Fuel Shortages: New Refineries, Feedstock and Mini-Refineries

I will not go into who is involved, how everything is organized and so on. Instead, I will simply write in general terms about the current situation.

First, the overall problem: the fuel shortage in Kazakhstan.

The shortage of fuel in Kazakhstan results from insufficient capacity at our refineries. At present it amounts to about 800,000 tons of AI-92 gasoline and 500,000 tons of diesel fuel. Under the current arrangements, through manual management, our refineries are more or less fully supplied with crude, so the main question remains importing the shortfall from abroad. The difference in fuel prices, cross-border trade and an emergency shutdown of a refinery in Russia have all made importing fuel very difficult. As a result, efforts to secure fuel supplies are now being made in manual mode. That is the current short-term situation. The fall of the ruble against the dollar will significantly help our Ministry of Energy in resolving this problem.

So, one way or another, the problem will be resolved for now.

The second issue on the agenda is solving the problem by reconstructing three refineries and building a fourth (as an addition to existing facilities).

At present the three refineries together can process about 14.5 million tons of crude. After reconstruction, processing is planned to rise to 18 million tons, and with the construction of the fourth refinery the total volume will reach about 24 million tons.

The main question here is how to supply these refineries with feedstock, and how to sell the surplus products, since the yield of light products will rise and overall refining volumes will increase.

On the first question, things are complicated. Reserves at small and medium-sized fields are running out, and the large giants are unlikely to sell crude on the domestic market, since their contracts allow them to export almost all of it to countries outside the CIS (Tengiz, Karachaganak and Kashagan). They will sell on the domestic market only if it is profitable, and with domestic price regulation that will be hard to achieve.

A few years ago producers were forced to supply about 25% to the domestic market; now the figure is 35%. The Ministry of Energy sets export quotas for each subsoil user, which lets it regulate supplies to the domestic market. But the trend is that this share will have to be raised every year, which will provoke discontent among small and medium-sized subsoil users. Such manual management will lead to nothing good. To keep the share at its current level, new fields need to be brought into production and exploration and extraction need to be encouraged. Unfortunately, exploration and production are not encouraged in any way here; on the contrary, decision-making is becoming more complicated. Unlike the large players, small and medium-sized subsoil users have no resources to influence the situation, and they have to either go through the circles of hell or reach an accommodation. In short, I can predict that once the new refineries are commissioned, a new problem will emerge: securing feedstock, which is simply a paradox for an oil-producing country.

As for sales, there are of course concerns, but excess capacity will increase competition in this market, which will affect refining fees and the margins of wholesalers and traders, and ultimately fuel prices. In that sense, if a new refinery is to be built, it is better to build it separately from the existing ones, since that would strengthen competition. The refineries may not run at full capacity, but that would allow us to increase exports, and exporting higher-value products is always more profitable than exporting raw crude and is less exposed to price swings.

If our gasoline is cheaper, I do not think Russia will turn it down. Moreover, KazMunayGas should think about developing its own network of filling stations in Russia rather than in Romania :), since selling through its own network in Russia would be very profitable and would help solve the sales problem, at least partly. We are afraid of competition, or so it seemed to me from the statements of our esteemed oil executives.

Now, mini-refineries. One has to understand that simple atmospheric distillation into three fractions (light distillate, or straight-run gasoline, diesel fuel and fuel oil) is not economically viable at all (I can run the numbers if anyone needs them). Of the three products, only diesel fuel can be sold at a reasonable price. Straight-run gasoline, even with super additives, can be raised to 80 octane at most. Producing higher-quality products requires units that can only be installed at large processing volumes (for example, reforming, catalytic cracking or hydrocracking units, and so on). That is why mini-refineries in Kazakhstan are currently associated only with gray schemes, in which various blending schemes are used to obtain two-fraction petroleum product mixes that are then exported. However, this too is becoming unprofitable, because duties on such products have risen and railway tariffs have gone up. As a result, crude oil delivered to its destination by pipeline, even after all taxes, now costs less than the petroleum products mentioned above. For these reasons, I believe mini-refineries will not be the panacea some people think they are, and they will do nothing to solve the problem of increasing fuel supply.

As for the Atyrau refinery, the logic was unclear: why did they first install units for producing aromatics and only then units to increase the yield of light products? For Atyrau, what was clearly needed first was units to increase the depth of refining, with the move into petrochemicals coming only afterward. Moreover, I do not understand at all where the benzene and ortho-xylene will be sold. Russia has enough of its own production, and shipping such products to China would be very expensive; I think they have enough production of their own as well. The marketing is unclear. We have no domestic demand for such products. It would be good if KazMunayGas showed its business plan for petrochemicals, or is this simply the implementation of the State Program for Accelerated Industrial-Innovative Development (SPAIID)?

At the Pavlodar refinery the optimal scheme is now in use: swap operations. So everything is fine with Pavlodar. True, Pavlodar officials are complaining that the switch to tolling (customer-supplied) feedstock affects the regional economy. For the country as a whole there is no difference, and for Pavlodar the change exists only on paper.

These are a few brief thoughts on this set of problems.