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Fuel market risks in Kazakhstan

23 september 2014, 20:35
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©Yaroslav Radlovsky
©Yaroslav Radlovsky

Kazakhstan authorities are trying to find a solution to the lingering fuel deficit that is not going to be lifted any time soon judging from the statement of First Vice Minister of Energy Uzakbai Karabalin who said that Kazakhstani oil refineries could not meet the country's demand for fuel, so a third of all of the fuel consumed in Kazakhstan had to be imported from Russia. Some experts say that the share is even greater and amounts to 40%.

One of the reasons behind the shortage is that domestic oil refineries produce fuel not suitable for most of the cars that are currently in use as they require higher quality gasoline. Everyone agrees that Kazakh oil refineries need to be modernized but it is yet unclear when this would happen.

There is a possibility that the modernization will be delayed, and will be completed only in 2018-2019 instead of the scheduled 2016, Deputy Director of the Agency for Research ROI (AIPS) Artem Ustimenko said.

There are three oil refineries in Kazakhstan: in Atyrau, in Pavlodar and in Shymkent cities. It is planned to build the fourth one but the feasibility study will be ready only in 2015 and the location has not yet been determined.

Ustimenko said that after the modernization Kazakhstan would need to supply the domestic refineries with more crude oil for processing: they will require 18.5 million tons instead of the current 14.3 million. He added that some of the "old" fields were expected to be depleted soon, so the crude gap would have to be closed by deliveries from Tengizchevroil, Karachaganak Petroleum Operating and North Caspian Consortium, that is provided that the latter resumes production at Kashagan in 2016.

Diversion of additional crude oil to the domestic market will mean "large losses to the Kazakhstan's budget" that is getting revenues from crude oil export. To address this the government would need to develop a package of "effective countervailing measures, including those involving regulation of costs of oil products at the domestic market, to minimize the financial losses of the government", Ustimenko added.

Oil industry expert Sergey Smirnov agreed that Kazakhstan would have to develop specific measures. Kazakhstan has sufficient oil reserves, but most of it is exported, so the country will need legislative measures, including taxation incentives.

Smirnov suggested legally binding oil companies to supply some of their output to the domestic market, so that the Kazakh oil refineries face no shortage of crude oil. Tax incentives are needed to make it more profitable to sell the products inside the country rather than exporting them abroad, he said.

Delays in modernization of the oil refineries also means the Kazakh oil products will fail to comply with the standards of the Customs Union, Ustimenko said.

Eurasian Economic Commission has postponed introduction of the ban on production of low quality fuel of K2 ecological class (Euro-2) until 1 January 2016, i.e. until the scheduled modernization of the oil refineries is completed. But it is unlikely that the Customs Union will continue postponing introduction of the new standards for Kazakhstan's sake beyond this date.  

"It is necessary to develop (on the governmental level and together with KazMunaiGas) a set of measures to promptly address the existing constraints, including financial ones," the analyst says.

Ustimenko said that since Russia had adopted the new fuel quality standards "Kazakhstan will have to import high-octane gasoline and diesel fuel of high ecological class starting from 2015. These types of fuel are more expensive, which may render import of light petroleum products from Russia unfeasible." However, these is still a possibility that some of the Russian refineries will not complete their modernisations in time and the cheaper fuel will still be available in Russia in 2015, he said. In this case Kazakhstan may even be able to import it at a give-away price.  

Reporting by Dmitry Khegai, writing by Dinara Urazova, editing by Tatyana Kuzmina


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