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. Last Updated: 07/27/2016

Oil Majors Compete In Domestic Market

Troubled by low oil export revenue in a market of weak world prices, Russian oil majors are flooding the domestic market with refined oil products in an attempt to build sales at home.

The search for new sources of revenue has caused a price war among Russian companies as they jockey to attract the only Russian customers certain to pay cash for fuel -- car owners and buyers in the transport sector, such as railrroads and airlines.

Giant LUKoil threw down the gauntlet a month ago when it cut wholesale prices on gasoline and diesel fuel between 10 and 30 percent nationwide. Since then, Yukos and Tyumen Oil Co. have cut fuel prices by 5 percent to 20 percent in Central Russia, Slavneft has cut wholesale prices by 70 percent, and Moscow's Central Fuel Co. has dropped wholesale prices in the Moscow region.

"Such companies as LUKoil, Yukos and Tyumen want to fight for solvent customers inside Russia just to soften the financial losses they suffer outside Russia," said Gennady Krasovsky, an oil and gas analyst with Rye Man & Gor Securities.

Russian companies export about one-third of total production and have traditionally relied on exports for cash and profits. But profits from exports have diminished with current world oil prices at about $14.50 per barrel, forcing local producers to look homeward for new sources of revenue.

That isn't so easy in Russia, where cash-poor buyers often pay for fuel in kind. The only sure way to raise cash is to sell to car owners and other buyers in the transportation sector.

"Depending on the area, we have cut wholesale prices from 10 to 30 percent," said LUKoil spokesman Dmitry Dolgov. "It's connected with the situation on the market, with the fall in world oil prices. Other companies have looked at the market and have done the same."

Dolgov could not say whether LUKoil has lowered its retail gasoline prices.

Simon Kukes, newly appointed president of Tyumen Oil, said the company is all but eliminating domestic crude oil sales. Since Kukes took over in February the company has raised its refining activity from 2 million tons per year to 8 million tons. By August the company will be refining 12 million tons, or 85 percent of its nonexport crude oil.

Tyumen hopes to win new market share by improving the quality of its gasoline, cutting prices at the pump, and opening another 200 gas stations under franchise agreements in the coming year, Kukes said. The company today owns 200 stations in Central Russia.

"We will be processing most of our crude -- the margins are higher and we want to be an integrated company," Kukes said. Since Tyumen cut retail gas prices from 5 percent to 12 percent last month it has "already seen sales increasing," Kukes added.

Oil majors' desire to increase refining and build local market share in fuel sales is a wise move considering the coming automobile boom, said Stephen O'Sullivan, co-head of research at United Financial Group.

"It's a quest for market share. They want to build strong, sustainable retailing businesses," O'Sullivan said. But cash-hungry oil majors will be careful not to cut prices too severely, he added.

The biggest pricing competition is being waged in Central Russia, home to 42 percent of Russia's total refining capacity. Yukos, which competes with Tyumen in the Central Russian fuel market, began late last month offering 5 percent to 20 percent discounts to wholesale buyers, giving better deals to buyers paying in cash. The agriculture sector is the company's biggest customer on the wholesale market.

In addition, Yukos has given its regional offices greater power to reduce retail prices in Yukos' 800 gas stations, the company said in a statement.

"Because oil companies have found it necessary to increase the size of their oil product sales, the price for oil products across the country has decreased by an average of 10 percent," the Yukos statement read.

With Tyumen, Yukos and Slavneft cutting prices in regions bordering Moscow, the dominant Moscow fuel supplier has been forced to lower its wholesale prices. According to Tyumen's Kukes, the Central Fuel Co., owned outright by the city of Moscow, has begun to lower its wholesale gasoline prices to buyers in the city and region.

A Central Fuel Co. spokesman would not comment on pricing.