There will be a price to pay for a single market with Russia

In Kazakhstan, just in the months of January-October of 2016, oil prices went up 12.3% and in the same period of the current year by 20%. Plus, recently KazMunayGaz increased the wholesale price of the 92-type gasoline up to 161 tenge/litter, explaining it with a necessity to compensate the expenses for a more expensive imported gas from Russia. Meanwhile, EAEU is planning to create a single common market for oil and its refinement products.

Does that mean that as a result oil prices in Kazakhstan will rise to the level of Russian?

Is there a chance that cheap Kazakh gas will be exported to Russia and the deficit will be formed again, but not due lowering of imports but rather increase in exports?

How will oil price quoting happen in Kazakhstan and will the government be able to retain their rise, and if it will be, through which domestic factors?

We asked Kazakhstani economist S. Smirnov, specializing on the issues of the oil and gas sector of the republic, to answer these questions and comment on the situation as a whole.

Price hikes

Ministry of energy of Kazakhstan is forecasting that finishing up of reconstruction of Kazakh refineries will allow to not only provide the domestic market of the republic with oil products of ecologic classes Euro-4 and Euro-5 but to also export surplus. However, there is no talk of what the price tags at gas stations will be

Meanwhile, official statistics show a stable growth of oil prices in the republic: for the period from Jan-Oct 2016, gas price went up 12.3% and for the same period of this year by 20%.

Authorities of Kazakhstan put responsibility for price increase on Moscow, and promise decrease in the prices. However, first the talks were of going back to the norm of gas prices by the end of Ocotber, and now this date has been pushed back to end of November. This is where the decrease of the share of imported Russian oil is expected to go down from 40% to 25-30%.

However, this is not first year such promises are made. For example, last year the authorities claimed that “due to timely decision on deregulating prices for 92-type gasoline and diesel fuel, risk of occurrence of deficit on such fuels reached a minimum”. Yet, we ended up with a deficit. I will note that the KMG Trading company, that makes up for the lack of fuel on Kazakh market (daughter company of KMG International) oversees import of gas Ai-92 on a profitless basis.

It looks like shrinking of the share of imports in the fuel balance of the country likely won’t lead to lowering of fuel prices. Its cost has long been determined by factors, on which Kazakhstani government doesn’t have a direct influence. Among these are oil quotes on the world market, exchange rates of currency, balance of wholesale and retail prices in the country and abroad.

Moreover, Kazakh authorities voiced the cost of modernizing of domestic refineries. If initially it was estimated at 3.5 bil. dollars, today it is 6.06 bil. dol. (ANPZ – 3.38 bil, PKOP -1.85 bil, PNHZ – 0.83 bil.)A hefty rise in the cost of modernization, conducted mainly using borrowed funds, which will have to be returned (with interest), doesn’t fit in with the hopes for prices decreases.

There need to be structural reforms in a whole slew of directions. Thus, by 2025 within the frame of EAEU there are plans to come up with a single energy market.

Today, approaches to tax and customs policy in participant states of EAEU drastically differ. Thus, in order to even out prices for fuel and lubricants throughout the economic space of the EAEU, there needs to be harmonization of tax codes and passing of a single mechanism of price-formation at the fuel market; and this needs to be done now, otherwise difference in taxes, tariffs on gas and other fuel in participant countries of EAEU will constantly violate normal market relations in this sector.

However, it is already apparent that in the process of forming of a single fuel market of EAEU, Kazakh gasoline will get more expensive, approaching Russian prices. Otherwise the risk of its overflow into adjoining countries is preserved, and as a result, there is deficit in the domestic market.

Tolling operations with China showed their unprofitability. It won’t be possible to contain price hikes via domestic factors. Tax policy is built in such a way that it is more profitable for oil companies to send crudeoil for export, then to refine it within the country. This is probably why, in order to fight price hikes for fuel, appropriate institutes offer consumers such “original” recipes as forgoing buying oil at the gas stations with increase prices, ban on export of oil products, switching to natural gas for transporting etc.

All of these recipes turned out to not work. Instead of various declarative statements, original recipes, administrative switches, looking for conspirators at the fuel market, Kazakh authorities would have to turn to tax system, which is currently oriented on export of raw materials. An instrument of regulation could be a strategic reserve of oil and oil products, in case of some halts of refineries or conducting of commodity intervention for sustaining of desired level of prices. Stock market trade of fuel will increase transparence in the fuel market.

Today they are betting on modernization of refinery sector of Kazakhstan. However, reconstruction of three of them, only gives a temporary relief. Based on estimates of ministry of energy, surplus may remain until 2022-2023. After 2025 growing fuel market of Kazakhstan will again experience considerable deficit of oil and diesel fuel. And this is understandable. Economy of the country isn’t stuck in the state of anabiosis and according to forecasts, consumption of oil products by industries and growing number of cars will keep increasing. Thus, amount of sold new cars in 2010-2015 alone has grown ten-fold from 16.4 thousand to 163 thousand and the growth continues.

Building of the fourth refinery isn’t even planned in the near future. There is still no clarity with regards to location of the plant, its capacity, resource base, target market, dates of construction. Officials “paused for a longer research of this issue”. They are again concerned with what should have been done many years ago. Situation resembles fortune-telling” will it, won’t it.. Even the president’s intervention won’t change anything.

At the relevant agency they are assuming that even if the fourth refinery was to be built, Kazakhstan won’t be able to sell produced oil on other markets. However, in the neighboring Uzbekistan, in addition to three existing refineries with overall capacity of 11.2 mil. ton, they have decided to build a new oil refinery complex with a capacity of 5 mil. tons, that in 2022 is planned to be rented in Jizakh oblast. Enterprise will produce 3.7 mil. tons of motor fuel of the Euro-5 standard, over 700 tons of jet fuel and 300 thousand tons of associated oil products.

At the same time, provision to build a fourth refinery in Mangistau oblast of Kazakhstan was passed back in 1991 by the cabinet of ministers of KazSSR at the time. And if issues with full loading up to capacity of existing  refineries are still not resolved, the low-grade at the international market (30-40% lower than the Brent mark) materials from deposits of Buzachi, Karajanbas, Kalamkas, Jetibay will be enough to load up the new plant.

Looks like the authorities don’t have money or desire for building it. Because this isn’t problematic banks, to save which National fund of the country spared 10 bil. USD. Meanwhile, half of this sum is enough for building a new plant, designed for refinement of Kazakh oil. However, Kazakh authorities, unlike Uzbek ones, are either afraid to compete with Russian enterprises or are lobbying interests of those who fish for mega profits in the murky waters of deficit.

Mini-refinerise of which there are over 30 registered in Kazakhstan, won’t solve the energy problems either. In 2016, their share of oil refinement comprised only around 470 thousand tons of oil (3% of total volume of oil refinement in the country). Mini-refineries are technologically incapable of producing quality types of light (gasoline, diesel, kerosene) oil products and thus a priori lose to large plants in both prime cost and quality. High concentration of tar, carbon, sulfur in gasoline from mini-refineries will inevitably break engines down.

Given the deficit of capacity of gas-processing plants, lack of developed infrastructure and technical capabilities for mass transition of transport to natural gas, there is no need to amuse oneself with dreams of new oil Mecca. Analysis of the situation with regards to switching automobiles in the regions of Kazakhstan to natural gas highlighted an interesting tendency: if in the West of the republic, auto-vehicles use mostly liquefied gas (propane-butane mix) in Almaty, Kostanay, Kizylorda, drivers are accustomed to compressed gas (metane). Because it is impossible to replace one gas for another, a car using natural gas as a fuel, ends up tied to a region. Moreover, practice shows that a growth of demand for natural gas among car-owners already caused a price hike for it and periodical deficit of that fuel type on gas stations.

From the editorial team

From the comments of economist Smirnov it is clear, that the main problem of Kazakhstani domestic market of motor fuel is its semi-market character. In the past, the government had an opportunity to use administrative means to force domestic refinement business structures to allocated negotiated volumes of raw material for refinement on three Kazakh oil refineries, with further sale on the domestic market at lowered, compared to neighbor states, wholesale prices.

After the latest dramatic fall of world oil prices, opportunities of oil-extracting structures to compensate losses at the domestic market through increased profitability of export operations disappeared and thus government was forced to refuse from regulating of wholesale prices for main types of motor fuel. However, at the same time the government makes concessions to population and tries to contain growth of wholesale prices in any way possible.

As a result of these efforts, as well as due to internal problems in Russia, where given the overall surplus o motor fuel, sometimes a temporary deficit forms – due to scheduling of renovations of refineries, one-time issues of technical nature or natural issues volume of imports of Russian fuel this year ended up lower than expected. As a result deficit formed, and since the market was limited in its standard reaction to it by the way of increasing of wholesale prices, a big scandal arose.

Since the fourth refinement in Kazakhstan won’t be built due to absence of raw materials for it, as well as inevitable problems with sales of finished production, in case of its launch , and small refineries aren’t capable of producing high-quality goods, Kazakh motor fuel market in the coming

decades will be balanced through imports, mainly from Russia.

This mean that wholesale prices in Kazakhstan will be reaching toward the level of Russian ones, with some corrections with regard to their structure. In other words they will keep increasing to the level of around 200 tenge/litter. At the same time, any actions of government or local governing bodies are only able to contain the growth of wholesale prices, but only in a certain moment of time and in a certain place. The price for this containment is disappearance of fuel from official sale and discrete price growth. Thus, the issue of deficit of motor fuel in Kazakhstan can only be radically solved after forming in 2025 of a single market with Russia and Belarus, when output of refineries of these two governments will be freely entering territory of Kazakhstan, and wholesale prices will take into account their higher wholesale price, as well as freely react to change in demand and supply in each region of the country. But every Kazakh citizen would have to pay for this, out of pocket that is, and it won’t only be limited to car owners, since the rise in prices for motor fuel will definitely be reflected in the rate of inflation in the country as a whole.

Читайте также на эту тему:  Why are there price hikes, but no oil in Kazakhstan, On Deficit of Gasoline and the Impotence of the Cabinet.


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