Taxes

Tax reform and refinery upgrades impacting Russia’s vacuum gas oil exports

At Tuapsinskiy refinery on August 14, 2006. “Û‡ÔÒËÌÒÍËÈ Õœ« 14 ‡‚„ÛÒÚ‡ 2006.

Russia’s tax reform and refinery upgrades are changing the pattern of its vacuum gas oil (VGO) production and exports. VGO is used as a feedstock in fluid catalytic crackers for the production of clean products, such as gasoline, diesel fuel and base oil.

Export tax changes are pushing down Russia’s refinery runs and production at the margin, according to Robert Campbell, head of oil products research at London-based consultancy group Energy Aspects.

Primary processing at Russian refineries has been consistently down this year as the tax reform hit refinery economics, while boosting the allure of exports. Russian refineries processed 139.7 million metric tonnes during the first half, 1.4% lower than the same period a year ago.

Partly to offset less profitable primary processing, and also as upgrade projects are come on stream, refineries are launching secondary units that use higher volumes of feedstocks such as VGO, which were previously destined for the export market. More is going into conversion units, said Campbell. Overall, VGO output is probably down quite significantly year-on-year, Campbell said.

Bashneft Joint Stock Oil Co. (Bashneft) said that it has completely stopped VGO production at its three Ufa refineries in the second quarter, after reducing the feedstock output by 93.6% in the first quarter. The drop in VGO output is linked to the overall reduction of refinery runs throughout Russia, said Campbell. In the first half of the year, Bashneft reduced throughout at its refineries by 14.9%. Lukoil reported 6.8% less refining throughput in the first quarter, although it said it plans to keep 2015 refining throughput unchanged from 2014.

However, some refineries, such as Tuapse, Rosneft’s oldest refinery located on the Black Sea Coast, have increased VGO production. Tuapse’s recent capacity expansion from 5 to 12 million metric tonnes per year, involved the construction of an entirely new refinery in the site, with a Nelson Complexity Index rating of about 8 and with 90% light product yield. Automotive fuels, which are now being produced in the Tuapse refinery, are classes 4 and 5 (equivalent to Euro 4 and Euro 5). The expansion included the construction of a vacuum gas oil hydrocracking unit and hydrotreatment of diesel fuel, a hydrogen unit, a naphtha isomerization and hydrotreatment unit, a catalytic reformer, sulfur production unit and a flexicoker.

The Black Sea has recently seen significant new volumes coming from Rosneft’s Tuapse refinery following the upgrade. Prior to the upgrade, Tuapse produced and exported 30,000-60,000 metric tonnes of VGO a month. Following the upgrade, it is doubling production and exports to 120,000 metric tonnes per month. It has also set up a VGO storage terminal for this purpose.

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