15 февраля 2011

`Diеsеl 2011: еvеnt rероrt`

Diesel fuel is exported from Russia more and more actively, while the surrogates are thriving on the domestic market. The Government rushes about trying to impose European quality standards, to lead the oilers to the stock exchange and to restrict prices` growth. But there is only one way to avoid the deficit on the domestic market: to open the borders for cheap imports.

On Wednesday, 20 April Creon has held Conference "Diesel 2011"at the Hotel Baltschug Kempinski Moscow. The event was supported by the IAC "Kortes" and "VNII NP". The diesel fuel prices and its quality were the main issues. "Creon" CEO Sandjar Turgunov said that diesel fuel fundamentally differs from gasoline because of the elastic demand, which correlates with economic situation. Moreover, it is actively exported and domestic prices depend on export ones, or in other words determined by prices on the world market. The Government is concerned about same problems as diesel, which in most countries is much cheaper than gasoline in Russia for some reason, has the same retail price. Diesel was ordered to get cheaper. This leads to the extinction of independent traders, who are unable to sell fuel at a loss - Mr. Turgunov noted. Also, the new standard Euro-3 came into force since this year. This standard regulates the diesel fuel quality, primarily, the sulfur content. Both events severely entangled the life of market players, who tried to find a way out of this situation during the conference.

Diesel fuel is not occasionally called "commercial" as it is consumed mainly by trucks but not private passenger cars. Its consumption correlates with the economic stance, it`s being reduced during crisis years and grows at demand revival. In Russia the diesel is the main export oil product; about half of its volumes are exported mostly to North-West Europe and the Mediterranean. This ratio of export and domestic demand remains stable for a number of years: both production and consumption grown by the same 9 % for five years. As a result diesel prices in Russia are set by export parity and therefore are too high for domestic market. Winter diesel is especially expensive as it contains up to 50% of jet fuel which becomes a premium product in Russia in winter. The prices at the beginning of the year grew even higher due to the double increasing of excise tax. There is the tendency of differentiation of fuel prices in addiction to its quality in other countries but in Russia the situation differs. Low-sulfur fuel is more expensive than conventional for just 300 rubles per ton or less then 1 cent per liter. The demand for it could be created by private car owners but the number of personal diesel cars in Russia is negligible and with current prices and quality will remain the same. Mikhail Turukalov who is chief editor of the prices and regional markets of IAC "Kortes" told about the main trends of diesel fuel market in Russia.

The Government actively supports the stock exchange pricing of petroleum products in order to split off domestic prices from international ones. However, Alexei Sergeyev, deputy general director of the "Stock Exchange Saint Petersburg" in his speech said that now the stock price of diesel is almost entirely determined by export prices, which in turn are determined by London exchange. Wholesale prices for diesel fuel continue to rise following the world prices while retail prices were lowered after the Government`s directives. This fact stimulates all market players to maximize exports. In the course of trading on the exchange futures contracts are primary used. "Kortes gasoil" index is the indicator for market participants in addition to stock quotes, the index is based on 18 Russian refineries` selling prices. According to Director of Strategic Development of IAC "Kortes" Pavel Strokov, soon there will be similar indexes for other petroleum products, gasoline and fuel oil.
However, the prospects of exchange pricing, its transparency and compliance to market principles raise questions among many market players. According to Dmitry Gusev, commercial director of Novotek Trading oil majors dump that volumes of petroleum products which State obligates them to in the stock exchanges of Moscow and St. Petersburg. But in fact it turns out that oil majors sell it to its own subsidiaries on pre-approved prices. These deals are registered on the stock, but the bidders even can not notice it. The State while trying to freeze the prices has no understanding whereas stock pricing or any other domestic market indicators are needed in Russia. Moreover, it`s not necessary at all to oil companies as any amounts realized on the free market are leftovers after export and after satisfaction of needs of its own retail subsidiaries. As a result there is prosperity of "fuel moon-shining", illegal or semi-legal blending of ersatz diesel fuel in independent oil product retail. Raw materials for this ersatz diesel are low-octane gasoline, jet fuel (although it`s not easy to buy small lots), marine fuel and gas condensate. Herewith the producers of the latter, knowing about the usage of its production, start to mix the condensate with crude oil. However, even the resulting brownish diesel is in demand. Mini-refineries became first victims of that as nearly half of them halted the activity due to competition with "blenders" and inability to produce low-sulfur diesel fuel. Now there is the tendency of squeezing independent wholesale traders which can`t buy the fuel on market prices and sell at artificially low. Philip Nikonov who is the independent expert believes that the only way out of this situation is the forced separation of refining and marketing businesses of oil companies; otherwise the independent wholesale and retail players in the oil market will extinct.

Executive Director of the Association of Russian Automakers Igor Korovkin told the participants about the other side of the problem - lack of synchronism of state regulation of environmental standards for oil companies and automakers. While in Central Russia it is difficult to get Euro-3 fuel at the gas station, in Siberia it`s almost impossible, in spite the fact that the engines of Russian cars comply with EU standards for a long time, and foreign models make nearly one half of the vehicle fleet. Up to 40% of legally produced diesel fuel does not meet the technical standards, and it is impossible to estimate the amount of surrogates. Moreover, almost all high-quality diesel fuel from Russian refineries is reserved for export. With dominance of low-quality fuel it is strange to require automakers to produce engines by the European standards, which increases the cost of the unit by 500 EUR. The way out of the situation is the regional differentiation of environmental standards and geographical restrictions for environment-unfriendly fuel and vehicles, like in some European countries. The expert thinks that Russia is not ready to the overall transition to European standards. About 45% of the truck fleet does not meet any standards and needs immediate replacement. Low-sulfur fuel is not produced by most Russian oil refineries, which are far from the export ports, and, after all, many additives are not produced in the country (including additives which bring down the emissions of nitrogen oxides).

Directions of technical modernization of the industry are clear. Sergei Shevchenko technology director of FLUOR, said about trends of global production and consumption of diesel fuel developing. According to him, consumption is slowly declining but the quality standards are continuously tightening in Europe, the main direction of diesel export from Russia. So, aromatics contamination in the fuel is also regulated in addition to the sulfur content, besides these regulations implement even to marine fuel as ships inevitably come to docks. From a technical view it`s reflected in addition of hydrotreater, hydrocracker and visbreaker units to the refinery. In particular, Rosneft upgrades Komsomolsk Refinery on this scheme while Gazprom Neft and Surgutneftegas can`t realize any similar projects. However, diesel fuel without upgrading will be soon shipped in Europe from Russia only as a feedstock for further processing.

Deputy CEO of "VNII NP", Alexander Danilov and Head of the Institute Laboratory Maria Kalinina spoke about the current state of the domestic oil refining and its readiness to meet European standards, and also about the state of the domestic diesel fuel additives industry. In Russia wear-preventing agents, promoters of inflammation, depressants and detergents are produced and developed, but the oil companies are not in a hurry to use them. These products often do not have proper certification in Europe despite a lower cost than imported analogs, so the oil companies are afraid to use them not to impede the supply of fuel to their main markets. However, much more serious problem is that only five Russian oil refineries are capable to produce Euro-5 fuel: in Perm, Kstovo and Ukhta of "LUKoil", YaNOS of "Slavneft" and TNK-BP`s Ryazan refinery. Rosneft, the largest refiner of Russia, does not produce Euro-5 at all. Only nine Russian oil refineries could partly produce fuel under less strict Euro-4 standards, they lack capacities to produce Euro-4 only.

Question from the audience about who needs the introduction of euro-standards of fuel quality in Russia if neither oil companies nor vehicle fleet are ready for it, nor ordinary consumers which can`t buy even common diesel on acceptable prices remained unanswered. Version about its necessary for State is not entrusted. According to Fares Kilzie, the head of Creon company, the cosmetic and image modernization of Russian oil refining will soon put it in an impasse. Moreover, the last regulatory actions of Ministry of Energy have showed the incompetence and inefficiency of officials in the agency compared with the managers of oil companies who can justify anything they need. The only solution in conditions of obsolete Russian refineries and lack of desire to develop it is the removing of barriers for the quality fuel import in Russia from other countries.

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