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Refining

Renaissance Capital

20 June 2019

Russian oil & gas

Supplies to Russian refineries began to slump after 1990 and bottomed out in 1998, as did refinery utilisation. Since that time rising crude output has allowed for a steady increase in domestic processing, even though the resulting products have tended to be exported whenever possible. Capacity utilisation has therefore been on the rise, peaking at 93.5% in 2012, according to BP data. Refining capacity utilisation declined to 86.5% in 2017 due to a deterioration in refining profitability on the back of an oil price decline and implementation of the tax manoeuvre, rebounding in 2018 as new secondary capacities improved the quality of the Russian refining basket.

Russia’s refining capacity represented some 6.6% of the world total in 2018, according to BP’s Statistical Review of World Energy, while Russia’s domestic consumption of oil products amounted to 3.2% of the world total, including refinery claims and losses. While Russia exports substantial volumes of oil products, its domestic consumption is also significant (Figure 11).

Russia still over-refines, although we expect utilisation rates will decline

Figure 11: Russian refining indicators, mnt

	2001	2002	2003	2004		2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Domestic product consumption	127	122	126	125		125	130	130	134	128	133	142	145	144	152	144	148	146	146
Refinery throughput	178	185	190	195		207	220	229	236	236	250	258	268	273	289	282	279	280	287
Non-CIS product exports	70	87	77	70		92	104	96	108	113	127	120	121	141	156	163	148	137	139
CIS product exports	2	2	3	3		3	4	6	8	8	5	5	17	10	10	8	8	11	11
Note: Domestic consumption includes refinery fuel and losses.
					Source: Ministry of Energy, BP's Statistical Review of World Energy 2019, Interfax, InfoTEK, Federal Customs Service, Renaissance Capital estimates
Figure 12: Capacity, throughput, and utilisation of Russian refineries, kb/d
	2001	2002	2003	2004		2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Russian refinery throughput	3,584	3,717	3,817		3,912	4,172	4,423	4,597	4,742	4,765	5,018	5,185	5,438	5,636	5,926	5,773	5,715	5,703	5,833
Russian refining capacity	5,536	5,444	5,313	5,316		5,398	5,514	5,471	5,387	5,425	5,563	5,721 5,816 6,279 6,417 6,523					6,594	6,596	6,596
Utilisation	64.7%	68.3%	71.8%		73.6%	77.3%	80.2%	84.0%	88.0%	87.8%	90.2%	90.6%	93.5%	89.8%	92.3%	88.5%	86.7%	86.5%	88.4%

Source: Ministry of Energy, BP’s Statistical Review of World Energy 2019, Interfax, InfoTEK, Renaissance Capital estimates

According to Russia’s Federal Customs Service, Russia’s oil product exports totalled

150mnt in 2018 – up 1% YoY but 12% below the historical maximum of 172mn tpa reached in 2015, which marked an end to the upward trend in product exports since 2004, as the tax incentives to refine and export oil products diminished with the implementation of the tax manoeuvre and a decline in oil prices.

In addition to the tax adjustments, the government was pushing oil companies to modernise domestic refineries to comply with new European fuel standards. While Russian product exports have been on the rise since 2004, they consisted mostly of heavy refined products or straight-run products, which were sold to more complex European refineries for conversion into high-quality fuel. This provided a steady stream of cheap cash flow, but eventually left the domestic market undersupplied in quality fuels. These efforts (discussed in detail later in this report) have pushed for a strong trend in refining modernisation, which resulted in falling product exports (see Refining, page 45) and made more crude available for export compared with the refiners’ golden age of 2014-2015. The companies invested heavily in downstream modernisation over the past several years and enhanced product quality significantly as a result. Downstream modernisation has had a positive effect on refining margins, partially offsetting negative effects from fiscal changes. However, with a substantial decline in refining profitability there is less incentive for oil & gas companies to modernise further.

Refinery upgrades, new fiscal regime and more export infrastructure suggest more crude exports ahead

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