I P WE EK


Round-up


regime should not create disincentives to industry development. At the moment these favour throughputs over refining efficiency,he said. In addition,differen- tial export duties on light and heavy products discourage investment in major conversion projects. TNK-BP favours equalisation of product duties to support industry development,he stated. Baudrand concluded his presentation


by showinghowTNK-BP plans to invest in more upgrading capacity at both its refineries to meet the tightening fuel specifications and changing fiscal regimes while increasing competitiveness. He also showed how,over the next five years, the company plans to set up and develop international trading operations.


The Russian session prompted a number of questions from the floor


Meanwhile,Chevron Lummus technolo- gies for isocracking,hydrofinishing and hydrotreating have been licensed to a total of eight Russian refineries across the country and operated by five dif- ferent companies,which proves the attraction of the Chevron technology, according to Cordry. In terms of exploration in Russia,


recent activity has comprised the 2008 exploration programme in western Siberia with Gazprom Neft on the Aikhettinsky and Pyakutinsky licence areas. In June 2010,Chevron signed a heads of agreement with Rosneft for the exploration of the Shatsky licence in the Black Sea. [The Shatsky licence is to the seaward of the Tuapsinsky Trough,which ExxonMobil is to explore with Rosneft.] According to Cordry,Chevron brings a


number of skills to a collaboration – it is a world leader in difficult environments (deepwater,Arctic and heavy oil produc- tion); it has high level organisational skills and a proven record in project management; and,in terms of opera- tional excellence and environmental stewardship,it is world class. He then went into further detail,


noting that Chevron has been involved in Arctic exploration since the 1960s and that it is currently the largest producer of heavy oils among the IOCs,with annual production of around 32mn tonnes. In project management terms,the com- pany is involved in over 40 projects,in which the Chevron share is over $1bn. Next to the podium was Didier Baudrand,Executive Vice President Downstream and Executive Director, TNK-BP,whose presentation was enti- tled ‘Focus on core assets’. He began by noting that TNK-BP’s downstream oper- ations currently account for 33% of EBITDA earnings,adding that the role of the downstream is to maximise the value of crude production. Refining cover will rise organically from 37% of


28


production in 2010 to 47% by 2016,he said,with marketing cover (gasoline and other product sales) forecast to rise from 40% to 75% over the same period. He then went on to showthat there are


a range of options to optimise the port- folio. The company’s two refineries at Ryazan and Saratov are competitive within Russia,but there is a need for investment in deeper cracking and improving product qualities,he stated. The company has a high quality retail net- work but lacks coverage outside Moscow at a time when rivals are investing in new offers,he continued. In terms of logistics, the company is well placed for exports and key markets,but marketing growth will require the development of product swap arrangements with rival refiners. Finally,there is a need to develop interna- tional trading to capture the CIF/FOB (cost,insurance and freight/free onboard) differential,he said. Current plans for changing fuel


specifications is another downstream challenge. Baudrand showed that Russia is trying to tighten gasoline specifica- tions twice as fast as in the European Union (EU) in order to catch up by 2015. He claimed the projected phase out of 92 octane gasoline by 2012 or 2015 is unre- alistic as it still accounted for 66% of the market in 2010. In addition,meeting the higher specifications usingMTBE (methyl tertiary butyl ether) is unrealistic on both cost and availability grounds,and the only other alternative is the import of up to 20mn t/y of 95 octane gasoline – a move Baudrand regarded as ‘unaccept- able’,concluding the phase out date will have to be delayed. He then went on to show how the


Russian fiscal regime in Russia – most notably the export duties regime – are a major source of value for Russian refineries. His view was that although a certain level of subsidisation is essential for the Russian refining industry,the fiscal


Diversity and collaboration The next presentation was by Torbjorn Becker,Director,Stockholm Institute of Transition Economics,Stockholm School of Economics. He started his talk on ‘Diversity and collaboration’ by looking at Russia’s post-crisis strategies given that Russian GDP/capita at $8,600 was comparable with Brazil but way behind even the EU average of $33,000. He showed the way that Russian financial reserves had fallen more rapidly than debt contracted in 2008 and the close linkage between oil prices and Russian GDP/capita,concluding that Russia remains heavily dependent on its resource wealth. He also showed that Russian oil reserves represent 6% of the global total,while gas reserves account for 24% of the world total. He then explained that natural


resources are not enough to close the gap with richer nations’ GDP/capita. The reason being that,as the World Bank had identified,the real sources of wealth are composed of three elements – the ‘natural capital’ made up of the resources; the ‘produced capital’,all the wealth producing equipment and ser- vices; and ‘intangible capital’. He then showed how the ranking of countries changes as the three elements are summed. According to theWorld Bank analysis,


intangible capital is made up of educa- tion/schooling 36%,foreign remittances 7% and predominantly the ‘rule of law’ 57%. In short,he explained, the key dif- ferentiator in the wealth of nations is defined property rights and individual rights and the ability to defend them. Russia has made commitments in this area,but Becker wondered if rising oil prices will reduce the urgency of reform in Russia. There then followed a lively panel ses-


sion. Chris Weafer,Chief Strategist, Uralsib Bank,noted that Russian profes- sionals are ‘well educated and hardworking’. Darrell Cordry confirmed


PETROLEUMREVIEW APRIL


2011


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