Russia's Ministry of Fuel & Energy has received recommendations for a major overhaul of its oil industry, based on the results of a 6 month study
Conducted by Boston Consulting Group Ltd., London, the study covered all sectors from exploration through retail marketing (40913 bytes) (OGJ, Aug. 8, 1994, p. 32).
The study was led by Charbel Ackermann, Moscow, vice-president of Boston Consulting. He outlined surplus capacities and structural problems throughout Russia's petroleum industry
Ackermann reckons the government could embrace required policy changes this year. Structural changes will take longer, particularly in refining.
"Downsizing of refining capacity will be Russia's most difficult decision to come to terms with," Ackermann said. "As in the U.S. and western Europe, restructuring will be very painful. It took a 10 year program throughout the 1980s to reduce refining capacity by 20% in the U.S."
UPSTREAM
Russia has a large number of central and regional geological and geophysical companies in the exploration sector.
Ackermann said there are too many such companies, often in financial difficulties yet needing to invest in hardware and software for modem seismic surveying and data interpretation.
Boston Consulting recommended cutting the number of national geological companies, perhaps to leave two national companies and a number of small local players. An alternative would be to privatize all contenders.
In exploration and production, Boston Consulting cited a need to attract new ventures by making more licenses available to foreign and domestic companies and to encourage further joint ventures between Russian and foreign firms.
"Transfer of licenses will be critical to the survival of many of the independents," Ackermann said. "The decision to liberalize exports was a key step, but a critical issue now is how export pipeline access affects upstream industry"
Ackermann said government's upstream priority must be producing a framework for access to pipelines, setting out tariffs and increasing access for domestic independents and foreign firms.
"Access is currently based on historical production," Ackermann said, "creating a problem of what to do with production from joint ventures. This year may bring a doubled requirement for pipeline capacity from new joint ventures."
DOWNSTREAM
Ackermann confirmed surplus capacity in refining. Russia's refineries have been running at only 60% utilization, compared with an average of more than 80% for the rest of the world.
"Low utilization has lead to significant profitability issues for refiners," Ackermann said. "Government needs to consider capacity reductions in certain regions.
"However, closing marginal parts of refineries rather than total plant shutdowns will suffice. Refiners should then invest in improving primary conversion processes and then in secondary conversion."
Another problem is that 20% of Russian refining capacity is not connected to products pipelines. This underdeveloped network, with a reliance on rail transport to supply some markets, is an attractive area for investment.
The pipelines too are beset with problems. Lack of pump capacity has meant difficulties in separation of batches, low throughput speeds, and high inefficiency
Another key area for reform is Russia's storage and retail networks. In the past, vertical companies were allocated more than 90% of storage facilities and 90% of retail outlets in each region.
"Government needs to streamline entry to storage and retail markets as a priority," said Ackermann. "We have suggested a framework for local licensing and proposed realignment of margins regulations.
"Now retailers have operating margins of only 2%, while wholesalers make 35%. If you are an integrated company under this regime you are okay. If you are independent, you're not."
Ackermann said regional monopolies need to be broken up, with existing companies given diversified areas of coverage and government ensuring local competition.
"Government needs to break up storage and retail monopolies through forced selloffs and asset swaps," Ackermann said. "This would give current companies an immediate diversification of markets and open opportunities.
"Russia has a potentially attractive retail sector because market coverage is very low in terms of stations per square kilometer. Lots of Russian entrepreneurs want to get involved in retail."
In oil field services Boston Consulting identified surplus capacity, fragmented markets, and varying degrees of competition. Consolidation or privatization of companies so they can restructure themselves are the main options.
STOCK MARKET
Boston Consulting recommended a revamp of share trading regulations and practices. There is a stock market in Moscow, Ackermann said, but its dealings are not very transparent.
"Overhauling trading could lead to a significant increase in valuation of Russian oil companies," Ackermann said. "The current $15-20 billion total capitalization of Russian oil companies could jump in the short to medium term if the right trading mechanisms are put in place."
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