Oil-producing Kazakhstan depends on Russia for gasoline. No way out?

Last week, the prices of gasoline and diesel in oil-producing Kazakhstan have spiked for the first time since November 2013. The rise was between 11% and 13%, depending on the type of fuel.

Some Kazakhstani experts predict that there will be more price hikes attributing this to Kazakhstan’s dependence on gasoline imports.

Yesterday, First Deputy Minister of Energy Uzakbay Karabalin said that the price rise was “unfortunate”, Tengrinews reports.

“I said earlier that the price would not change. To be honest, I hoped that there would be no rise but unfortunately we could not avoid it,” Karabalin said at the briefing on Wednesday, August 27.

“Predicting fuel deficit is like saying that communism will come on a certain day, it is of course, difficult. But now we are taking steps to ensure there will be no deficit. We believe that the big difference in the fuel prices prevented our traders from importing the agreed amounts of fuel from Russia. (...) This created a deficit. We believe that in the future there will be no deficit if prices are kept at this level, cost-effective for suppliers," the Deputy Minister said.

This is far not the first fuel deficit experienced in Kazakhstan. Independent expert Sergey Smirnov explained that those ups and downs kept happening because Russian fuel was more expensive then the fuel made by Kazakhstani refineries, but the former was also of a higher quality.

“Domestic oil refineries are responsible for only 60% of the fuel consumed in Kazakhstan. The other 40% comes from abroad, mainly from Russia. And this path is blocked now, because AI-92 gasoline (the most popular brand) costs around 125 tenge ($0.69) at the Kazakh-Russian border. But one should add transportation, storage and operation costs into the pot, and this brings the price to 150 tenge ($0.85). Who would possibly want to incur such losses?” he said.

The thing is that fuel price in Kazakhstan are not free floating. The government sets caps on retail sales of petroleum products, including gasoline. And the current cap on top-selling AI-92 gasoline is at 128 tenge per liter ($0.70). And before they were upped last week they stood at 115 tenge per liter ($0.63).

Kazakh Vice-Minister of Energy Karabalin supported the idea that the problem came from the prices difference by saying that the deficit was worst felt in Kazakhstan regions bordering with Kyrgyzstan, Tajikistan, Uzbekistan and Russia, because the neighbors found cheap Kazakh fuel attractive and were buying it up in large quantities.



Yerlan Khasenbekov, head of the Agency for Research on ROI, explained the essence of the Kazakh-Russian fuel relations: “Every year, both countries sign an indicative agreement specifying the amounts of petroleum products to be imported to Kazakhstan. The agreed amounts cannot be changed along the way - that is, Kazakhstan cannot buy more or less fuel from Russia than agreed.”
 


In addition to Kazakhstani traders not wanting to import the fuel at a sacrifice, Russia is now also experiencing difficulty supplying it. There has been a production stall at Achinsk oil refinery in Russia due to an accident that will take till the end of the year to remedy. And the situation was worsened by suspension of Kazakhstan's own Pavlodar refinery for a scheduled maintenance.

Pavlodar Petrochemical Plant JSC is one of three Kazakhstani plants producing fuel in Kazakhstan. The other two are Atyrau Oil Refinery JSC and PetroKazakhstan Oil Products LLP in Shymkent. However, all three are not enough to satisfy the country’s needs.

Together they produce around 1.9 million tons of AI-92 gasoline and 4 million tons of diesel fuel. Kazakhstan’s annual consumption of AI-92 gasoline stands at 2.8 million tons and consumption of diesel fuel makes around 4.6 million tons. So, to cover the gap Kazakhstan has to import 40% of its fuel.

Kazakhstan exports its crude oil to Russia and in return gets an agreed amount of refined fuel from Russian refineries, but the latter comes at a completely different price.

According to Khasenbekov of the Agency for Research on ROI, crude constitutes only 57.7% of the gasoline price, another 14% is refining expenses. Taxes account for 15.2% and transportation costs for another 5%.

Artem Ustimenko, another analyst from the Agency for Research on ROI, agreed that Kazakhstan was in dire need of modernizing its refineries to produce more fuel suitable for contemporary cars.

Kazakhstan is having trouble increasing its AI-92 output because it inherited its refineries from the Soviet Union, but fuel standards were completely different back in the time they were constructed. Only after the domestic refineries are modernized will it become possible for Kazakhstan to fully cover its domestic fuel market. However, according to the updated plan, this is not going to happen before 2018 or even 2019.

This means that Kazakhstan will have to live with these fuel swings and prices instability for another several years.

Yesterday Karabalin chose not to make any predictions in regards to the future price jumps. “We are monitoring the market and looking at the reaction to the gasoline prices rise. I have no heart to say that prices will not rise again. We are surrounded by countries, where prices are higher,” Karabalin said, adding that after having tried predicting prices he became convinced that it was a “thankless job”.


By Dinara Urazova and Tatyana Kuzmina (Assel Satayeva and Vladimir Prokopenko contributed to the story)