Several Russian refineries are likely to shut in a few years, mirroring the current European crisis in which dozens of plants closed as they failed to compete with modern rivals in Asia and the Middle East, one of Russia's top industry players said.
"Russia will face a gasoline surplus very soon. It will become unprofitable to produce heavy products and those firms that fail to upgrade will see their market share eroding, losses widening and most likely will be forced to close," the president of Bashneft, Alexander Korsik, told Reuters.
Bashneft is one of Russia's leading independent refiners, processing over 400,000 barrels per day mainly in the Urals region, and producing over 300,000 bpd of crude. Russia, the world's largest oil producer, refines around half of its domestic crude output of 10.5 million bpd and exports the rest. Europe's oil refining industry is cracking again under pressure from ferocious global competition and shrinking domestic demand.
Unlike in Europe, few Russian plants closed in recent decades despite being built in Soviet times to serve the huge needs of the Red Army for poor-quality fuel oil and diesel. Many plants were or are being upgraded to meet soaring demand for good-quality gasoline and diesel amid a boom in demand for modern cars among the growing middle class.
However, as tax laws long encouraged exports of heavy fuel oil in the hope refineries would accumulate more funds for upgrades, Russia has seen a jump in the number of midsize, simplistic plants, often known as teapots.
"There is a large oil refining surplus in Russia and it must shrink," Korsik said. "Russia needs to produce certain amounts of gasoline, jet fuel, lubricants and bitumen for domestic needs. Diesel will be exported. The rest isn't needed. The rest has appeared because of the tax system, which encouraged production of poor-quality products," he said. Korsik said he believed the most vulnerable plants would be simplistic refineries built in recent years that are not part of any large oil firm and lack guaranteed access to crude.
"We understand where we at Bashneft will get our oil from ... If somebody is short of crude - well, that's called bad luck. And probably it wasn't a very good investment decision in the first place, to build small refineries without having long-term access to crude," he said. "It doesn't mean, though, that everyone's refining margins will shrink. We hope for decent margins at our refineries." Korsik, one of Russia's most highly regarded oil managers, oversaw production at Sibneft during its spectacular output growth in the early 2000s before the company's purchase by Gazprom for more than $13 billion.
He also held top executive positions at gas firm Itera and oil company Russneft before joining Bashneft parent Sistema in 2009. Forbes magazine rates Korsik as one of the top 20 best-paid Russian managers with annual compensation of $5 million. Bashneft, which works on some of the most depleted fields in Russia, saw output rise by more than 30 percent in the last five years and counts on new Arctic fields to add a further 100,000 barrels per day. Its plants are fairly modern by Russian standards with refining depth - the ratio of quality, light products to the original amount of crude - of 85 percent, due to rise to 94.4 percent when it finishes a large modernisation before 2018.
Korsik said the plants would stop producing fuel oil and vacuum gasoil, keep exporting large amounts of diesel and slightly raise gasoline output to meet domestic demand. "We are fully aware of the risks that increased volumes of diesel will come to Europe from Asia and the Middle East. But again the only way to survive this competition is to have low costs," he said.
"If the government manages to keep monopoly prices under control, including for pipelines and railways, then there is hope that we can remain competitive in Europe for a long time." Bashneft is controlled by tycoon Vladimir Yevtushenkov's diversified conglomerate Sistema, with minority shareholders owning around a fifth of the share capital.
Bashneft's shares have soared by 40 percent since the start of 2012, outperforming the broader Russian market index due to solid performance and market rumours the firm might be bought by state giant Rosneft. Rosneft and Bashneft have repeatedly denied holding talks on the subject. The firm is considering a secondary public offering (SPO) and Korsik, in London to meet potential investors, reiterated the SPO could happen at the end of 2014 or in 2015. "If the SPO takes place, the share of the main stakeholder will certainly not go below 51 percent because the market won't be able to swallow such a big portion of shares," Korsik said.