Russian Refinery Processing Capacity (49039 bytes)
Russian Petroleum Products Balance (33813 bytes)
Lack of focus in Russia's massive refinery modernization program may result in huge sums of money spent in plants with a shaky future.
That will squander resources needed for Russian refineries with a viable outlook.
That's the main conclusion of the International Energy Agency in a new study. IEA warns that the current modernization program of Russia's refineries "lacks discrimination between viable refineries and those that probably will not survive the ongoing economic transition."
The program, adopted in June 1992, extends through 1997-98 and beyond and includes a wide range of projects involving nearly all Russian refineries. The estimated total cost is $5-6 billion in foreign exchange for imported equipment and another 11-12 billion rubles (1991 prices) for domestic outlays.
Combined capacities of new units planned for installation during 1994-97 are 37.5 million metric tons of primary distillation, 14.1 million tons cat cracking, 6.2 million tons hydrocracking, 1.1 million tons coking, 8.4 million tons catalytic reforming, and 13.5 million tons hydrotreating. The revamping of almost 100 existing process units also is covered by the program.
SPREAD TOO THIN?
IEA warned, "The limited resources available appear to be spread too thinly across too many projects. There is no economic or technological assessment on whether some of them make sense in the new economic environment."This means scarce funds could end up being used for refineries with no long term future, it said.
With average refinery utilization hovering around 60%, Russian refinery throughput is not expected to recover during the next few years.
Russian refinery throughput fell to 180 million tons in 1994 from 291.1 million tons in 1990. Throughput is expected to fall to 140 million tons the next few years as the economic downturn combines with higher energy prices to drive down consumption.
While consumption could well rebound in the next decade in line with economic recovery, IEA does not believe that by 2000 refinery runs will exceed 150 million tons/year, far less than the Russian government's projections of 210-220 million tons/year. This means much existing capacity will be surplus.
REFINERIES' PROFILE
There are 28 refineries spread across 23 sites in 10 of Russia's 11 economic regions. There are also about a dozen other oil processing plants, including lube plants, oil field topping plants, and specialized gas/condensate processing plants.Russia's refineries are marked by obsolescence, poor conditions of equipment, and heavy overstaffing. Secondary processes account for only 56% of primary distillation capacity, and cat cracking barely exceeds 4%. Output is dominated by heavy petroleum products, particularly heavy fuel oil (mazut).
The product mix is not sufficiently adapted to consumption trends toward light products. Excessive crude runs leave a large excess of mazut. This mismatch aggravates the traditional mismatch between regional production and consumption of different types of refined products.
This has led to costly railroad transportation, which for products is several times higher on a metric ton per kilometer basis than crude shipped by pipeline. This is why IEA believes an important aspect of the restructuring of the sector is the need to rationalize throughput regionally to better match local consumption.
But the agency fears the rationalization process will, nonetheless, prove to be highly regionalized, reflecting the differences in the regions' economic performance and consumption patterns.
That's why, despite overcapacity, proposals for new refineries continue to proliferate. It is a question of economic survival, says IEA, because lack of refining capacity to ensure local supplies has left many regions with large product deficits, especially of light products.
"In the future," IEA said, "refineries will be competing for market share based on price and quality, while regional exports and imports will be small balancing items."
Refineries most likely to survive will be those with large regional competitive markets and able to produce mainly middle distillates and high quality gasoline as well as low sulfur fuel oil.
Because of high transportation costs for products, some isolated areas--Omsk in western Siberia and Angarsk in eastern Siberia, for example--may be dominated by a single supplier.
Central Russia has traditionally been short of products. Because of this and its diversified economic base, the region probably will face a less pronounced decline in refinery runs than other parts of Russia and will be less affected by the shakeout, says IEA.
The agency also believes the viability of the Krishi refinery market in Russia's Northwest region, centered on St. Petersburg, also seems relatively sound.
Besides regional features and refinery sophistication, factors likely to influence the rationalization process of the refining sector will be environmental problems as well as the age and poor condition of equipment.
PROGRAM SHORTCOMINGS
In its scrutiny of the modernization program, IEA found the easiest, least expensive option to improve refining yield is not being emphasized: improving crude unit atmospheric and vacuum tower performance.Better use of resources is all the more urgent because the modernization program was to be funded through refined product exports. At the time of the program's inception, domestic prices for crude were low, and refined product transportation was undervalued.
As rail freight rates rise toward full cost recovery and prices for domestic crude used in Russian refineries reach international levels, it will become increasingly unprofitable to export products.
In that case, it makes better economic sense to export crude than refined products. It is significant that the government dramatically lowered export taxes on refined products last February, IEA noted.
Coastal and border refineries will have an edge in product exports, IEA says. But it warns that the increasing unprofitability of refined product exports calls into question the viability of the rising number of equipment contracts being signed by western suppliers with Russian refineries contingent upon product export quotas.
IEA added that some of these refineries, especially those inland, do not appear to have a long term future.
Accordingly, IEA said, Russian refinery investment during the next decade will be "enormously risky." That's because the change in export netbacks and domestic product prices will have a major effect on refinery modernization strategies and on the way projects will be financed.
"If refineries are to execute modernization projects in a cost effective, efficient manner, they will have to borrow over an extended period of time--rather than use annual cashflow--to import equipment," IEA said. "Moreover, they will have to borrow a mix of currencies (foreign exchange and rubles) reflecting the cost structure of the project."
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