The Fuel Market: Three Myths and What Can Be Done

On fuel, Part 3: what is to be done?

I have read all the comments on my post about fuel carefully, and I have concluded that both ordinary people and our national companies are far removed from reality.

There are a great many myths. I would like to dispel a few of them and then discuss what can be done to bring down the price of gasoline in Kazakhstan at least somewhat, though that is, frankly, very difficult.

Myth 1

"How can it be that oil is getting cheaper while gasoline is getting more expensive?" Our people are a curious lot: they watch the price of oil in US dollars and the price of fuel in tenge. Look at both products in the same currency and you will see that in dollar terms both fuel and oil are getting cheaper. In tenge, oil is not getting cheaper (because of the devaluation), while fuel is getting more expensive, because part of the cost of fuel depends on the US dollar, and excise taxes were also raised after the devaluation.

Myth 2

"How can it be that we have so much oil, yet gasoline keeps getting more expensive?"

Unfortunately, when the whole oil strategy was being built, it was determined at the time licenses were sold that 30% of oil would be supplied to the domestic market and 70% to the foreign market. Large players such as Tengizchevroil do not supply oil to the domestic market at all. Now let's do the math. We produce 75 million tons, of which 25 million tons come from Tengiz and 12 million tons are gas condensate. That leaves 38 million. Thirty percent of 38 million is 11.4 million tons, while the needs of our three refineries are around 15–16 million tons. So, in reality, given the fall in production from 80 to 75 million tons (the result of our brilliant subsoil use policy), we have been left without oil for our own refineries. A couple more years of such subsoil use policy, and our modernized refineries will stand idle for lack of feedstock.

Myth 3

"Our gasoline is of poor quality, so it should cost less than Russian gasoline, which meets Euro-5, while ours is only Euro-2."

In fact, let me let many of you in on a little secret: their high-quality Euro-5 gasoline is much cheaper than our Euro-2.

Why? Because when high-quality Euro-5 is produced, the yield of light fractions in Russia rises to 85–90%, while ours barely reaches 60%. The higher the yield of light fractions, the lower their unit cost, because the losses and the fuel oil are charged against the light fractions. For illustration, AI-92 gasoline costs $500 per ton, while fuel oil costs $60–70 per ton at most.

Those are the three main myths on our fuel market.

Do we have any room to solve the problems of the fuel market? Probably we do, although not much.

1. Many people are right to say that middlemen need to be eliminated. Kazakhstan is in a paradoxical situation: subsoil users themselves hardly refine any oil, because it is practically impossible to get access to a refinery. Trying to solve this through market mechanisms and corporate law in Kazakhstan is impossible (alas, that is the objective reality). So it has to be solved through legislation. Amend the law on the circulation of petroleum products and allow only three categories of participants to have oil refined at the refineries: subsoil users, the refinery itself, and anyone who has a retail network. No one else. Of course, this is a somewhat non-market approach, but alas, in Kazakhstan it will not work any other way.
2. The tax systems of Russia and Kazakhstan. Unfortunately, one of the reasons we cannot resolve the problem of the border regions is the difference between the two tax systems. To bring our tax system closer to the Russian one in any way, the only option is to build the vehicle tax into the excise tax. Formally, fuel prices would then rise, but people would no longer bear the cost of paying vehicle tax. Tax administration would be reduced, and the use of alternative energy would be encouraged.
3. The refineries need to be modernized faster. However banal it may sound, in 25 years we have not built a single refinery; everything was inherited from the USSR. The management of all the refineries, no offense to KazMunayGas, is far from the most efficient. Take the Atyrau refinery, for example: instead of building units to increase the depth of oil refining, it built an aromatics unit. Who needs these intermediate products without a value chain? As a result, the aromatics unit is barely alive because there is no one to sell to, and the entire loan burden for this unit falls on ordinary refining dating from the 1940s. We lost time and did not solve the fuel problem, even though it is far more urgent than the mythical petrochemical complex, and no one knows when that will be built.

Instead of building car plants with zero added value, it would be better to modernize the refineries themselves. For them, localization of production is 100% and demand is guaranteed. Reading the news now, I understand that our refineries will be modernized by 2019 at best.