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Scenarios for the future of Russia’s downstream sector

Hydrocarbon Engineering,

EY estimates that over the next seven years Russian demand for diesel fuel and gasoline will grow at an average of 2.8% and 2.4%/y, respectively, provided that GDP growth reaches 3.1% on average.

According to estimates, by 2020 Russia will consume 40.6 million t of gasoline and 42.7 million t of diesel fuel annually. With the imminent increase in secondary processing capacities and growth in domestic demand, export supplies of diesel fuel are set to rise from the current 36 million t to 51 million t, while gasoline surplus will reach 10 million t.

In order to allow for more reliable assessment of the economic impacts of the upcoming upgrades in Russian refining, EY classified domestic refineries into the following three groups:

  • Group 1: Refineries with a high depth of refining and/or enjoying a favourable location; total output approximately 101 million t in 2013.
  • Group 2: Refineries with a high depth of refining and unfavourable location; plants with a depth of refining close to the country’s average; refineries with a low depth of refining, but enjoying a favourable geographic location; total output around 113 million t in 2013.
  • Group 3: Refineries with a high share of fuel oil in the product mix (over 30%) or a relatively poor location; total output approximately 61 million t in 2013.

For each group they ran three scenarios. Scenario 1 reflects the fiscal terms that are currently set for 2016. Scenarios 2 and 3 were developed to cater for a proposed major increase in the rate of export duty on fuel oil, a change broadly discussed un various regulatory sources.

Scenario 1

EY estimates suggest that, with planned upgrading proceeding on schedule, the switch to the 2016 tax regime (reduced export duties on crude oil and diesel fuel (will lead to much better margin performance.

A growth in refining costs driven by increased export netback is partially offset by a growth netback from diesel fuel. On the other hand, higher product yields have a major positive impact on the refining margin.

Once the upgrading is complete, the refining margin of Group 1 refineries will increase to approximately US$ 15/bbl, while Group 2 and 3 refineries will be earning US$ 12/bbl and US$3/bbl, respectively.

Scenario 2

EY estimates suggests that if, upon completion of upgrading, the export duty on fuel oil is raised to match that of crude, the refining margins of Group 1 and 2 refineries will still be US$ 1 – 2/bbl above the current level as positive impact from upgrading will offset the negative impact from the upward revision of the export duty on fuel (approximately US$ 6/bbl versus US$ 4.5/bbl). By contrast to Groups 1 and 2, the situation for Group 3 is critical, with losses of approximately US$ 6/bbl.

Scenario 3

In the last scenario, EY reviewed the impact of a lighter subsidy burden on the upstream segment (as a result of lowering the rate of export duty on crude oil from the current 59% to 55%) and a higher rate of export duty on fuel oil (up 100%), with the current refining configuration remaining unchanged.

EY estimates suggest that the above changes in the fiscal regime, if introduced now, will lead to shutdowns of Group 2 and 3 refineries, which collectively produced 177 million t, or 64% of Russia’s total refining output in 2013. The margin of top-performing refineries included in Group 1 will stand at approximately US$ 1.5/bbl, which compares well with that of European peers.

According to EY, findings indicate the urgent need for upgrading the domestic refining infrastructure and the overall importance of subsidies for the downstream segment.

Edited from various sources by Emma McAleavey.

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