The director of Gazprom neft’s downstream business unit, Mikhail Antonov outlined the progress of the upgrade projects at the company’s refineries and its expectations on future products demand in a recent interview for Argus.
— What upgrade projects will the company complete in the near future?
— The Moscow refinery will commission the Euro+ complex, which is of immense complexity. It was under construction for several years and is currently in the final construction phase. The complex consists of the new 6mn t/yr primary crude processing unit, a reforming unit, which will produce high-octane gasoline components, a diesel hydrotreatment unit and several auxiliary facilities. This solution will enable us to decommission five older-generation units, and to improve not only energy efficiency, but also the environmental performance of the entire refinery. This is a unique construction project as it located within the area of the existing refinery, among the other units. Some subsystems of the complex will be launched as early as this year, and we plan to commission the Euro+ in 2020.
— It was reported that investment in the Euro+ project would reach Rbs98bn, is this the actual figure?
— Capital investment in the project remained unchanged, we are progressing on schedule.
— What impact will start-up of the Euro+ unit have?
— First of all, the chance to improve economic effectiveness, meaning that Moscow refinery’s crude processing capacity will rise to 12mn t/yr — the current capacity is about 11mn t/yr, and the optimal capacity is based on the short-term production plans. Commissioning of the modern units incorporated in the Euro+ complex will improve the accuracy of crude separation and product slates for refining processes.
All of the above will allow an increase inmotor fuel production volumes. The new catalytic reforming unit, part of the Euro+ complex, will produce reformate, one of the components of 104 octane motor gasoline. So the Moscow refinery, just like Omsk refinery, will be able to produce 100 G-Drive motor gasoline. Besides, the isodewaxing process will enable Euro+ to produce winter diesel, including arctic grades.
— How much will production of the main products as a result of Euro+ commissioning?
— In figures, we will be able to double jet fuel production from 0.7mn t/yr to 1.4mn t/yr, diesel production will grow by 50pc from 2.1mn t/yr to 3.2mn t/yr, including winter diesel, and motor gasoline production will rise from 2.3mn t/yr to 2.9mn t/yr.
— Will there be sufficient demand for this volume of jet fuel?
— We are optimistic about jet fuel demand evaluations. In the Moscow region, the market for the product has been growing steadily, air service volumes have been also materially increasing. Moscow refinery is located in the middle of the Moscow airport hub and we have efficient sales and logistics channels thanks to Gazpromneft-Aero, the operator of company’s jet fuel business.
— When do you plan to launch the advanced crude refining complexes at Moscow and Omsk refineries?
— We plan to finish construction of a primary crude processing complex, a hydrotreatment complex, a VGO hydrocracking complex and a delayed coking unit at Omsk refinery in 2021. In point of fact, it’s a ‘refinery-in-refinery’ project, which requires large-scale related infrastructure, and it has a high percentage completion rate. The construction rate of the Biosphere unit, which will improve the water treatment efficiency to 99pc, is also high.
— At Moscow refinery, the advanced crude refining complex will incorporate two main facilities: a vacuum gasoil (VGO) hydrocracking unit and a delayed coking unit. We expect that the hydrocracking unit will also enable us to maximise production of high-quality Euro-5 diesel. Gazprom neft will start building the complex next year, and this construction project is scheduled for completion in 2024.
— When the key upgrade projects are completed, do you expect exports of the main products to rise?
— First of all, we will be able to stop producing fuel oil as a result of the upgrade, and this will improve our crude processing efficiency. Higher production of diesel, some of which is traditionally exported, will result from the upgrade projects, so I think it will make its contribution to export growth, but anyway everything hinges on consumption on the domestic market, which we prioritise. So far, we are looking at the domestic market with cautious optimism — first of all due to increased freight transportation volumes and overall motor transport dieselisation. Time will show which trends will prevail in 2024, but I think that higher [diesel] production volumes will dominate on the domestic market. The main [goal] is to improve crude processing efficiency and to convert the remaining dirty products volumes to high-quality and marginal products.
— Does this mean you do not expect a domestic clean products surplus?
— Projected clean products demand depends on the type of product, with each of them demonstrating its own behaviour. A diesel surplus has always been typical for our country, with Russian refineries exporting approximately 30mn-40mn t/yr of diesel, and the fact that domestic diesel consumption is rising is certainly a positive thing.
Kerosine is traditionally in high demand on the domestic market. But the story is different with gasoline — we are facing saturation on the gasoline market this year, virtually for the first time. But we are ready for these challenges because our refineries have flexibility, partly due to petrochemical products and the sale of individual components. That is to say, if a product is not popular on the domestic market as motor fuel, we can always diversify the products basket.
— Russian refiners note the detrimental effect of the tax changes in recent years, which impair processing economics. Do you expect project implementation deadlines to be delayed?
— The upgrade programme for Gazprom neft’s refineries was launched in the late 2000s and we have been consistently implementing it over the years, despite market volatility and changed tax conditions. For us, the upgrade programme is the overriding priority as it enables us not only to improve our business efficiency, but also to reduce the environmental impact caused by the refineries. These effects may not be obvious in the short term, but over a ten-year span we can see that we had set the right targets. We are on schedule in terms of the upgrade programmes, but we think it is important for the government to support the downstream sector through tax incentives.
— Many market participants and analysts sector predicted a serious deterioration of downstream economics and even the closure of some refineries from the market, with the completion of the tax manoeuvre in 2019. Do you agree that downstream efficiency will continue to deteriorate?
— Apocalyptic scenarios failed to materialise, but we did face a certain overall reduction of motor gasoline sales in the first [of 2019], when we found out that the reverse excise tax mechanism could not compensate [for higher export prices] XOK?. Amendments on the reverse excise tax were accepted in July and we are facing implications on the economics of the projects. We are moderately optimistic, but we will be able to discuss the results after year end.
And the fact that we are coming into challenging times for the downstream sector is something that’s unavoidable. We should clearly distinguish the refiners between those which have finished and those which have yet to finish the upgrade. I think we will face stratification into underachieving and advanced refineries; this is a normal process compliant with the worldwide trend. We can see that volatility is rather strong in Europe, and low-performing refineries suffer from forced downtime or even shut down their units, while ‘advanced’, sophisticated refineries with a solid set of secondary processes keep working. I believe that these trends will be repeated to some extent in the long term.
— Do you expect some low-performing refineries to shut down?
— Stratification is something that will inevitably happen, and it will be up to the owners of such refineries how to proceed with them.
— The IMO 2020 regulations capping sulphur content in marine fuels at 0.5pc will take effect next year. How did Gazprom neft prepare for that? What are the plans to reduce high-sulphur fuel oil production?
— We have been producing 0.1pc marine fuel at Omsk refinery for several years by now, we put production of 0.5pc marine fuel on test and we will begin commercial production next year. Upon completion of construction of the advanced crude refining complexes at Moscow and Omsk refineries, we plan to halt fuel oil production. We will have facilities and resources for marine fuel production according to the new requirements, and through the use of the bunkering infrastructure of our arm, Gazpromneft Marine Bunker, we will improve the marginality over the entire value chain.
— How will remaining high-sulphur fuel oil be used?
— Time will show how much high-sulphur fuel oil will be needed by the markets but I believe that the reduction of fuel oil output will be a gradual process and that there will be a certain transition period. Currently, the issue under discussion is whether the IMO 2020 requirements will apply to [Russia’s] inland waterways and if these strict requirements will extend to domestic consumption. We are almost ready to halt fuel oil production from 2021-2022 at Omsk refinery. Generally, our entire refinery upgrade programme is aimed to end fuel oil production, so this issue will cease to be so pressing for us in the years ahead.
— One of the global downstream development trends is the increasing integration with the petrochemical industry. What is Gazprom neft’s view on this?
— Two of our refineries are already quite well integrated with the petrochemical sector. We have joint ventures with SIBUR, which receive certain components for petrochemical production from us; we also produce large aromatics volumes. We also plan to involve rising gas, natural gas liquids and LPG volumes in production since they are the optimal resources for the petrochemical [industry]. In the long term, we are mulling over conversion of several catalytic cracking units at our refineries to petrochemical production as one of the possible petrochemical sector development scenarios.
Turning back to the question of a possible gasoline surplus — only time will tell how the markets will develop. It is critical for a modern refinery to have flexibility and, in terms of investments, we can choose the configurations, which will allow us to range far and wide from motor fuel production and divert our feedstock flows to increase petrochemical [production]. Petrochemical sector development is a part of company’s long-term strategy until 2030, and we plan to expand the share of petrochemical products in the basket to 15pc by that time, which is in line with the current global trends in the downstream segment.