The modernisation of Russian downstream

According to EY, it is obvious that the Russian downstream segment if continuing to develop rapidly. Oil product prices and the current tax environment remain supportive of development, contributing to increased outputs and a higher level of investments (see ‘Russian refining economics and upgrading’).

If the upgrading of the domestic refining infrastructure keeps up its current pace, EY holds that the depth of refining in Russia will increase from 72% to 85% by 2020.

EY notes that hydrocracking is more profitable than catalytic cracking due to higher net present values under the current tax configuration and a continued spread between export duties on gasoline and diesel fuel. Diesel fuel will therefore become the main addition to the domestic product mix.

However, with the depth of refining remaining low, the Government’s intention to raise export duty on heavy products to match that on crude, referred to as ‘the 2015 problem’, may seriously impair the prospects for the refining industry. With a long investment cycle required for upgrading, most refineries that are currently undergoing upgrades to increase light product yield will not be able to achieve fundamental improvements by 1 January 2015.

EY explains that due to the specifics of petroleum refining processes, stopping production of certain products will reduce the output of light products, including gasoline, which may lead to a deficit on the domestic market. EY believes there are two alternative ways to avoid this situation:

• If the Government decides to go ahead with the ‘big tax maneuver’ (see ‘Russian fiscal policy in the downstream sector’), an optimal combination of add-ons to the existing industry model will need to be found, according to EY. A key objective is to carefully weigh and link together numerous variables sensitive to potential changes in the operating landscape (crude oil production vs. refining vs. product mix), having considered various price scenarios. It is also critical that the upgrading aspect be factored into the ‘big maneuver’.
• If it is decided to keep the 55-61-90-100 system, the industry will not be ready for the  100% export duty on fuel oil until the upgrading is complete. EY estimates suggest that the export duty may not be raised above 75 – 80% of that on crude oil. The resulting shortfall in government receipts should be offset by a higher mineral extraction tax (MET) rate. The increase will be from US$ 25.8/bbl to approximately US$ 110/bbl. Such steps may however put yet another burden on upstream players. 

Adapted from a report by Emma McAleavey.

Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/23072014/the-future-of-russian-downstream-986/