselves and are entered into on a long term basis, the FAS representative explained.

Mr. Golomolzin also mentioned the ways in which each agency got its own authority: "The Technical Supervision Service monitors the adherence to obligations assumed as part of technical modernization projects. The Russian Standards Service ensures adherence to the required technical regulations and standards, the FAS makes sure enough fuel of the required quality is produced and sold in the domestic market."

According to Denis Borisov, Head of the EY Moscow Oil & Gas Center, the investment situation in the industry is rather bleak at the moment, investment activity having peaked a long time ago. "And it has to do not only with the fact that some companies have already completed their modernization projects but also with the fact that the fundamental economic indicators that companies base their investment decisions on have gone downhill. The internal rate of revenue for modernization projects has gone down," the expert explained. According to him, in terms of how attractive Russian oil refineries are as prospective investments, the situation now is less interesting in Russia than, for example, in Europe. Investors no longer see the same incentives in Russia that they used to find here before in the form of high oil refinement margins in Russia. "The fall of the oil refinement margin below that in Europe means that additional incentives are needed to keep the modernization of Russian oil refineries on track," Mr. Borisov is sure.

According to Alexander Scherbakov, Head of research in oil refinement and Chief Analyst at IHS Markit, believes that further reduction in the profit margins that will result if the system of export tariffs is changed or the overall level of subsidies for the sector declines will have a negative impact on the competitiveness of Russian oil refineries as they try to fight for new market niches in export markets.