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. Last Updated: 07/27/2016

EU Rules May Hurt Major Oil Refiners

MILAN, Italy -- Russia's oil-refining sector is set to shrink in the years to come unless funds are invested to modernize plants in the face of tough new EU fuel specifications due to come into effect from 2005, analysts said.

They said integrated Russian oil majors are shunning investing millions into refineries because they make more money by selling crude oil rather than processing it through the refineries.

At the same time, state legislation and environmental rules do not encourage refiners to upgrade their fuel quality.

"The Russian oil companies believe investment into refineries are not profitable due to state legislation and environmental rules. Refining is a forced necessity," said Vladimir Kapustin of the Gubkin State Oil and Gas University.

As a result, the industry, a major supplier of key oil products such as heating oil, diesel and fuel oil to Western Europe, will lose much of its competitive edge and could expect lower prices for its petroleum exports which will need to be upgraded to meet the new European Union specification.

Russian refineries rank very low in their complexity with only three plants meeting an established international index. This means the refineries produce mainly cheap fuel oil and have limited capacity to churn out much needed middle distillates and gasoline.

The industry will face a crunch in 2005, when the EU slashes the sulfur content of motor fuels.