Oil refining in Kazakhstan is reaping the rewards of the extended modernization of domestic oil-refineries and ineffective government administration, while the regime is still forced to balance the demand for fuel by shipments from Russia.
With the annual oil extraction of almost 80 mil. tons and export of over 60 mil. tons, the republic cannot provide itself with adequate volumes of oil products. Especially difficult is the situation with high-octane types of oil. Annual consumption of oil AI-92 makes up 3,3 mil. tons, however, domestic oil refineries meet the demands of domestic market only by 70%; the deficit is covered by imports from Russia.
Around two years ago while fighting the deficit, the government, trusted the “invisible hand” of the market and stopped regulating the prices for oil products, but this didn’t solve the problem. In the beginning of this year fuel prices have grown a few times already. Fall of 2017 wasn’t an exception. In september AI-92 oil has gotten more expensive two times, and the by the end of the month its price was 147 tenge.
But the oil didn’t even sell at this prices everywhere. Some of gas stations would only sell it by coupons, some didn’t have fuel at all, so the price hike continued. Nonetheless officials announced that there is no talk of fuel deficit, and the situation that unfolded is caused by a little shortage. Whatever the case is, starting from January the price at gas stations has risen from 135 to 155 tenge and this isn’t the limit. The government is planning continuing importing from Russia (where the price is higher than in Kazakhstan) and as a result, prices will keep rising.
The reason for the situation at hand is the dependence on Russian imports, ineffective and non-transparent management of extraction and refining of oil. For example, in ministry of energy they themselves approved a plan according to which in sepetember-october two out of three oil refineries (in Atyrau and Pavlodar) will be stopped for renovation. Seems like everyone should be ready for that, and thus there shouldn’t be a problem with oil reserves. Knowing of the upcoming planned renovations, they could’ve calculated what volume, from where and into what regions should be supplied. But that’s in theory; on practice the situation turned out dismal.
This summer, due a rise in prices on the border from 517 to 572 USD/ton a lowering happened (from monthly 90 thousand ton in the first 5 months down to 35-50 thousand ton) of 92 oil from Russia. At the same time a cruel joke with the price of motor fuel was pulled by devaluation – from 314 to 340 tenge/USD. In tenge equivalent price of imported oil at the border has risen from 160 to 196 thousand tenge/ton.
Traders, fearing administrative cases and fees for supposed price-fixing, didn’t increase imports of expensive Russian oil (an agreement that “justified import and justified prices will not be interpreted as a price-fixing”, was signed by the ministry of energy and anti-monopoly institution only on Oct. 4), oil tank bases and some gas stations limited sale of oil in anticipation of price hikes for it. All of this was quite predictable, and fuel crisis could’ve been avoided, but…Despite the fact that the government constantly reminds us that we live in the conditions of market economy, domestic refineries, work on their own terms, and oil products belong to those who supply oil to plants. At the same time raw materials for them are supplied by subsoil users not at the market price by at the much lower one (conditions are established via contracts for subsoil usage). Without that refineries in the country would have stalled due to high prices of products produced by them. It is worth noting that the depth of refinement there is very low (65-68%0 while in US and EU countries this index is around 87-92%.
The situation can be fixed and fuel independence could be achieved, having conducted modernization of refineries. However, the terms of ending of “Integrated plan of development of refineries of Kazakh Republic for 2009-2015” passed by the government in May of 2009 that oversees restructuring of three current plants and increase of volumes and depth of refinement in 2015 up to 17,5 mil. ton and 90% keep changing date. Today it is moved to the second half of 2018.
In that time price of renovation of refineries has grown from starting 4 bil. to over 6 bil. USD.
Promises are made that after modernization refineries will increase production of AI-92 2,2 times, AI-95 and AI- by 9,6 times, diesel fuel almost three-fold and that next year refineries will more than cover needs of domestic market in these products. However, it is unlikely that powers of three plants will be able to get fully loaded, since there won’t be enough oil. Annual growth in oil reserves in the country lags behind the volumes of oil extraction by around 22%. At the deposits, from which the oil goes to the domestic market, volumes of extraction are falling, and one cannot count on such large projects as Kashagan, Tengiz, Karachangak: they work based on agreement of distribution of production.
Thus,reliance on outside resources will be preserved, and someone in Kazakhstan will continue receiving margins form lowered oil prices and high wholesale oil prices, formed at the Russian level. A periodic deficit in fuel will also be preserved, since any country, having first satisfied its own energy needs, only exports excess product, thus such exports, due to possible acts of God are insecure in character.
Means taken by government – firing of vice-minister of energy together with vice-president of state company KazMunaiGaz miraculously coincided with large imports o Russian oil, and falling of dollar rate (which allowed to lower wholesale prices for imported oil) don’t solve problems at the fuel market.
Instead of various declarative statements, administrative pressure, search for conspirators at the fuel market, government should start working on changing of tax policy. In particular, in order to stimulate oil exports, they need to get rid of VAT for domestic refineries and introduce that tax on exported materials. Lower (down to zero) import customs fees for oil-refining equipment, introduce a floating rate excise, which would automatically go down in the period of high oil prices an vice versa. They need to optimize expenditures by embedding refineries into hierarchy “drill-hole to the gas station”. Formation of government oil reserve will not only load up the powers of plants, but having rid them their existing scheme will give them funds for development. In the opinion of specialists, toll manufacturing of refinement lower the volume of paid taxes by over two times, and decreases profitability by almost twenty times.
Having a strategic reserve of oil products in case, for example of refineries closing for renovation, will rid the country of panic demand, and the stock market trade of fuel will increase transparency of fuel and lubricants market. We note that since in Russia VAT and excise tax are comparable to import taxes, oil-refineries don’t care where to export the oil; for export or to domestic market and there are no issues.
Creation of common energy market by 2025 within the framework of EAEU (including oil products) demands equalizing of prices for oil products throughout the EAEU space, and thus harmonizing of tax legislature and accepting of single mechanism of price formation at the fuel market. For now, price formation in Russia and Kazakhstan is very different. Given equal expenditure for refinement and transporting into Russia, in the structure of prices of oil above 50% is part of taxes and customs (VAT, income tax, excise tax, mineral tax) and around 6% is raw oil. In Kazakhstan, however, around 60% is raw oil and around 15% taxes.
At the same time falling of oil quotes at world market doesn’t lead to lowering of oil prices. Thus, in May of 2008 when a barrel of Brent oil was 120 USD, a litter of AI-92 at the gas station was sold for just 87 tenge. In October 2013 this ration was 107 USD to 115 tenge. Today, with the price of barrel at 57 USD, litter of oil will be 155 tenge.
This allows suppliers of raw materials to refineries (they are also owners of produced products) to preserve their profits. Five largest companies – TOO Petrosun, AO KazMunaiGaz Pererabotka Marketing, TOO Petroleum Operating, TOO South Oil, Litasco SA, controlling 80% of wholesale market of oil products, form prices that are advantageous to them. Large number of participants will change this.
FROM THE EDITORIAL TEAM: At the same time, based on the words of energy minister Kanat Bozumbaev said by him in the corridors of the government, average price of oil at the end of October- early November should be around 160-161 tenge/litter, thus it will grow. Minister explained high price with the necessity of importing from Russia, but promised that a lowering is planned. In October share of Russian oil, in his words, should make up around 40% and in November a lowering to 30% is expected and down to lower than 20 in december.
