Russia’s refining sector
The development of Russia’s refining companies
Following the dissolution of the Soviet Union, Russia’s oil and gas companies fought an uphill battle to compete in the international market. Approaches toward energy sector privatisation and deregulation were hotly debated. The years of strict state control had created innumerable inefficiencies. Energy infrastructure was sorely in need of investment, but the upheaval and the uncertainty of the market discouraged investors. It became clear that opening up and modernising Russia’s energy industry would take many years, along with some patience and adaptability among the companies remaining. Russia’s oil companies had their own histories and corporate cultures, but there were some key commonalities in approach.
First, most companies were reorganised along the lines of vertically integrated oil companies. Most had to make serious changes to realign themselves in terms of their corporate structure and governance, the upstream assets they controlled or hoped to control, the storage and transport options available to them, the number and type of refineries they would control, how they would upgrade their refineries to meet fuel quality standards, their ability to deliver product to domestic markets, and their ability to trade internationally. Although the industry is tied to the international market, the majority of Russia’s vertical integration was achieved domestically. This offered a contrast to some of the international majors, where vertical integration typically cut across international boundaries. But Russia was unusual in that it enjoyed a vast reserves base, had a major refining industry, controlled the transport infrastructure, and was a major petroleum market as well.
Second, the ownership and control of the oil companies remained dominated by the government, but there grew to be an increased interest in and need for private sector investment and foreign participation. The major Russian oil companies moved away from being strictly state owned enterprises, though a high level of government ownership remains. All companies must comply with national laws and regulations, however, so even a fully privatised company might be seen behaving in the same fashion as a state owned company would, leading many observers to conclude mistakenly that the industry remained fully state sponsored.
Third, the oil industry has been encouraged to expand export activity. Part of this has been for the national interest and government revenue. Part has been for the simple dictates of business, since international competitiveness is seen as the key to long term profitability. In this regard, the central government has played a major role, since public policy such as the value and type of export duties can greatly shift the patterns of trade. The recent relaxation of the export duty on refined products offers an example, since it made product exports more economically attractive than crude exports. Russian companies immediately reduced their exports of crude, raised refinery runs, and boosted product exports.
Fourth, and related to the point above, the refining industry has been required to expand and modernise in order to meet tighter petroleum product standards, both for domestic markets and to make Russian exports compatible with European specifications. Every major refining company has worked to improve product quality, and many have exceeded expectations and moved to EURO standard fuels well ahead of schedule.
As Russia’s oil industry has grown and adapted, essentially all of the companies have restructured, entered into joint ventures, acquired new holdings, or merged with other companies. Many have forged stronger international ties as well, with some companies participating in refinery projects abroad. For example, TNK-BP was formed in 2003 as a merger of BP’s Russian operations with Tyumen Oil, and the Russian consortium became known as AAR (Alfa Access Renova). Slavneft was owned by TNK-BP and Gazprom Neft, but TNK-BP’s share was taken over by Rosneft. In March 2013, Rosneft finalised a purchase of AAR’s share in TNK-BP. This was followed by a deal between BP and Rosneft where Rosneft took over TNK-BP, and BP became a shareholder in Rosneft. Rosneft already had purchased most of the assets of bankrupt Yukos at public auction.
Perhaps in part because of this churn in ownership, structure, investment and operations, it is important to note that there is now an immense amount of bad data on Russian oil companies, often propagated by thieves who create fictitious companies and online sites, claiming to own various Russian oil refineries and assets. This practice is in fact so rampant that the real Russian companies must constantly publish fraud alerts, and new sites have sprung up to report on ‘Russian oil scams’. Readers are warned to ignore any information on Russian oil companies published on B2B websites, and to take precautions about being redirected from websites to other official looking, but fake, company and government websites.
The recovery and rise in refinery utilisation
The breakup of the Soviet Union and the economic collapse was like a sword to the vitals of the refining industry. Throughout its lifetime, refining had been protected by the government, and it was notoriously inefficient, with many dilapidated units. As Figure 7 shows, FSU refinery utilisation crashed in the mid 1990s and stayed below 55% until 2001. The economic reforms began to yield results, however, and as discussed above, programs of reform, restructuring, and investment spread throughout the refining industry. Refinery utilisation rates began to climb. Aided by government policy and participation, the rise of refining barely slowed during the global economic crisis of 2008. As the figure demonstrates, refinery utilisation rates in the EU have languished, dropping from 87% in 2007 to 79% in 2013. Even in Asia, where demand remained relatively strong, utilisation rates have remained slightly sub par, declining from 86% in 2007 to 82% in 2013. Russia’s refinery utilisation rates finally have surpassed those in the EU and in Asia, attaining a level of 85% in 2013.
Edited for the web by Emma McAleavey.
Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/29082014/russian-refining-industry-1205/