Trends and opportunities of oil market discussed on traditional conference in Minsk
Western European refinery woes are Belarusian opportunities. That was the message communicated by Belarusian oil manufacturers and marketers at last week’s conference, “Market for Oil and Gas of the Republic of Belarus,” organized by the state-owned oil and gas company JSC Belorusneft.
The conference featured several industry spokespeople, all of whom regarded Belarus’ oil refining situation with varying degrees of optimism. A good example of the caliber of speakers was Vyacheslav Mishchenko, Senior Vice President for Business Development with Argus Media, a major marketing agency for oil and gas producers in the Commonwealth of Independent States (CIS). He noted that fuel suppliers in former Soviet countries have competitive advantages in meeting unfulfilled European demand for refined products resulting from the drop in supply from continental producers, among which are geography and a well-developed transport infrastructure.
However, suppliers in the CIS countries face stiff competition from rivals, particularly in the Middle East. Chief among these competitors are several new refineries scheduled to come online in the Persian/Arabian Gulf states over the next three years. These are expected to fulfill the demand for European diesel, a market in which there is today a shortfall as a result of diminished Western European oil refining capacity. Belarusian diesel producers can supply part of the demand, but the chief concern likely to be expressed by purchasers would be about the reliability of that supply. Committing to this market would mean further developing the country’s refining capacity.
European refining hits the skids
Western European oil refining capacity has dropped dramatically as profit margins continue to plunge. Since 2008, the volume that European refineries can handle decreased by 1.7 million barrels/day with the closing of some 14 refineries, roughly one in eight that had operated before the global economic meltdown. According to Oil and Gas Journal, total production capacity in the Western European market now ranks third behind Asia and North America, reaching 13.5 million barrels/day in 2013. The production drop was more than 3 percent from the year before. Platts noted that the highest level of refinery closures was in France, with capacity in that nation dropping 30 percent over the same period (the UK followed with 22 percent, Germany with 15 percent, and Italy with 10 percent).
All major oil refineries in Europe have continued to record decreases in profit over the first half of 2014. A total of 12 European plants are in danger of closure over the next six years, according to Jean-Louis Schilansky of the French oil industry lobby UFIP. This will leave a total of 75 refineries still operating on the continent. Italy is likely to be the next country to close oil production facilities in the coming year.
Meanwhile, reserves of unprocessed petroleum continue to grow with an unexpected increase of feedstock coming to Europe from the United States, projected to become this year the largest oil and gas producer in the world. Since the start of the shale gas boom in that country in the summer of 2008, the need for increased refining capacity for Middle Eastern and Asian oil and North American gas condensate has swamped European producers even as unprofitable plants close. The drop in demand within Europe for petroleum products, the result of dwindling post-meltdown Mediterranean economies and “Energiewende” (“Energy Transformation”), the increased use of alternative energy in Germany and other European states, has created something of a perfect storm for Western European oil companies.
The drop in refining profits has been staggering for the industry, going from 36 EUR per metric ton (about 5 EUR per barrel) in 2012 to 18 EUR in 2013 and an average of 15 EUR (about 2 EUR per barrel) in the first half of this year. Even the decrease in refining capacity below demand levels has only slowed the decline. According to Platts, French refining capacity is at 1.4 million barrels/day, while demand is estimated at 1.5 million, following the closure of the last three refineries.
Trading conditions for Western European refiners, meanwhile are projected to remain difficult. Unplanned downtime, should it happen, will have a greater impact on the market than in the past. US suppliers are competing for traditional European markets, such as Africa, slashing prices to make headway against their rivals. Further, if a European economic recovery doesn’t happen soon, the domestic market is unlikely to take up any appreciable slack in demand. Where European refining capacity drops below demand in this environment, a window of opportunity could easily open for Belarusian producers.
Bringing Belarusian refineries up to speed
Vitaly Pavlov, Deputy Director of the Mazyr Refinery (Mozyrsky Neftepererabatyvayushchy Zavod, or MNPZ), one of four branches of the state-run monopoly Belarusian Oil Company (Belorusskaya Neftyanaya Kompaniya or BNK), noted that the Homiel Vobast refinery had already begun improvements that would be useful in providing reassuring proof of reliability for potential European customers. The plant has set as its strategic goals an increase of its production capacity, a focus on light oil production, and the meeting of international standards for all of its products so that the plant can produce product for export as well as for domestic consumption. The facility has begun work on new facilities like the expansion of its tank farm, and the refinery has conformed its products to standards such as BS EN 228:2008 Specifications for Automotive Petrol, ISO 8217 Specifications for Marine Fuels, and Euro-5 Emission Standards for Passenger Cars.
As a result of these changes, the share of high-octane gasoline that the plant produces will increase to 26.5 percent from 23 percent, diesel to 40 percent from 23 percent, and hydro-treated distillates to 12 percent from 2.9 percent, all at the expense of the normal fuel oil production percentage. After the current round of investment projects are commissioned, the processing capacity of the Mazyr refinery is expected to reach 12 million metric tons (87.6 million barrels), with light oils reaching 71 percent of the total product.
Belorusneft, sister company of MNPZ, announced at the conference that it has embarked on a serious investment plan for its gas plant to meet potential export requirements. According to Sergei Kamornikov, Deputy Director General, the production of liquefied natural gas (LNG) in Belarus will increase 7 percent to 604,000 metric tons (4.4 million barrels). Of this amount, 322,000 metric tons (2.35 million barrels) will be produced by their facilities, while MNPZ will provide the rest. Of the amount produced by Belorusneft, 72 percent is dedicated for export to clients in 14 countries. A total of 80 percent of the plant’s capacity is dedicated to meeting long-term commitments at present.
Selling gasoline to Ukrainians
According to Viktor Krasnyansky, BNK Deputy Director, Belarus’ state-run oil and gas enterprise exported a total of 8.5 million metric tons (63 million barrels) of product in 2013. In the first half of 2014, this amount was 4.9 million (35.8 million barrels), well ahead of the projected 8.6 million metric tons planned for the year. The largest recipients of Belarusian gas have been Latvia (33 percent), Ukraine (19 percent), Estonia (7 percent), and Lithuania (6 percent), all nearby states. The biggest year-to-year increase for Belarusian oil product export was to Ukraine, which saw a 65 percent growth in purchases of Belarusian fuel to 980,000 metric tons (7.15 million barrels). Exports of refined product to Russia in the same period dropped 21 percent to 384,000 metric tons (2.8 million barrels). Poland likewise saw a drop from 74,000 to 44,000 metric tons (540,000 to 321,000 barrels).
For the year 2015, BNK continued to regard clients in nearby states as its business development priority, including deliveries to the country’s strife-torn southern neighbor. BNK-Ukraine, the sales division assigned to Kyiv, will enter the retail fuel market in that country either late in the year or early next year under the Belorusneft brand name.
Beyond the political independence of establishing a market presence despite potential objections from Moscow, the move by Belorusneft is bold in several ways. Even the act of buying property to open gas stations poses a significant risk. Property available for this purpose in Ukraine, and for tank farms to store product before distribution in that country, is not in the best condition. The market for oil and gas in Ukraine itself is seen by Belarusian experts to be laden with risk. Fuel imports into the country declined by 32 percent (1.3 million metric tons), with diesel being the largest under-performer. In addition to the political events, a general decrease in purchasing power for the population is considered to be one of the main causes.
Despite this, BNK-Ukraine sold in the first six months some 800,000 metric tons (5.9 million barrels) of its product south of the border. Of this, the largest volume sold was diesel, amounting to 450,000 metric tons (3.3 million barrels, or 56 percent) of fuel. Included in this amount are fuel shipments purchased by Belorusneft from the large Mazeikiai refinery in Lithuania, and from the Grupa Lotos refinery in Gdansk, Poland, which were resold to Ukrainian purchasers.
Fuel sales to Poland and Russia
Sergey Kuzavkov, Chairman of Beloil Polska, while describing considerations for promotion of Belarusian oil products in Belarus’ western neighbor of Poland, said that significant changes are expected in the market this year. Certainly not the least of these was the newly-passed Polish regulation requiring companies that plan to import fuel to obtain a concession that at a minimum will bring to the market 10 million PLN (3 million USD) worth of product to market. The purpose of this regulation was to reduce the number of “gray” schemes that do not provide value-added tax (VAT) payments, excise tax, and fuel surcharges to Polish coffers.
This should result in a decrease of the number of fuel suppliers in Poland, and stabilize prices for fuel consumers in that country, Kuzavkov noted. In order to meet these “transparency” requirements, Belarus will need to import 20-30,000 metric tons (150-220,000 barrels) more diesel to its western neighbor each month. Importation of AI-95 gasoline will likewise be affected, as differences between the European standard research octane number (RON) and the Russian standard AI number over “oxygenate content” will need to be resolved.
In describing the Russian market, Angela Bratkovskaya, head of marketing and sales for the European Trading Company (Evropeyskaya Treydingovaya Kompaniya or ETK), observed a dramatically friendlier environment in Belarus’ Eurasian Common Market trading partner for Belorusneft fuel. Prices are fixed in Russian rubles, and are calculated at the border between the two countries when the fuel passes out of the territory of Belarus and into the Russian Federation. The price includes the price of delivery by rail to its destination, excise tax, and VAT.
Bratkovskaya considered factors that will be significant for Belorusneft in Russia in the near future. These include an increase in small-scale wholesale activity, the cost for tank farm storage rental (highly dependent on availability, a factor not guaranteed during the hostile economic environment that exists between Russia and its European oil and gas clients), and application of appropriate contracting for the company’s activities in the Russian Federation. Acquisition of fuel-station property is going to be a long-range consideration for the company’s activities in Belarus’ eastern neighbor.
More immediately, Belarusneft must take into account the construction and commissioning of new Russian refineries, and the effect that will have on the market for its products. The new production capacity is expected to increase the supply of gasoline and other fuels on the Russian market to the tune of 37.8 million metric tons (276 million barrels) per year. As a result, price competition for fuel producers is expected to be significant in the Eurasian economic zone.
Translated from Ekonomicheskaya Gazeta
Article by Oksana Kuznetsova