Kazakhstan’s refining industry in trouble

analysis

Kazakhstan’s refining industry in trouble

By SRI ⋅ May 31, 2008 ⋅

Last Monday, Kazakhstan announced that it has temporarily banned the export of petroleum products in a bid to stem price growth on the domestic market. Just in April, the price of diesel fuel grew 6.5 percent and gasoline 3 percent, considerably outpacing inflation, which stood at 0.9 percent.

Kazakhstan has huge oil and gas resources, but the country has been experiencing shortages and price hikes in the cost of gasoline and diesel. This threatens other sectors of the economy, like the agricultural sector, and could further affect consumer spending, already down due to the credit difficulties of local banks.

For the Kazakh government, the price increases are a sensitive issue, as it is trying to keep inflation to single digits after it spiked to 18 percent last year. Just recently, Kazakh opposition parties called on Prime Minister Karim Massimov and his cabinet to resign amid the worsening economic climate.

According to Sauat Mynbayev, the Kazakh energy minister, diesel fuel and gasoline export in the first quarter of this year increased by 50 percent compared to last year, with most exports going to other CIS countries.

This is the result of not only the record global price of crude oil but also of the growing prices of petroleum products in Russia, the prominent exporter of oil products in the CIS. Russia has also implemented an export tax on both crude oil and petroleum products.

Foreign demand for Kazakh crude, and especially for its petroleum products, has increased significantly over the last year. Increases in global prices, and more specifically, Russian export taxes, have fueled the demand.

However, the main causes for the shortages of petroleum products in Kazakhstan are the antiquated, out-of-date refining industry and a lack of a comprehensive strategy for the downstream sector of the domestic oil and gas industry. Unlike the upstream sector, the refining sector has remained largely in the state’s possession. It has not received high levels of FDI like other parts of the oil and gas production sector and remains outdated and only partially integrated into the broader Kazakh energy infrastructure.

Kazakhstan has three refineries - in Atyrau (Western Kazakhstan), Shymkent (Southern Kazakhstan) and Pavlodar (Northern Kazakhstan). All three are remnants of the Soviet era and struggling to keep pace with current standards and demands. KazMunaiGas, the main retail marketer in Kazakhstan, owns directly the refinery in Atyrau and controls the refinery in Shymkent through its 50 percent joint venture with Chinese CNPC. The Pavlodar refinery is owned jointly by the government of Kazakhstan and MangistauMunaiGas, a Kazakh oil firm recently identified as a possible takeover target by KazMunaiGas.

The total refining capacity stands at 345,093 bpd — but last year, only around 193,000 bpd of refined products were produced. This was the result of disruption in service due to regular upgrades of facilities, and, more importantly, the consequence of the dire state of the Kazakh petrochemical industry.

Like most industry in Kazakhstan, the refineries are not well integrated into the domestic economy. Prior to the break-up of Soviet Union, these refineries were part of a broader regional network, planned and built mostly to satisfy the economic needs of the Soviet Union, not Kazakhstan. Therefore, Kazakhstan’s oil and gas infrastructure is closely tied not just to Russia but also to Uzbekistan.

As a result, Kazakhstan’s refining configuration is not suited to its internal needs. The Atyrau refinery is the only refinery that can process domestic oil produced in the region. The Pavlodar refinery does not have connections to the most prolific producing region of the country and depends on Russian oil. The Shymkent refinery currently uses oil from Kazakh fields at Kumkol, Aktyubinsk, and Makatinsk, but utilization is low because it is unable to process other oils.

Furthermore, as the government’s aim is to keep the domestic prices of gasoline and diesel fuel low, the oil companies have no incentive to produce refined products domestically. In the past, the government has forced the oil producers to allocate a portion of their crude oil output to domestic refiners, essentially introducing a crude oil tax. It also frequently imposed bans on export of specific petroleum products like fuel oil during the heating season and diesel fuel during the harvest season.

These government actions have lead to a further distortion of the market. The refiners could not project domestic demand and often decreased production as a result of the government’s attempts to keep the retail prices artificially low.

The shortages used to be corrected by importing petroleum products from Russia. However, rising demand for both crude oil and the introduction of export tariffs by the Russian government, have made this option far more expensive than in the past.

Additionally, as the prices for petroleum products have increased globally, the refiners began to export oil products overseas. Due to the low level of technology of the Kazakh refineries and the resulting poor quality of the products, they were often re-refined in other countries like Ukraine before being moved further to European markets. While this strategy was not profitable in the past, Russia’s energy policies and the rise of prices for petroleum products have made it quite attractive.

Kazakh authorities are now facing serious challenges in respect to the domestic refining industry. The Soviet-era technology and infrastructure are not able to keep up with growing demand for petrochemical products and with new developments in the industry.

Unfortunately, the government is trying to resolve this situation with methods that seem to further impede the market for the products and discourage investment in the industry. The refining industry is a capital intensive industry, and the current investment climate in Kazakhstan hardly gives potential investors the confidence to make the necessary capital expenditures for upgrades.

The government is seemingly lacking a comprehensive strategy in respect to the domestic downstream sector. While the existing infrastructure should theoretically be able to ensure supply of refined petroleum products for the country (at least in terms of pure capacity), the technologically outdated refineries are unable to produce quality products in sufficient quantity. Furthermore, domestic economic policies aimed at making gasoline and diesel fuel available at low prices prevents the refiners from making sufficient capital expenditures to upgrade existing facilities or build new ones.

(Silk Road Intelligencer)