The crisis gripping the refining sector in the former Soviet Union (FSU) is deepening as that industry faces massive rationalization and restructuring.
The past 2-3 years in particular have seen a sharp drop in refining operations in the former Soviet republics. That is associated with the economic crisis strangling the region, economic reforms in Russia and the FSU republics begun in 1992, and dissolution of what had been a single economy within the U.S.S.R.
Refinery runs in FSU republics have been on the decline for a number of years. Peak throughput occurred in 1987 at 9.69 million b/d. In Russia, however, the peak came in 1980 at 6.5 million b/d.
The steepest declines are recent. In 1989 and 1990, refinery runs for the FSU fell only 1.7% and 3.6%, respectively. But in 1992, crude runs dropped by 18.5% to 7.14 million b/d from about 8.78 million b/d.
In the first 9 months of 1993, crude throughput averaged 5.99 million b/d, a decline of 19.6% from the same period in 1992. Thus, for all of 1993, refinery runs are unlikely to exceed 6 million b/d in the FSU and 4.3 million b/d in Russia. That's down almost one third from 1991's level and about the level of crude runs in the early 1970s.
Given current operable refining capacity in the FSU, now down to about 9.27 million b/d distributed among 48 refineries, capacity utilization will average only about 63% this year.
SQUEEZE TO WORSEN
As economic reforms continue, the combination of shrinking economic activity and higher energy prices will drive FSU refined product consumption down further, causing the refining sector's squeeze to worsen.
FSU refined product consumption declined by 17.6% in 1992 from the year before and by 24.2% in first half 1993 from the same period a year ago.
It appears that by the mid-1990s, when the plunge in economic activity is expected to bottom out, refinery throughput in Russia likely will have shrunk by about 50% from the 1990 level to about 3 million b/d. For the FSU as a whole, the decline probably will be even steeper-perhaps about 60% or so, putting refinery throughput at about 3.7 million b/d.
Although refining operations will rebound somewhat with economic recovery in the second half of the decade, crude runs will not return to their former levels in the foreseeable future.
COMPARING DECLINES
All FSU republics have experienced a sizable decline in crude runs, although the smallest contractions have occurred in oil producing republics.
Refinery runs fell in Russia 12% in 1992 and 16.4% in 1993, in Kazakhstan 6.1% in 1992 and 1.5% in 1993, and in Uzbekistan 8.9% in 1992, with the latter posting an 8.1% rise in runs in 1993. For the other republics, heavily dependent upon crude imported from Russia, the drop in crude runs typically was quite substantial in 1992: by 61.1% for Georgia, 60.9% for Lithuania, 29.9% for Ukraine, and 42.5% for Belarus.
For 1993, Russia had intended to reserve 5.12 million b/d of crude for its refineries, or slightly more than the 5.03 million b/d it ran in 1992. This was part of its plan to fix consumption of refined products in Russia at the 1992 level in an effort to stabilize the economy.
Instead, crude throughput in Russia's refineries has dropped, largely due to their inability to pay much higher prices for crude-although internal prices are still only a fraction of world market prices-and the financial insolvency of their customers. Refinery runs in Russia through September 1993 averaged only 4.38 million b/d, so the full year total may end up at only 4.3 million b/d, down about 15% from 1992.
For the other republics, a key factor in the large declines in 1992-93 has been a substantial reduction in Russia's deliveries of crude to them, again owing to much higher prices and payment difficulties stemming from lack of cash. For 1993, with Russia's continuing fall in crude oil production, the Russian government set total crude exports to FSU and non-FSU countries at only 1.99 million b/d in keeping with its plans to increase domestic refinery runs.
Russia eventually agreed to supply the other FSU republics with 1.12 million b/d in 1993, down about 37% from 1992 deliveries. Deliveries to FSU republics, however, will end up much lower than that, apparently about 900,000 b/d for the entire year.
This planned allocation, accomplished through the Russian government's export quota system, leaves only 880,000 b/d for exports outside the FSU in 1993, substantially less than the 1.32 million b/d exported in 1992. According to the government's latest reform program, adopted earlier this month, these export quotas are scheduled to remain in place through most of 1994 before being phased out.
Allocations planned for 1993 have proven infeasible for a variety of reasons. With the overall downturn in economic activity, higher prices, and the financial insolvency of many consuming enterprises, Russian refineries had a difficult time getting distributors to take their products, and their own financial problems made it hard to take their full quotas of crude.
The same was true for the former Soviet republics as well.
For example, Russian Minister of Fuels and Energy Yuri Shafranik noted that earlier in the year Ukraine insisted that its quota for Russian oil be no less than 800,000 b/d, rather than the 400,000 b/d Russia offered, but then backed down from this position because it did not have money to pay for even the smaller volume of oil.
Much of Ukraine's purchases of Russian oil and gas have been paid through "technical credits" extended by the Russian government.
FINANCIAL CRISIS
The FSU refining sector's profound financial crisis is reflected in the fact that as of Sept. 1, Russia's refineries were owed 1.5 trillion rubles, or about $1.25 billion at the current exchange rate.
The bulk of that debt is owed by regional product distributors within Russia. Only 4.2% is owed by other FSU republics, which typically buy crude rather than Russian refined products. At the same time, the refineries themselves owed other enterprises 1.4 trillion rubles, or about $1.17 billion, of which 1.1 trillion rubles was for crude oil alone.
The debt problems are reflected in a serious backup of products, especially mazut (residual fuel oil), at the refineries. This is due to the collapse in demand as well as transportation tie-ups. In third quarter 1993, Russian refineries had only about 2,000 tank cars/day available to load products-only 52.1% of what had been normal levels.
Because of lower than expected deliveries to refineries in Russia and the other FSU republics, the Russian Ministry of Economics, which determines export quotas and plans the overall allocation of crude, was forced to approve more than two dozen additional quotas for oil exports outside the FSU earlier this year, substantially altering the planned allocation of crude oil.
Thus, in the first 9 months of 1993, Russia reported it shipped outside the FSU 1.61 million b/d of crude, 69.3% more than what was officially exported during the same period in 1992.
But the government still has not moved fast enough in adjusting crude export quotas.
With tanks brimming with products, many refineries could not take even their new, reduced allocations of crude. Thus, several crude production associations had no choice but to shut in production for which they had neither export quotas nor domestic consumers. Shafranik on Oct. 21 noted the irony of the situation: "For the first time...(crude) extraction is being inhibited by a fall in purchases of refined oil products."
Russian energy planners continue to have problems developing realistic forecasts for energy consumption because they inherited the historical supply side bias of the old Soviet system, while at the same time the government has been unwilling to further liberalize oil markets and let market forces have more rein, contends Matthew J. Sagers of PlanEcon Inc., a Washington, D.C., consulting firm that specializes in the former Soviet Union and eastern Europe.
The same mistakes are being repeated in the planned allocations of crude for 1994, Sagers said. He noted the Russian government has initially set crude runs for the Russian refineries at 4.51 million b/d, the same amount it expects the refineries to run in 1993. Russian officials concede, however, that the problem of nonpayment among Russian enterprises could hold throughput to less than 3.6 million b/d in 1994.
Sagers said, "Part of the problem is that the Russian government has attempted to use the export quota system as a policy instrument to help hold the lid on internal oil prices-fearing the contribution of escalating energy prices to overall inflation-and to protect domestic consumers."
Although the average domestic price of crude oil about tripled during January-July 1993, from about 8,000 rubles/ton to about 24,000 rubles/ton, the price has increased only modestly since then. The average crude price was only about 35,000 rubles/ton by late October, or a little more than $4/bbl at export points.
UTILIZATION DOWN
Refinery capacity utilization continues to lag in the FSU.
The utilization rate in Russia was only about 76% in third quarter 1993. For the FSU as a whole, the rate was about 61%. Ukraine's refineries are operating at only about 15% of capacity, and those of Belarus less than 30%.
Not surprisingly, given civil conflicts, political unrest, and Georgia's previous reluctance to join the Russian-led C.I.S., the lowest capacity utilization was in Georgia, where the old Batumi refinery operated at only about 6% of its rated capacity in the third quarter.
In a few republics, refining operations have held up quite well. Refinery runs in Kazakhstan, for example, were down by only 1.5% in the first 9 months of 1993 compared with the same period of 1992. This reflects the fact that Kazakhstan is a large crude producer and now has a local surfeit of crude.
As with Russian crude production, Kazakh oil production also is being inhibited by Russia's refining problems. Russian refineries, the main recipients of Kazakhstan's oil production, are refusing to accept the contracted delivery amounts of Kazakh crude, projected at 280,000 b/d in 1993.
Kazakhstan has only one refinery in its western region, where the bulk of its crude is produced, and this refinery at Atyrau can take only a fraction of local production. The other two are in the eastern region of Kazakhstan and are supplied mainly with Russian crude delivered by pipeline from western Siberia. The Shymkent (Chimkent) refinery in South Kazakhstan does, however, receive some local crude from Kumkol as well as imported Russian crude.
Due to lack of alternative destinations because of the pipeline configuration-Kazakhstan's oil "exports" are in fact mostly swaps for Russian crude involving the Russian refineries-Kazakhstan's crude producers have been forced to shut in a sizable amount of production. As a result, Kazakhstan's crude production is down by about 11% in the first 9 months of 1993 compared with last year.
With two big refineries in its eastern region running mainly Russian crude, Kazakhstan has had to worry about crude supplies from Russia as well as finding buyers for its crude, particularly with the growing difficulties of cross-border trade and payments problems. So far, however, Kazakhstan has done reasonably well in obtaining sufficient crude, with a third quarter capacity utilization rate of 93%.
Another reason for refinery runs being more stable in Kazakhstan is that the republic was traditionally a net importer of products from Russia. Accordingly, as product consumption has shrunk with the economic downturn, Kazakhstan has reduced product imports before its own production.
Uzbekistan's refineries also ran at about 93% utilization in the third quarter. Crude runs rose by 8.1% in the first 9 months of 1993. This partly reflects the fact that Uzbek crude production has been rising-up by about 20% so far in 1993.
Still, about 53% of the crude run through Uzbekistan's refineries in the first 3 quarters of 1993 was imported from Russia, so it also has been successful in managing its trade relations with Russia.
The other FSU republic to show an increase this year is Lithuania. Its crude runs were up by 2.8% in the first 9 months of 1993, showing recovery from previously depressed levels.
In the third quarter, Lithuania's Mazeikiai refinery received a full complement of crude for the one distillation unit still in operation-although having other units down left utilization at the plant at slightly more than 50% in the period-the first time this has occurred in several years.
Previously, because of difficulties in sorting out its trade relationship with Russia, the refinery had experienced periodic shortages of crude that shut down operations. Even in 1993, the refinery sat idle for much of February and March.
The turnaround since then is due to implementation of a processing deal with Lukoil Co., the first of Russia's new vertically integrated oil companies. The contract with Lukoil calls for processing 120,000 b/d at Mazeikiai in 1993.
Not all of this will end up being delivered because of delays in implementation, but it still may represent the largest segment of the refinery's operation this year. In 1992, the refinery processed only about 90,000 b/d, or less than one third of capacity.
UPGRADING FOCUS
A main focus of FSU refining activity is on secondary capacity to upgrade the product mix. The refinery production mix is dominated by heavy Petroleum products, particularly mazut.
In 1990 mazut's share of FSU refinery output was 37.1% percent. Although that's considerably lower than the 44.5% it represented in 1980, it is still very high by world standards. Light products, such as gasoline, diesel fuel, and kerosine, generally account for only about 51-52% of output.
This product mix has become increasingly out of phase with trends in FSU consumption that increasingly favor light products. This results in excessive crude runs to meet light product requirements, leaving a large surplus of mazut. The surplus of mazut can be disposed of only by selling this low value product on the international market.
FSU refineries are not very sophisticated. All secondary processes combined represent only 43% of primary distillation capacity, and overall FSU cracking capacity is less than 5%, although cracking ratios vary substantially from refinery to refinery and among the different republics.
Petroleum products mostly obtained are by using straight run distillation processes, which have the simplest technology and lowest costs. There has been little use of cracking or other secondary refining processes.
Besides the overall limited amount, the type of secondary processes is another reason for the lack of refining depth. The main secondary refining processes used are hydrotreating and catalytic reforming, not cracking. Together, hydrotreating and catalytic reforming account for 65% of secondary capacity in the FSU. Hydrotreating is the most widely used secondary process, accounting for more than 40% of all secondary processing capacity.
That lack of refining depth has spurred Russia and the other FSU republics to press an ambitious modernization program intended to alleviate the refining sector's crisis while providing further opportunities for participation by foreign companies.
Copyright 1993 Oil & Gas Journal. All Rights Reserved.
