The Russian oil refining industry is actually one of the largest in the world - fact. Ever since the Soviet era and right up to the 2000s Russia was second only to the US in terms of primary distillation capacity. Today, even though it has been displaced by China, Russia remains in the top three (See Figure 1).
Figure 1 - Top 10 global refining capacities in 2018, kbpd
Source: BP
Taxation of the Oil Industry in Russia – A Brief Review
Given the importance of the oil industry as a whole, refining in Russia has always been under the scrutiny of the state, which traditionally used taxation as a means of control: these included export duties on crude oil and petroleum products, excise taxes on the sale of petroleum products on the domestic market and a tax on crude oil production (severance tax).
At different periods, various strategic and tactical goals from taxation of the oil industry were declared, which was reflected in ongoing reforms and changes.
The first changes were made in 1995-1996, when against a backdrop of low oil prices on international markets; it was decided to abandon export duties in order to increase the competitiveness of domestic oil production.
In mid-1999, it was decided to restore the export duties, and such duties were also introduced for petroleum products. From 1999 to 2011, export duties on oil and petroleum products evolved in different directions - sometimes they leveled off and sometimes decisions were made to differentiate them. Wherein for some petroleum products, export duty rates were either higher or lower than duty rates on crude oil.
The main objective of the policy of export duties on petroleum products was to maximize the loading of refining capacities and create incentives for exporting petroleum products rather than crude oil itself. However, the system of export duties that existed in those years led to an increase in the profitability of production of heavy petroleum products and not to an increase in the conversion rate.
In order to encourage refineries to modernize their capacities and minimize the production of heavy petroleum products, a decision was made in 2011 to switch to an export duty rate system, which provided for a gradual increase in the duty rate on heavy petroleum products over several years to the value of the duty on crude oil.
Taking a closer look at the results achieved, there has been clear progress - whilst in the previous decade, from 2005 to 2014, fuel oil yield from Russian refineries almost stayed flat amounting to 28-30%, in 2018 it dropped to 16% (see Figure 2).
Figure 2 – Refining Throughput & Fuel Oil Production in Russia
Nevertheless, Russia is still one of the largest exporters of heavy petroleum products, and further modernization of the industry is necessary.
2018 Tax Maneuver - Change of Concept
The concept of “tax maneuver” appeared in the Russian oil industry in 2012 and essentially represents a redistribution of the tax burden within the value chain: oil production, refining, and the sale of petroleum products on the domestic and export markets.
Until recently, refineries were the main beneficiaries of such a system - the presence of a high export duty on crude oil created a situation in which Russian refineries were able to buy oil from local oil producers at a large discount. However, starting from 2019, the approach has changed radically: over the next 6 years, it is planned to gradually reduce the export duty on crude oil until it is completely abolished and at the same time raise the ‘severance’ tax.
Such changes will lead to an increase in domestic oil prices to world levels, which will immediately affect negatively the profitability of Russian refining. Therefore, in order to support domestic refineries, measures are planned such as a gradual reduction of export duties on petroleum products (until they are completely canceled), various compensation measures for refineries geographically remote from export markets and for independent refineries that are not part of vertically integrated oil companies and continue modernization projects.
Despite all these measure from the Russian Government to support domestic oil refining, many experts believe that the expected drop in business profitability will be fatal for a number of Russian refineries – only time will tell.
Is Increasing the Conversion Rate the Last Hope?
In this situation, the only way for the survival of Russian refineries is to increase competitiveness, including increasing the conversion rate.
Traditionally, the main technology used by Russian refineries to reduce the production of heavy oil residues was delayed coking. And, apparently, this trend still exists.
One of the flagships of Russian refining is the Omsk Refinery with a capacity of more than 20 million tons per year – currently constructing a new delayed coking unit (DCU) with a capacity of 2.0 million tons per year. Start-up of the unit is scheduled for 2021. In parallel, the refinery is reconstructing the existing DCU. Following the results of all the work, the owner of the refinery, Gazprom Neft, expects to increase the conversion rate at the refinery up to 97%, and to increase the light petroleum products yield to 80%. The supplier of delayed coking technology is Wood (previously known as Amec Foster Wheeler).
In addition to the Omsk Refinery, Gazprom Neft continues to modernize its other refining asset, the Moscow Refinery. It is planned that in 2020 the second stage of the refinery modernization will be completed, which is mainly aimed at improving the operational and environmental efficiency of production with a slight increase in refining throughput and improvement in product quality.
The main focus is the replacement of existing units that were built back in the 1960s. The future plans of the company include a radical change in configuration aimed at minimizing fuel oil production. Among the technical solutions discussed, we can mention VGO hydrocracking with a capacity of 1.5 million tons per year and DCU with a capacity of 2.0 million tons per year.
Another example of DCU in Russia is the unit at the Yaroslavl Refinery, which is part of Slavneft, a 50/50 joint venture between two state-owned majors, Rosneft and Gazprom Neft. Now the project is at the basic engineering design (BED) stage. It is assumed that the capacity of the DCU will be more than 3 million tons of heavy oil residues per year. Chevron Lummus Global LLC is the contractor for BED package. The commissioning is scheduled for 2024.
LUKOIL, Russia’s largest independent vertically integrated oil company, is also actively implementing a project to increase conversion rate at its Nizhny Novgorod Refinery. In addition to a delayed coking unit, the project includes diesel hydrotreatment, gas fractionation, hydrogen manufacturing unit, sulfur recovery unit and infrastructure facilities. The design capacity of the DCU is 2.1 million tons per year. Its start-up will significantly reduce fuel oil production at the refinery, increase the conversion rate up to 96%, and the yield of light oil products will increase to 76% from current levels of 64%. The licensor of the DCU is also Chevron Lummus Global LLC; commissioning is scheduled for 2021.
The state oil giant Rosneft, processing circa 100 million tons of crude oil at its Russian refineries, continues to modernize its refining capacities. At four Russian refineries, the company is completing VGO hydrocracking unit construction projects. The refineries in Tuapse, Novokuybyshevsk and Komsomolsk-on-Amur plan to complete commissioning and start production in the first half of 2021, and the Achinsk refinery plans to complete a hydrocracking by the end of 2021, and be put into operation at the beginning of 2022.
Rosneft’s future plans include the completion of the construction of a hydrocracking complex at the Ryazan Refinery, as well as the implementation of the third stage of the modernization of the Tuapse Refinery, including the construction of a Flexicoking unit, the only licensor of which is ExxonMobil.
Among independent refineries, the most interesting is the modernization of the Orsk Refinery with a capacity of 6.6 million tons/year. Over the past few years, the refinery has been constantly improving its configuration, and is currently implementing a DCU construction project using Wood (ex Amec Foster Wheeler) technology. With the start-up of the DCU, the Orsk Refinery plans to process crude oil as efficiently as possible and stop the production of fuel oil. According to the results of this project, the conversion rate will exceed 98%, and the yield of light petroleum products will reach 85%. Completion of all work and start-up of the complex are planned for 2023.
Conclusions
The importance of the oil industry as a whole and of the refining sector in particular for the Russian economy forces the government to constantly regulate the industry by changing the tax environment. Whilst such regulation may create certain instability in the industry, they also make local refiners better prepare for any changes and always have a backup plan if these changes have a negative impact on the operational and investment activities.
What we can say is that the course taken to increase the conversion rate and minimize the production of heavy petroleum products continues to be a key way for further development – with the primary goal to increase the competitiveness of the Russian refining industry.
Euro Petroleum Consultants is a technical oil and gas consultancy with offices in Dubai, London, Moscow, Sofia and Kuala Lumpur. Euro Petroleum Consultants also organises leading conferences worldwide.
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