15 февраля 2011

Gasoline 2012: Agenda

The tension on the Russian petrol market gets higher as it ceases being the market. Industrialists desire a certainty, not hysteria, which now could have unpredictable consequences

In the April of this year traditional Creon conference "Gasoline 2012" will take place. Although there`s a lot of time to the activity, the interest to the industry`s event is already substantial. It`s unlikely that any other sector of Russian oil, gas and chemical industry attracts keener attention of business community as gasoline market. The "gasoline crisis" of last year`s spring became another one in the chain of similar events starting from autumn 2005. The government at that time had asked oil companies to limit the growth of fuel prices and gasoline prices had been rising with "jumps" since then: they grow rapidly and then freeze at the level to jump again later. The price of regular 92 grade gasoline in Russian have increased from 17 to 27 rubles for these years but fuel consumption in the country didn`t fall but instead increased from 26 to 33 mln tons of gasoline per year. This market growth has ended just in the last year.

The gasoline in Russia is quite expensive as retail prices for 92 grade and American Regular grade are nearly the same for a number of years while the income level in Russia is significantly lower than in US. But there is almost nobody to develop the market of this premium product in Russia. The demand for gasoline is inelastic; unlike US the consumption of the product rises even with abnormally high prices, because quantitative and qualitative level of car use remains low as a car for Russians is mainly not a luxury but an essential way of transportation. You have to drive no matter what the price at gas station. The fact that gasoline had already become a socially important in Russia is clear. It seems that oil companies would be interested to work on this market as more strict environmental standards mean a necessity of additional costs and emerge an excuse for fuel prices raise. It`s likely that increase of prices is the only way for oil companies to get more cash out of petrol business because with inelastic demand additional fuel volumes will be just unsold. The demand in Russian and nearby CIS countries is limited while the export of gasoline to Europe or US is economically unattractive. The only way is to sell more expensive product in Russia. However, only several refineries in Russia are enable to produce premium Euro-4 and Euro-5 grades of gasoline in sizeable volumes.

In general, Russian refinery industry is very distinct one. Lighter oil products output of oil is roughly 50% at Russian refineries while in US and Western Europe this figure is 70 to 90%. In other words, if Russian refineries are as technologically advanced as Western ones, they could manufacture the same amount of gasoline out of halved volume of crude oil. As the demand for fuel in the country is inelastic and the state until recently have stimulated the increase of volumes of domestically refined oil it`s very natural that gasoline output of oil is not growing but has decreased for fifth year in a row. For the recent five years it has dropped from 16 to 14%; more crude oil comes to refineries but less petrol from one ton being produced. The same is true for diesel fuel, the main export product of Russian refinery industry. There`s nobody to update Russian oil refineries, to develop it in terms of volumes and quality. The present export duties system dubbed "60/66" mainly stimulates crude oil export rather then the development of refineries. Crude oil prices in Russia have risen by 17% last year while manufacturers` prices for gasoline have got just 12.5%. The profitability of oil export business has increased significantly as a result. Retail petrol trade is contrary unattractive as the profitability of the business gets lower. Retail operators get almost nothing of recent gasoline prices` increase unlike the state and oil companies. For example, retail prices for 95 gas grade have risen by 2,9 rubles in the last year but the contribution of retail operators was negative as the retail price markup have dropped by 70 copeks.

In practice the only actor interested in development of Russian petrol market is the forgotten Customer and the State that theoretically should represent his interests. But as Head of Creon Fares Kilzie notices, the state regulation of the market in the country is very distinct one. Oil companies traditionally increase prices in the autumn to sell fuel in the spring by "frozen" prices. Agricultural Ministry looks at this as the form of support of Russian farmers but it`s more likely look like an undercover cartel agreement. Sometimes Federal Anti-Monopoly Service discovers signs of real competition laws` violation but even penalties in 1.5 bln rubles are absurdly insensitive for oil companies. Annual revenue of an oil company from gasoline sales exceeds half a billion not rubles but dollars. Common customers receive nothing of these media-backed manipulations. All campaigns are organized with similar scheme. The State represented by Ministry of Agriculture, Ministry of Economical Development, Ministry of Industries and other authorities demand from oil companies some actions not desirable for them like increase of fuel`s environmental friendliness, discounts for farmers, increase of gasoline supply for domestic market and so on. Oilers react with increase of prices explaining it with the necessity of compensation of any investment. Prices get "frozen" after it while the State temporarily lifts all demands.

It`s likely that the situation suits everyone, Mr Kilzie continues, but it`s absolutely not true. With a lack of competent state regulation the market soon turns into bazaar and the nature of bazaar causes scandals, hysteria and clashes. The latter example we witnessed in the last year when "doing all right" oilers engaged in conflict with "underdog" oilers over Euro-3 standard introduction and the State have backed "underdogs". But the "Family Affair" principal will surely work. And prices` increase after March elections will be its most prominent display. Fuel prices in Moscow are already significantly higher than Russian average, additional gas excise tax is planned in the summer, oil companies worried by the stagnation of oil production and it threatens severely to ambitious export projects. The future of accompanies businesses like manufacture of fuel additives and car engines is uncertain too. "- Why the gas is so expensive? - MTBE is expensive. - But why MTBE is expensive? - The gas is expensive itself. - Why the exhaust so dirt? - It`s due to poor gas. - But why the gas is poor? - It does not matter as the engine determines everything. - But what`s the problem with engines? - The gasoline is poor anyway." We organize "Gasoline 2012" Conference to cease such looped dialogues.

We have just one issue to discuss. "By 2012 Russia should have enough gasoline of affordable price and good quality. Who (surname, name, position) should provide the achievement of this goal?" Fares Kilzie is sure that there should be the only and personalized regulator in the industry. But to consolidate opinions and interest and create gaming rules that the regulator should follow strictly, common efforts of all market participants who are going to stay in the business, are necessary.

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