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Russian Downstream ? Quo Vadis

The Russian oil giants have been partly catching up with their Western competitors, at least what the reserves of oil equivalents are concerned. The new created company, after the merger of Yukos and Sibneft, possesses 19.

The Russian oil giants have been partly catching up with their Western competitors, at least what the reserves of oil equivalents are concerned. The new created company, after the merger of Yukos and Sibneft, possesses 19.4 billion barrels of oil equivalents which puts it worldwide on the third place, only behind Exxon Mobile and Royal Dutch/Shell but ahead of BP.

After a period of high oil prices in recent years, the Russian companies are over flooded with cash and crude. However, it is widely acknowledged that they have to expand their operations into the downstream business outside the country, in order to diversify their activities and build up a company structure more similar to global oil giants.

The CIS and Eastern Europe have obviously been the first choice. These countries are well known by the Russians and already large importers of Russian oil and gas. They are also important transit countries for Russian energy exports to Western Europe.

Until now, the efforts have only been mildly successful. Lukoil has only three refiners outside the Russian border. It acquired the Odessa refinery in the Ukraine in 2000 where it now owns 97 percent. The capacity of the refinery amounts to 76?000 barrels per day. Already in 1999, the company bought a part of the Neftochim refinery in Burgas, Bulgaria. In 2000 Lukoil bought an additional stake and is now of full control of the company. The facility has a daily capacity of 210?000 barrels. Also in 1999 Lukoil purchased a majority stake in Rumanian Petrotel.

Yukos, after the merger the biggest Russian oil company, purchased a majority stake in the Lithuanian AB Mazeikiu Nafta, the only refiner in the Baltic States. This was Yukos? first acquisition of a downstream asset outside Russia. Sibneft, it new partner does not possess any stakes in foreign refineries.

Tyumen Oil Co. (TNK) owns the Lisichansk refinery, which is located in the Lugansk region of East Ukraine. The facility which was bought in 2001 has a capacity of 16 million tons a year. Until now, the TNK management preferred not to acquire facilities but to cooperate with foreign partners. The company believes to lack the inside knowledge of foreign markets. However, this could drastically change after the new joint venture with BP.

But why does it make sense for Russian companies to diversity outside their border at all? The downstream business has lower margins than the upstream business but the income normally proves to be quite steady which is an advantage in times where the oil price could be significantly lower than today. Furthermore, business outside Russia is a hedge against all the economic and political risks in the Russian market. Yukos for example has realized that it is essential to look for new markets for its abundant crude. The issue will become more important as the production of Russian oil companies is likely to further grow in the future.

In their ambition to expand outside Russia, companies have sometimes met stiff resistance. The Polish government for example has refused to sell the Gdansk oil refinery on the Baltic Sea to Russian bidders. There is still a wide spread fear of a Russian domination in these regions and it will probably takes several years to overcome it.

A typical example is the Romanian announcement to privatize Petron, the country biggest refiners, this week. The International Monetary Fund has urged the country to accept the highest bid to narrow the budget deficit but it was reported that strategic issues and long term development plans would also be taken into consideration. At the same time, the Romanian Industry and Resources Minister noted that he would be very displeased if Lukoil, that showed interest in Petron, would acquire the company and monopolize the country?s refinery market.

With such a starting position, Russian oil majors, will find it increasingly difficult to build an international network of downstream facilities and catch up with their international peers. In the best position is probably Tyumen Oil which can leverage the new connections with BP.

Author: Andreas Wild

Source : Neftegaz.Ru