Rushan Shamgunov about HRCC: ''Tremendous amount of work has been done, and the result can only be successful''
This year TAIF-NK PSC plans to launch the Heavy Residue Conversion Complex, where mazut will be processed into light and high-quality petroleum products. This will increase the margin of the company twofold. Why do not all Russian refineries decide to modernize their plants and how fluctuations in oil prices have affected the income of TAIF-NK?
Rushan Rashitovich, how do you assess the state of Russian oil refining industry following the results of 2017 and what place TAIF-NK PSC takes in it?
Last year, 546,8 million tonnes of oil and gas condensate were produced in Russia — it is about one eighth of all world indicators. At the same time, Russia is among the three largest petrochemical states, along with Saudi Arabia, which produces 550 million tonnes of oil a year, and the United States with about 520 million tonnes of oil a year. Despite the fact that the media often report about a decline in oil refining, only the United States and China surpass Russia by refining volume — about 800 million tonnes of oil a year and about 450 million tonnes respectively. In Russia, the annual oil processing volume accounts for 280 million tonnes. According to last's year results, our state took the second place by oil production volume, and the third – by the volume of processing. At the same time, if you look at the details, the Chinese processing is larger by the total volume of products and less by the processing depth – if they build a fluid catalytic cracker unit, it is considered one of the advanced refineries. As for the quality of oil products, we are at the level of the leaders – Japan, Germany, the UK. Therefore, it could be argued that the industry operates at the level of world's standards in general.
I would note that in recent years Russia has made a breakthrough in oil refining efficiency. If five years ago the oil conversion ratio in Russia was less than 70%, then last year we crossed the threshold of 80%.
According to the results of 2017, more than 8 million tonnes of oil raw materials were processed at TAIF-NK, the process utilization rate was 99%. We produced about half a million tonnes of gasoline, more than 2 million tonnes of diesel fuel, 2 million tonnes of mazut and 100,000 tonnes of aviation kerosene.
You are one of the companies that processes purchased oil. How profitable is it?
As for the profit, it is a difficult question, there are a lot of nuances, starting from the quality of oil. For example, refineries in Western Siberia process oil with a sulphur content of 0,5%, we process oil with a sulphur content of 1,8%. Their output of light oil products is about 60%, we have 45%. As a result, at atmospheric and vacuum crude unit alone they have a better result by a third than we do. Accordingly, it requires less secondary processes, therefore, processing costs decrease.
The purchase of oil — it is prime costs, but there is also the issue with energy carriers. Many large plants can afford a private CHP plant, which means individual tariffs for electricity and heat. Small plants buy all this on the market, and it costs them more. Therefore, to say that oil refining from ones is profitable and from the others it is not — it is not quite right.
If you look at the price of oil: five years ago a barrel cost about 120$, today it is two times less. Has the price decline affected the production of TAIF-NK?
In the West, it is adopted a slightly different system of oil refining efficiency — they calculate the income not from oil price, but the benefit from refining one tonne of oil. It ranges from 3 to 7-8 dollars per barrel, which means — up to 50 dollars per tonne. If you take an average of 5 dollars per barrel, you get 30-35 dollars per tonne, converted into rubles — about 2,000. This reflects some realities, then there are amendments: some refineries have better oil quality, they produce light oil products and sell them more expensively, plus deeper conversion — such plant has a margin of about 2,000. Other refineries have worse oil, the plant produces more mazut or heavy petroleum products, so the margin is less and ranges from 500 to 1,000 rubles. Then the tax environment comes into force. The 'tax manoeuvre' was designed to shift the tax burden from oil production to processing. As a result, they have greatly increased customs duties on oil products, customs duties on oil fell. As a result, the price of oil on the domestic market increased, but prices of oil products remained at the same level, thus, because of the taxes, in the margin of the refineries the share of taxes increased, and our net profit decreased.
And yet, how sensitive is oil refining to oil prices?
It is sensitive to changes in oil prices, the market always reacts belatedly to changes in the cost of oil. We trade at a market price, which is formed including on the stock exchange. In order for the oil product to get on the stock exchange, it is necessary to buy raw material, process it and get oil product, then it must reach the buyer. All this takes time. Therefore, when oil prices rise, the refinery earns a little more, when they fall — less than the average level. In addition to fluctuations in oil prices, there are other factors, such as seasonal ones. In winter, people drive less cars, the price of gasoline begins to fall, in summer during holiday season demand begins to grow. This is very well noticeable in aviation kerosene — in summer airlines request more kerosene, oil companies begin to ship it more, there is a demand, respectively, the price begins to rise. In autumn, the reverse process takes place. All this creates different tendencies of changes of economic efficiency of work of oil refineries, which is defined by their general influence.
How has the margin of Russian oil refineries changed in the last 5 years?
Over five years, the income of Russian refineries has decreased significantly, but not only because oil has become cheap. The main reason has become the change in the tax legislation of Russia. Taking account of the fact that the excise tax in our country rises every six months and the price of gasoline remains unchanged. In the end, the margin of the refinery in the last 5 years has fallen considerably.
Then it turns out that oil refining in the current economic realities is unprofitable.
It is unprofitable in a particular place, with particular oil, with particular configuration of the plant. If the plant has high conversion, if the equipment has catalytic cracking, hydrocracking, tar processing unit — all this improves the economy and distinguishes from plants of low conversion. Thus, people begin to use as raw materials not oil, but mazut — it is cheaper, and the products that are obtained from it cost the same, as a result, the margin can be increased.
What is the payback period of the modernized plant?
The bank interest is now such that one hundred percent of the invested funds can be repaid in 15 years, and if the company works well, the payback period should be less. I would tell about profitable projects with a payback period of five years, and low-profit projects — 8-10 years. If the payback period is more than ten years, I would not consider these projects to be effective.
What support measures does the oil refining industry need to increase oil conversion rate?
It is necessary to stimulate through taxes, for example, in the last five years oil refining has developed very effectively due to the adoption of technical regulations on the quality of petroleum products. There was an unprecedented level of investments in the industry. The plants, which carried out the modernization and produced high-quality petroleum products, paid excise duties at reduced rates, thereby repaying the funds invested in modernization. But, unfortunately, not all companies went the way that was planned — the task was to reach the world level in conversion rate. Of course, it has caught up with the European levels, Japanese plants, but it didn't come closer to American one. We have reached the world level in terms of oil products quality. If taxes are transferred to oil exports or reduced, then oil refining will again show margin growth.
As an incentive to oil refining industry, the ministry of energy of the Russian Federation proposes to introduce negative excise duties on oil, but the finance ministry does not support the proposal. In your opinion, how could such measure stimulate the industry?
The question is, what conditions would be. For example, you invest in a unit, you introduce it — you get a negative excise, you do not introduce it — there is no excise. The government with the help of the system of reverse excise duties significantly supported the petrochemical industry. We are talking about billions of rubles, which are returned to the company's accounts due to the fact that the state returns excise duties on certain processes of petrochemistry. The measure is good, it could play a positive role in oil refining as well. Today the only way the refineries could go is external crediting because they have no internal reserves. The margin is spent on taxes, salaries, repairs, large funds are now available only at the expense of bank loans. Some enterprises are in a slightly better situation, some – in a slightly worse, but in general it is not great. At the same time, the loan can be obtained at 9-10% per annum, that is, the profitability of oil refining should be at least 15-20%. In the present economic conditions it is physically impossible. It turns out that it is impossible to develop on borrowed money, there are no own funds, but the legislation has a mechanism such as ''special investment contract''. I have not heard that someone has signed one, but theoretically it is possible to specify in it reverse excise taxes as well. As we can see, by the example of petrochemistry — this can greatly affect the economy of the refinery.
In general, the country is experiencing a deterioration in the quality of produced oil, but, at the same time, the demands to the composition of refined products are increasing. How is the industry reacting to these changes?
We can say that in the last five years the demands have been growing. But along with this, the quality of oil was only worsening. It is necessary to modernize, increase profitability by involving in the turnover the vacuum distillates and mazut. Investments in deep conversion of raw materials are the biggest expenses of all processes. If the primary processing unit for 3 million tonnes costs about 8-10 billion rubles, then to build a hydrocracking unit for 3 million tonnes cost more than 100 billion rubles. The amount increases tenfold and the return accordingly: oil will be bought for 12-20,000 per tonne, and mazut — for 9-10. The difference for each tonne is 8-10,000, multiply it by 3 million tonnes per year, you will get 25-30 billion rubles — this is very serious money.
Which TAIF-NK products are the most popular and marginal on the market today?
On the first place by demand – aircraft fuel and automotive gasoline. By the way, aircraft fuel is the most marginal product, then it is followed by diesel fuel, straight-run gasoline, automotive gasoline and so on. I think that this situation will continue in the next five years.
How have the sanctions against Russia impacted on the activity of TAIF-NK PSC?
Until recently, these sanctions did not concern us, they were imposed against state-owned companies, to which TAIF-NK does not apply. However, TAIF-NK is a participant of the economic process. We, like everyone else, borrow money from banks, including in the West. If Russia's sovereign rating starts to fall, the cost of the credit for Russian companies starts to rise, and this inevitably affects us. That is, even if there are no direct sanctions against TAIF-NK, the macroeconomic situation indirectly concerns us.
I think that the industry has been hit more by the cost of borrowed money than the sanctions, because they were imposed against objects by production projects, this is what brings money to Russia — the extraction and sale of oil. The sale of petroleum products does not bring such money. But, for example, there was a time when oilfield services for oil-producing companies were provided mainly by foreign companies, such as Schlumberger, and for the fantastic amount of money. Now our Russian companies have learned how to do it, as a result, the prices fell, and all the foreigners were forced out of the market. Much the same is happening to oil machine building, metallurgy and other related industries. Import substitution takes on not only a political dimension, but also a real economic component. Therefore, there are also positive aspects from the introduction of sanctions.
In your opinion, what factors in the medium term will determine the margin of TAIF-NK?
A tremendous amount of work has been done. We have completed the construction of the Heavy Residue Conversion Complex, and we have high hopes for it. We are going to start deep conversion and to stop the production of mazut, and instead to get light oil products. Our marginality on the share of mazut processing will increase twofold. The result can only be successful, no one expects other from us. After the start of the HRCC, we will demonstrate the oil conversion rate of above 98%.