BMI View: Gazprom's plan to invest US$487.7mn in the Omsk refinery in 2012, as part of a wider US$3.9bn investment programme that will run to 2020, should raise capacity and enhance operations and fuels standards at the plant. This is an opportunity for the company to build on rapid fuels sales growth both at home and abroad. The move will also have a considerable impact on European refiners, which will struggle to compete with imports from Russia; and on Central Asian countries, which will welcome the plant's expansion in export capacity.
On April 5 2012, Gazprom Neft approved the mid-term 2012 Omsk refinery investment programme. The programme will cost RUB14.4bn (US$487.7mn) and will see the company develop and outline detailed design and budgetary documentation for the facilities and upgrades included in the 2020 Omsk Refinery Development Program. This latter programme will see the company invest over RUB115bn (US$3.9bn) in the 400,000 barrels a day (b/d) facility to raise environmental standards for the fuels produced, expand processing depth, and diversify the range of high-octane gasoline products, diesel fuels, coke, advanced bitumen materials and petrochemicals.
The mid-term 2012 programme includes the start-up of a diesel and catalytic gasoline hydrotreatment plant, which has been under construction since 2010. The plant's gasoline unit will have capacity of 1.2mn tonnes per annum (tpa) - or 24,000b/d - while the diesel unit will have 3mn tpa (60,000b/d) capacity. The plant will produce grade 4 and 5 diesel and gasoline. The wider 2020 programme will include the upgrading of six existing production facilities and the start-up of eight new facilities, which will include:
A high-octane gasoline components unit producing TAME (tert-amyl methyl ether) and MTBE (methyl-tert-butyl ether) - to be built by 2014-2015;Atmospheric vacuum distillation units with a gas condensate treatment system capable of processing 1.2mn tpa (24,000b/d) - to be built by 2017;A delayed coking unit, also to be built by 2017; andA hydrocracking plant that will include a sulphur unit, a hydrogen unit, and other facilities. This is expected to be completed by 2019.
Preparing To Move Eastwards
Such a colossal investment plan could at first seem disproportionately optimistic given the current gloom that is permeating the downstream industry. However, Gazprom's refining business has been its best performing segment, according to the company's Q311 results (the latest currently available). Products sales in Q311 grew 43% year-on-year (y-o-y), much faster than the company's overall turnover which expanded 22% y-o-y.
These outstanding results are part of a wider trend observed across the board in the Russian downstream. Refinery runs across the nation increased 6% month-on-month (m-o-m) and 9% y-o-y to 5.4mn b/d of crude in June 2011. This set a modern high, the likes of which had not been seen since the fall of the Soviet Union. This high is explained by growing demand in both the domestic and export markets.
|To Infinity And Beyond
|Breakdown Of The Omsk Refinery's Throughput By Product Type (LHS) and Total Annual Throughput In mn tpa (RHS)
|Source: Gazprom Neft, BMI
Gazprom's Q311 Russian sales expanded fastest with the company recording 47% y-o-y growth. This was thanks to a good summer driving season but also due to macroeconomic growth, with the nation's GDP expanding 5.0% y-o-y in Q311. Notably, the mostly gasoline-based domestic market will benefit from the expansion in Euro-4/Euro-5 gasoline production. Sales to Europe also grew at a healthy 39% y-o-y rate and, unsurprisingly, exports to Europe offer the highest margins and thus constitute a real opportunity for the company.
However, increasingly stringent environmental standards have acted as a type of non-tariff-based barrier to European imports from Russia. This has forced Russian downstream players, including Gazprom, to invest heavily in bringing their Soviet-era plants into compliance with European regulation. The authorities have also enforced upgrades and followed the EU's lead by mandating cleaner fuels, introducing Euro-4 standards at the start of 2010 and preparing for the introduction of Euro-5 standards at the start of 2014.
The new Euro-4/Euro-5 diesel unit should, therefore, not only boost the Omsk refinery's white product yield, but it should also allow for larger exports to European markets, which are mostly geared towards diesel. This should be a source of further concern for ailing European refiners. Indeed, whereas many are suffering because of record-high Brent prices and cuts in output from traditional crude producing partners, as was the case with Libya in 2011, Russian refiners will continue to benefit from secure feedstock flows. The Omsk refinery is ideally placed as it is able to process cheaper sour West Siberian crude mostly sourced from Gazprom's fields in the region. The company has a strong upstream position in Siberia thanks to the 2005 acquisition of the local upstream giant, Sibneft, now known as Gazprom Neft.
Relief For Central Asian Markets
Besides Europe, the Omsk refinery's main markets are in fact located in Central Asia where most former Soviet Republic's depend on its output for both gasoline (which is the main fuel used in the region) and for diesel. Kyrgyzstan, for instance, sources 60%-70% of its refined products from this plant, through Gazprom Neft's fuel trading subsidiary Gazprom Neft Aziya (GNA). This asymmetrical relationship between Russia and its Central Asian neighbours has often led to worries over supply disruption. This was notably the case in 2011 when, faced with gasoline shortages in the domestic market, the Russian government increased the gasoline export tariff to 44% on May 1 2011, a level high enough to act as a de facto export ban. This created a domino effect where each country tried to hoard its limited supplies by limiting exports and re-exports to neighbours. Kazakhstan's export-cut on gasoline was followed by GNA's Omsk refinery's decision to stop supplying fuel to countries outside the Customs Union of Russia, Belarus and Kazakhstan. This had a severe impact on Kyrgyzstan and there were soon shortages in the country.
Although the situation has now reverted back to normal as refinery runs have increased in Russia, the crisis underlined the risks posed by this downstream dependence. Central Asian countries are trying to boost their own refining capacity but in the meantime, larger gasoline production from Omsk should provide relief to those worried by the risk of renewed disruption. As a result, BMI sees Gazprom's investment programme for the Omsk refinery not only as a growth opportunity for the company but also as an important development for partners both in Europe and in Central Asia.
Copyright 2012 Business Monitor International Ltd. All Rights Reserved.
(Originally published in the May 1, 2012, edition of BMI Emerging Europe Oil and Gas Insights.)