No. 4, 2009

The status of and prospects for the refining sector of the Russian oil industry

Last year, primary refining in the Russian Federation amounted to 236.3 million tons (48.4% of production), which is 3.4% more than in 2007.  In terms of capacity and the volume of refining, Russia comes in third in the world after the United States and China.  The industry is represented by 27 major refineries, 46 mini-refineries and two condensate

refineries. 

What assets are available?

From the mid-1980s to the beginning of the 1990s, Russia's aggregate productive capacity for processing liquid hydrocarbons amounted to 351.5 million tons (7.3 million barrels a day) and the Russian Federation ranged second in the world in this respect.  After the crisis in the 1990s and as a result of the modernization of production units and increase in the share of secondary refining processes, there was a substantial drop in productive capacity for primary crude oil processing.  The aggregate productive capacity for refining liquid hydrocarbons in Russia today amounts to 272.3 million tons of crude a year.  In addition, Russian vertically integrated oil and gas companies hold assets in a number of foreign refineries, mostly in the CIS and Eastern Europe - in Belarus, Romania, Serbia and Ukraine.

Last year, 77% (182.8 million tons) of all refining was carried out by refineries belonging to vertically integrated oil and gas companies and another 22% (89.6 million tons) by independent refiners, with only about 1% being refined by mini-refineries.

More than half (61.3%) of all oil refined comes from refineries with a capacity of from 6 to 15 million tons a year. In other major oil-refining countries, the United States in particular, it is also refineries with a capacity of from 6 to15 million tons that process most of the crude.  In Russia, big operations account for 16.5% (over 15 million tons a year), while the corresponding figure for the United States is 23.3%. 

According to the results of 2008, Rosneft came out on top in the refining sector.  Its refineries processed 49.5 million tons or 21% of the Russia-wide total. LUKOIL came in in the second place (taking into account refineries located abroad), having the most balanced structure of upstream and downstream assets and a correspondingly high R/P Ratio - ratio of extracted reserves to primary processing.  According to the results of last year, company-owned plants on the territory of Russia processed 44.1 million tons, with good results being demonstrated also by Gazprom, TNK-ВР and Surgutneftegaz. 

In 2008, five vertically integrated oil and gas companies - Rosneft, LUKOIL, TNK-ВР and Gazprom (including the assets of Gazprom neft and Slavneft), Surgutneftegaz - accounted for 74.6% of the petroleum products production in Russia, including about 73% of the output of  motor gasoline, 73.5% of diesel fuel, 74.5 % of fuel oil and 73 % of lubricants. 

In the structure of production, it is Rosneft that predominates in virtually all sectors, with the exception of other petroleum products, where LUKOIL accounts for about 36%, producing significant volumes of oils and jet kerosene. 

The highest R/P Ratio on the territory of the Russian Federation is achieved by companies producing small volumes of oil themselves.  For instance, for Slavneft it is 69% and for RussNeft 53%.  Meanwhile, the industry leaders' indicators are somewhat lower: Gazprom neft - 52%, LUKOIL - 45%, and Rosneft - 44%.

The black oil legacy of the Soviet past

The majority of refineries on the territory of Russia were built in the late 1940s to mid-1960s.  At that time, there was a tendency to locate new refineries as close as possible to regions of concentrated consumption of petroleum products.  Large-capacity facilities were built in Ukraine and the Volga Area, which, until the end of the 1960s, were the country's oil-producing hubs.  About 20% of the capacity for primary oil refining are located in the Southern, North Western and Far Eastern regions, being the closest to the petroleum product export markets.  At the same time, the majority of Russian refineries (with the exception of the Kirishinefteorgsyntez and Tuapse refineries) are situated at a considerable distance from the seaport infrastructure. 

After 1966, seven refineries were constructed in the USSR, six of them outside the Russia - in Lisichansk, Mozyr, Mazeikiai, Chardzhou, Chimkent and Pavlodar - this reflecting the need for refining facilities to be close to regions experiencing petroleum product shortages. The only refinery built in Russia after 1966 was the Achinsk refinery, which was commissioned in 1982.  In addition, in 1979, refining was launched at the Nizhnekamskneftekhim plant to provide stock for petrochemical production.

In recent years, given the growth of domestic demand and the favorable export market situation,  the volume of primary refining and the capacity loading have increased at most refineries.  The expansion of this business has also been promoted by the spread between the export duty on crude oil and on petroleum products, making it economically attractive to develop refining.  Owing to the lack of own crude sources, plants outside the system of vertically integrated oil and gas companies (Salavatneftorgsyntez, the Moscow refinery and others) have demonstrated lower than average growth rates for the industry.

In 2008, the capacity for primary refining of liquid hydrocarbons averaged 86.8% for the country as a whole, including 89.6% at vertically integrated oil and gas companies, 78.7% at independent refineries and 72.1% at mini-refineries.  For individual enterprises, this indicator varies between 13%-54% (Petrosakh, Salavatnefteorgsyntez, Urayneftegaz, Kogalymneftegaz) to 100% (Kirishinefteorgsyntez, the Achinsk, Tuapse and Komsomolsk refineries). 

Depth of refining in 2008 across the industry amounted to 71.5%.  Overall, during the last decade, this indicator has grown by more than 5%. 

In general, however, Russian refineries lag behind plants in Europe, the United States and the Asia-Pacific Region in technological terms.  The proportion of secondary processes, such as catalytic cracking, hydro-cracking, isomerization and reforming, is clearly insufficient to compete with the world leaders.

Within the mix of petroleum products produced in Russia, it is production of heavy and medium fractions that continues to predominate, above all black oil and diesel fuel.  In 2008, diesel fuel accounted for about 37.8% (69 million tons), fuel oil for 35% (63.9 million tons), gasoline for 19.6% (35.7 million tons) and other petroleum products (aviation gasoline, jet fuel, lubricants, etc.) for 13% (7.5 million tons). 

Gasoline produced in Russia is supplied primarily to the domestic market, since it is of relatively low quality and cannot be sold abroad.  At the same time, about 50% of the diesel fuel and more than 70% of the fuel oil is exported, since they are semi-finished products that are subsequently used as stock by refineries in the importing countries. 

Domestic commercial consumption of petroleum products (not counting the technological needs and losses at oilfields, refineries and in pipelines) in 2008 amounted to about 97 million tons. 

The first few years of the 21st century saw intensive centralization (consolidation through mergers and acquisitions) and concentration (through greater investments and increased production) in the domestic refining industry.   In 2000-2008, the oil company that expanded its volumes of primary refining most was Rosneft (more than quadrupled), mainly owing to takeover of  YUKOS refineries. The increment at LUKOIL was 57%, both through internal development and as a result of acquiring the Nizhegorodnefteorgsyntez and Ukhtaneftepererabotka plants.  The corresponding TNK-ВР figure is 31%. 

Looking to the future

To sum up the analysis of the state of oil-refining within the Russian oil and gas complex, the following may be said.

One of Russia's key objectives is to overcome the consequences of the global financial and economic crisis, speed up economic growth and upgrade the economy technologically.  This process should be based on the fast growth of high-tech industries relying on effective use of subsoil resources.  The availability of significant reserves of these, plus the technological capacities for processing and transporting them, constitute a major competitive advantage of our country in the present-day international economic order.

The Energy Strategy of Russia for the period up to 2030, approved by the Government of the Russian Federation on August 27, this year, says that, to achieve a long-term sustainable development of the oil complex of the Russian Federation, greater economic efficiency and technological balance of production, refining and transportation of oil, expanded production of competitive output with a high added value,  the production structure of the national oil and gas complex has to be transformed, including through accelerated introduction of a complex of technological and organizational innovations. In this context, the Russian Government has already outlined a number of measures for changing the administrative, tax and customs policies for the purpose of stimulating geological survey work, bringing new fields into production, using modern methods for raising the oil recovery factor and improving oil-refining and utilization of associated gas.  The change in the organizational and economic conditions for the functioning of the oil complex, combined with active state participation in geological surveying, building of the transport and refining infrastructure, provision of diplomatic and political support to Russian oil and gas companies on foreign markets, will all help ensure stable operation of the oil industry and a strengthening of Russia's geopolitical and economic positions in the world.