An earlier article, ‘Russian fiscal policy in the downstream sector’, discusses Russian fiscal policy and highlights that its aims for the oil and gas industry have not been achieved. EY holds that this is primarily due to the completely different price environment surrounding the 60-66-90-100 system.
According to EY, it is known that the price differential between crude oil and the oil product mix (which among others, includes fuel oil) widens as the price of liquid hydrocarbons goes up. As a result, even though the increase in heavy product duty to 66% of oil duty significantly undermined the economics of fuel oil exports, primary processing was still profitable on the back of strong trading gains from light products.
EY believes that in order to effectively eliminate the cross-subsidy between upstream and downstream segments in the country and improve the sector’s overall efficiency, it is crucial that the viability of proposed fiscal initiatives be considered under various price scenarios (see ‘Scenarios for the future of Russia’s downstream sector’).
In a recent report on the Russian downstream sector, EY explains that the presence of cross-subsidy between upstream and downstream segments is one of the key prerequisites for the profitable operation of most domestic refiners. For instance, in 2013 crude oil feedstock costs made up over 60% of total refining costs.
Furthermore, a relatively moderate tax burden on the average oil product mix is responsible for a fairly high level of the refining margin in Russia (roughly US$ 7/bbl), even though the depth of refining remains low.
This level of refining margin exceeds that or European peers, including those refining crude oil of the same grade. However, EY notes that prior to the introduction of the 60-66-90-100 system, the refining margin in Russia had been substantially higher.
Prior to 2011, downstream investments had accounted for approximately 20% of the sector’s total capital spending, while in 2013 their share rose to 24%. The introduction of 60-66-90-100 system that marked the beginning of wider tax reform has encouraged investment in the sector.
Over the coming years, EY expects that primary processing capacities in Russia will add another 12.2 million t. Russia’s total processing capacity may therefore rise from approximately 295 million t to 300.2 million t. Consequently, the share of secondary processing may grow from the current 70% to approximately 100% (compared to 140% in the US).
EY holds that in the current economic environment, most of the recently announced processing and refining projects will go ahead, as they remain economically attractive. EY estimates suggest that by 2020, after the commissioning of 18 hydrocracking and 11 catalytic cracking units, the output of diesel fuel will increase by 21.6 million t, and gasoline production output will rise 6 million t.
The depth of refining in Russia is set to rise from 72% to 85% by 2020. EY estimates suggest that domestic refineries will have the following product mix: gasoline (18%), diesel fuel (33%), fuel oil (15%), other products (34%).
Adapted from a report by Emma McAleavey.
Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/23072014/refining-economics-and-upgrading-981/