EX-SOVIET BLOC PRODUCT MARKETS DUE BIG CHANGES

Petroleum products demand in eastern Europe and the former Soviet Union (FSU) will change drastically by 2000 as countries in the region embrace free market economies. So concludes a study by PlanEcon Inc., Washington. D.C., and DRI/ McGraw-Hill, Lexington, Mass., of refined products distribution and use in seven eastern European countries and 15 FSU republics.

May 31, 1993

6 min read

Petroleum products demand in eastern Europe and the former Soviet Union (FSU) will change drastically by 2000 as countries in the region embrace free market economies.

So concludes a study by PlanEcon Inc., Washington. D.C., and DRI/ McGraw-Hill, Lexington, Mass., of refined products distribution and use in seven eastern European countries and 15 FSU republics.

So far, upstream oil and gas activity in the region has attracted most interest from foreign companies. But growing interest among foreign investors in the downstream sector is expected because eastern European and FSU markets are too large to ignore, PlanEcon and DRI/McGraw-Hill said.

Since peaking in 1980 at 516 million metric tons, regional consumption of all petroleum products in 1992 declined to 379 million tons, including 54 million tons in eastern Europe and 325 million tons in former Soviet republics. By comparison, European Economic Community (EEC) countries in 1992 used 412 million tons of refined petroleum products.

Consumption in eastern Europe and the FSU of four main refined products - mazut (residual fuel oil), gasoline (including naphtha), diesel, and kerosine-by 2000 will decline to 207.6 million metric tons, down about 29% from 293.1 million tons used in 1992.

In addition, regional demand patterns are expected to shift.

For example, consumption of mazut, gasoline, diesel, and kerosine in FSU countries will fall to 161 million tons by 2000 from 253 million tons in 1992. Meanwhile, use of the four main refined products in eastern Europe in 2000 will grow to 47 million tons from 40 million tons last year.

FIVE MAJOR TRENDS

Growing consumption of motor gasoline is one of five major trends identified by the PlanEcon and DRI-McGraw-Hill study. The others:

Conversion of refinery processes to produce more light products and improve product quality.
Major expansion of motor fuel outlets and related distribution infrastructure.
Increasing diesel fuel consumption for trucking.
Declining demand for heavy refined products by industry and electrical power generators.

Those trends indicate refined product slates by 2000 will be geared more for light industry and services and less for heavy industry. Heavy reliance on railways to transport refined products will decline in favor of shipments by road. Emerging entrepreneurial, middle class consumers will pace sharp increases in privately owned and operated cars, vans, and light trucks.

In eastern Europe, large increases in vehicle mileage by 2000 will boost gasoline consumption by more than 50% to 14 million tons. In FSU republics, as gasoline prices move closer to world prices, gasoline powered trucks and buses-which consume three fourths of all gasoline sold-will be replaced with more efficient diesel vehicles. So despite increasing car ownership, FSU gasoline consumption will decline by more than 6017, during the forecast period.

DOWNSTREAM CHANGES

PlanEcon and DRI/McGraw-Hill found the region's limited refining capabilities largely shaped products use patterns rather than responding to consumer demands. Regional refiners were able to supply nearly all petroleum products consumed in the region except for small volumes of high octane gasolines and lubricants imported from western countries.

Regional refinery processes, as a result, are shallow compared with plants in countries outside the region and produce a refined products slate weighted toward mazut and other heavy products. Most facilities use straight distillation processes with little application of cracking or secondary refining process. Overall products quality tends to be low in eastern Europe and the FSU.

As more western vehicles begin operating in the region, imports of lighter, higher quality products will increase. Conversion capacities and secondary processes of refineries in countries covered in the study need extensive upgrading to integrate with the rest of Europe.

Because of the attractiveness of the region's downstream petroleum markets and a lack of competition in refining, countries in the region have tried to couple market access with funding from foreign investors for refinery grades. The tactic has slowed penetration by international companies into regional downstream markets, the study said.

In centrally planned economies of the past, generally primitive service stations belonging to state owned distributors sold most refined products wholesale to other state enterprises. Even in the best circumstances, the thin network of distribution facilities was inadequate even for the small fleets of state owned vehicles.

Poland, for example, has an average of 116 stations/10,000 sq km and about 9.5 stations/100,000 inhabitants and the FSU 2.3 stations/10,000 sq km and about 1.8 stations/100,000 inhabitants. By comparison, EEC countries average 550 stations/10,000 sq km and 390,00,000 inhabitants.

"With the rapidly growing number of private vehicles, usually used cars imported from the West, the networks in some countries have been completely overwhelmed," the authors said.

Countries throughout eastern Europe and the FSU plan to increase considerably the number of motor fuel outlets and expand distribution systems that serve them.

PRODUCTS OUTLOOKS

The study predicts regional mazut consumption by 2000 will decrease to 76 million tons from 144.7 million tons in 1992, diesel use will increase to 81.5 million tons from 81.1 million tons, and kerosine use will increase to 18.5 million tons from 16.7 million tons.

Declining demand for electricity and in metallurgy, chemicals, and heavy, machine building will sharply reduce mazut consumption in the region. Mazut demand in FSU republics is expected by 2000 to slide to 63.2 million tons from 130.4 million tons in 1992. After falling sharply for the past 2 years to 14.3 million tons in 1992, mazut demand in eastern Europe will continue falling at less than I% /year to 12.9 million tons in 2000.

PlanEcon and DRI/McGraw-Hill expect economic recovery in eastern Europe to pace steadily increasing diesel fuel demand. By 2000, diesel consumption in eastern European countries will reach 17.2 million tons, up from 14.2 million tons in 1992, largely because of growing use in trucking. Diesel demand in the FSU,, meanwhile, will keep falling to a low of 55.1 million tons ire 1996 before bouncing back to 64.3 million tons in 2000. FSU diesel consumption in 1992 was 66.9 million tons.

Changing air travel patterns will heavily influence kerosine consumption because aviation fuel demand accounts for most kerosine use in the region. Kerosine demand in the FSU will drop to 12.4 million tons in 1995 from 18.4 million tons in 1990 before recovering in 2000 to about 16 million tons, Eastern Europe's kerosine consumption will increase from 1.9 million tons in 1991 to 2.2 million tons in 1996 and 2.5 million tons in 2000.