Governor of the Middle Urals Reverts to the Old Game
01.11.2010 — Analysis
Russian Railways JSC intends to embark on production and processing of hydrocarbons. TransCreditBank controlled by Russian Railways announced financing of oil and gas field prospecting in the Ural Federal District and construction of crude hydrocarbon processing facilities. Experts doubt about the viability of the project: key players of the petroleum market are not interested in its implementation. Experts shared their guess with the "RusBusinessNews" columnist, assuming that nobody is going to build the oil refinery: its brand name is likely to be used as a blind.
It is not for the first time that attempts to build a refinery in the Sverdlovsk Region have been made. Back in the 90s such intention was sounded by Eduard Rossel, the then governor of the region. At his instigation, TNK-BP established the Ural Oil Company, which was to perform prospecting, production and processing of petroleum products. In 2003 the project dried up without much ado. Unprofitability of oil production in the Middle Urals was stated as an official reason.
In 2006, the baton was taken by a group of entrepreneurs dealing with petroleum trade transactions. They registered the Verkhotursky Oil Refinery and even were allotted land for its construction. It was stated that the refinery's output would amount to 3 million tons a year and the refining depth would be equal to 98%. The estimated amount of investment totaled 500 million dollars. The project involved licenses for prospecting and development of oil and gas fields within the Sverdlovsk and Tyumen Regions. Half of the products were meant for export.
The project was criticized by Eduard Rossel. According to him, the refinery could be profitable only at processing of 10-15 million tons of crude oil a year. However, the Verkhotursky Oil Refinery would be able to receive not more than 2 million tons from the oil pipeline - without any hope for larger oil production quotas.
The futility of the project impelled the regional head to decide against its support. However, just half a year later, the government of the Sverdlovsk Region suddenly changed their mind and started looking for investors for construction of the oil refinery, the cost of which jumped to 1.4 billion dollars. No domestic company was interested in making investment, but foreign companies did not mind taking part in the project. Their taking the stage pushed the stakes up: in 2007 the construction of the Verkhotursky Oil Refinery was estimated at 2.4 billion dollars. The Czech Export Bank was going to give most of the money (2 billion); Karel Komarek, co-owner of the Moravske naftove doly oil company, promised to cover the balance. The real investment amounted to about 500 thousand dollars: in 2008 the Czechs lost interest to the project.
At present, there is another attempt being made to build the refinery in the Sverdlovsk region. In summer, TransCreditBank entered into agreement with the regional government; at the end of October, another agreement was signed with the Verkhotursky Oil Refinery LLC with the bank's intention to have a share of its authorized capital. Experts doubt that the third attempt is going to be more successful than the two previous ones.
There is a reason for investors' being reluctant to tie up money in the construction of the oil refinery. The Karel Komarek's withdrawal was officially explained by tumbling oil prices and financial discord between the owners of Moravske naftove doly. According to the informed sources, these explanations are not serious, but the terms and conditions, under which the Czechs agreed to finance the project, must be taken into consideration. Komarek was interested in participation in oil production, and the Czech Export Bank required guarantees in the form of secured contracts for oil deliveries to the future refinery. No one had ever seen the requested contracts.
Entering into a agreement with TransCreditBank, Anatoly Moseyev, General Director of the Verkhotursky Oil Refinery LLC, informed journalists about existing oil delivery arrangements with Surgutneftegaz JSC and Shell as well as with the Association of Small and Medium-sized Oil Companies (Assoneft), which was ready to act as an intermediary in negotiations about acquisition of oil fields in the Tyumen Region.
On the other hand, Alexei Artemenko, acting for the director of Surgutneftegaz Press-Service, told "RusBusinessNews" that he knew nothing about agreements for oil supply to the Verkhotursky Oil Refinery. Elena Korzun, General Director of Assoneft, was far from being specific about crude oil supplies to the future refinery.
The experts of the VNIPIneft (the Research and Design Institute of Oil Refining and Petrochemical Industry) point out that all major oil companies have their own underutilized refining facilities; therefore, they are unlikely to be interested in new refineries coming into being. For example, Surgutneftegaz is renovating the Kirishi deep conversion complex that will be able to increase its output by 12 million tons with the conversion rate reaching 95%. The company has no motivation to give 3 million tons of oil to the Verkhotursky Oil Refinery. For the same reason, large vertically integrated companies will not sell oil field to oil start-ups. Another problem relates to sales of high-quality gasoline. The Russian market consumes Euro-3 quality petroleum products in very small amounts; that is why, oil companies defer the transition to higher standards. Export supplies cannot save the situation: when there are no preferential duties, fuel exporting can be profitable only from refineries located in the vicinity of ports. Russia has only few of them, and even those do not feel secure due to numerous state-of-the-art facilities being built in the Middle East, India and China.
Two years ago these circumstances compelled the Arab company Quality Energy Petro International Ltd to give up the construction project for a refinery with the estimated output totaling 9 million tons in the Chelyabinsk Region. At that time, Anatoly Moseyev said that the market dominated by vertically integrated companies that own most of the oil refineries makes it very difficult for independent refineries to find partners in crude oil supplies. However, today he is lobbying a similar project in the Sverdlovsk Region.
Alexander Zykov, Duma Deputy for the Verkhotursky City District, doubts the very construction of the refinery. In his opinion, within four years government authorities and entrepreneurs were just pretending that they were taking efforts: they violated the law when allotting the land, deforested the area, and then embarked on shuffling of investors. At first, they announced that the construction would be financed by Americans; then, they referred to Czechs who were later substituted by English investors; now, they are again talking about Czech companies ALTA, PSG and ZVU. The Verkhoturie residents understand that if the refinery was intended to be built, the first issue on the agenda would relate to increasing of generating capacities. The North of the Sverdlovsk Region is in short electricity supply, and the plans for putting new units at the Bogoslovskaya Combined Heat and Power Plant were brought to a halt in 2008. No construction of houses for future employees of the refinery has ever been started: Verkhoturie has neither qualified labor force nor accommodation facilities for 750 "imported" people.
Bank analysts also point out the excessive fuzz-buzz around the projects and absence of whatsoever transparency in the ownership of the Verkhotursky Oil Refinery LLC. There are four companies registered under this name in the Sverdlovsk Region. Alexei Ruban, prosecuting attorney for the Verkhotursky Region, says that the inspection revealed no business at all. Absence of any outcome after the five-year efforts in trying to launch refinery operations in the Sverdlovsk Region makes experts think that the Verkhotursky refinery brand name is likely to be some kind of a "soft cover" and has been invented for transactions that are hardly related to oil refinery.
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