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. Last Updated: 07/27/2016

Oil Boss: Rethink Plans for Refineries

TNK-BPTony Considine
LONDON -- Russia should focus on crude oil exports rather than build giant new export refineries that could swamp the world market with unwanted product and end up making losses, said a top oil executive.

Tony Considine, TNK-BP head of downstream, said some of Russia's 22 existing refineries would not be able to compete and would be shut down.

"Russia may want to have refineries, but what if the customer doesn't want to buy products but wants to have refineries and buy crude oil for those refineries?" Considine said in an interview.

"There are some consuming nations who say that they regard refineries as strategic assets."

Russia, the world's No. 2 oil exporter, refocused on refining last year after years of neglect as hurricanes in the Gulf of Mexico drove oil product prices to record highs and a new export tax regime favored product exports at the expense of crude.

As a chorus of consumers called for new refineries to ease tight product markets, and oil producers, especially Russia's Middle Eastern competitors, rushed to oblige, Russia chimed in with proposals for huge plants near major crude export outlets. With the backing of Russian officials, keen for more value-added exports, state pipeline monopoly Transneft called for the building of two huge new plants, one near the Baltic port of Primorsk and another at the end of a planned crude pipeline to Asia. Each would have a capacity of at least 400,000 barrels per day and a cost of $3 billion.

Considine, however, echoed global concerns that such large-scale refinery construction could result in severe overcapacity and losses for refiners.

"We will go back to the same old problems we had in the 1980s and '90s, when we had massively low margins with no payback on the original investment," he said.

Russia already has an excess of crude distillation capacity and plenty of potential for upgrades to be made before new refineries are considered, he said.

"I think it is an interesting concept, but Russia has already got significant refining capacity. ... The logic doesn't seem to be quite right," said Considine.

Russia produces around 9.5 million bpd and its refining runs rose to an all-time high of over 4 million bpd last year. It consumes barely half of its refined products at home.

Considine said some of the existing and future plants were poorly located to supply growth markets in Asia and the United States. "I can understand a refinery in the East because the Asian nations are short, but don't quite understand a refinery in Primorsk. America is short, but it is importing products from South America. At the end, it is all about competitiveness," he said.

Some existing plants will be forced to close in the next 10 to 15 years as they are far from export or large domestic markets, having been built for military purposes during the Soviet Union, Considine said. "That is a dilemma for the government. I think at the moment we have a situation where the economics favor everybody, but I don't think it is sustainable. Some refineries in Russia will probably close."

TNK-BP produces 1.5 million bpd, and has two large refineries in Russia and one in Ukraine. It also wants to buy Lithuania's Mazeikiu from Yukos.

Considine said TNK-BP was studying whether to proceed with upgrades that would drastically cut fuel oil output at its Ryazan and Lysychansk plants and would require investments of up to $1 billion per refinery. But he said his firm and other producers were keen to hear Russia and Ukraine's long-term fiscal strategies and whether they planned to encourage higher fuel standards.

"The big concern is uncertainty," he said.