WATCHING THE WORLD RUSSIAN REFINERIES AWAIT UPGRADES

With David Knott from London Almost all 48 refineries in the former Soviet Union have large and small upgrades slated for completion in the next 5 years. Many upgrades have been started and abandoned as central funding ran out in the late 1980s. About 70% of FSU refinery equipment-largely that installed before 1980-is in poor condition. That assessment is the view of Paul Nicholson, FSU development director at insurance broker Sedgwick Energy Ltd., London. Sedgwick's contribution to FSU

Nov. 22, 1993

2 min read

Almost all 48 refineries in the former Soviet Union have large and small upgrades slated for completion in the next 5 years.

Many upgrades have been started and abandoned as central funding ran out in the late 1980s.

About 70% of FSU refinery equipment-largely that installed before 1980-is in poor condition.

That assessment is the view of Paul Nicholson, FSU development director at insurance broker Sedgwick Energy Ltd., London.

Sedgwick's contribution to FSU refining projects has involved reeducating refinery staff in basic western concepts.

"We found that many FSU refiners have no awareness of the value of equipment," Nicholson said. Before 1990 "...if any unit burned down, they would ring up the ministry and get another."

FINANCING

Nicholson said western companies entering refinery joint ventures have insisted on western style financing of projects. This involves securing of hard currency investments through insurance.

Nicholson said the most positive feature in favor of financing FSU refinery projects is that many have great spaces between process blocks. Before glasnost, a distance of as much as 200 m between key units was thought necessary so one bomb could not knock out an entire plant.

The distance between units may be energy inefficient, but it limits the risk of property damage and therefore the amount of insurance required. It also makes upgrades attractive to improve efficiency.

"Financing the Russian refining industry is seen as risky because of the inherent lack of profitability within the refining system," Nicholson said.

Financing via export counter-trade is considered the only viable route to financing of upgrades.

"Given the shortages of petroleum products," Nicholson said, "it will not be surprising if the upgrade projects that are first to be realized are the smaller single unit modernizations and revamps."

UPGRADES IN PROGRESS

Most upgrades that are progressing involve modernization or completion of an existing unit that is operating on an uneconomical basis or awaiting completion. Typical hard currency project values range from $10 million to $60 million.

"Small single unit projects are beginning to be built. But major upgrade projects, such as those foreseen at the Atyrau, Yaroslav, Salavat, Zaratov, Khabarovsk, Mozr, Mazeikiai, Novokubishev, and Ufa refineries are progressing slowly through the financing stage."

Many FSU refineries would have no replacement value if they burned to the ground, Nicholson said. "No company has yet insured an operating FSU refinery, nor would I advise it."