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 KAZAKHSTAN International Business Magazine №1, 2008
 The Market of Petroleum Products. How much Is Petrol for the People?
The Market of Petroleum Products. How much Is Petrol for the People?
Despite a stable growth in oil output, Kazakhstan has been regularly facing problems with domestic supplies of petroleum products in the past decade, and, as a result, a constant hike in their prices. The market is feverish in spring, summer and autumn. The year 2007 was exception only in that the autumn hike in prices took place two months later than usual. However, neither the government nor companies operating in the country are rushing to invest funds in oil refineries. The reason for this is partially clear. A simple arithmetic calculation shows that in the current situation the game is not worth the candle: VAT, excise on petrol and problems with exporting domestically-produced fuel and lubricants make oil refining projects loss-making.
The peculiarity of privatisation in the Kazakh oil and gas sector has led to the government now being unable to pursue a consistent energy policy. This is partly linked to the Agency for the Regulation of the Natural Monopolies and Protecting Competition’s activities not matching the role it is supposed to play. The weakness of this structure enables it to react to current events but not set the rules for the “energy game”. Although all new mining contracts have a special provision on supplying 10-20% of the oil extracted to the domestic market, in reality the commercial development of these fields will not start any time soon. However, the provisions of long-term contracts signed earlier do not allow the government to apply civilised methods of tariff regulation, so it has to use, as a rule, inefficient ways of influencing the domestic market. As a result, the government, repeating the very same administrative mistakes, is not capable of forcing extracting companies to supply oil to domestic oil refineries. After receiving another price blow it adopts some administrative solution which does not demand great efforts and moves further. For example, the former energy and mineral resources minister, Vladimir Shkolnik, regularly imposed bans on exports of petroleum products. Baktykozha Izmukhambetov, who replaced Mr Shkolnik in early 2006, and major oil companies signed a memorandum on social partnership between government bodies and the main producers of oil and petroleum products in ensuring supplies of petroleum products to the domestic market in 2006. This document forced producers to take into account recommendations made by government agencies on wholesale and retail sales of fuel and lubricants at affordable prices and saturating the domestic market with them. However, the reality proved different. The government did not manage even to force the signatories simply to fulfil their obligations: the life of the memorandum turned out to be shorter than it is title and the prices again – first in summer, then in autumn – crept up. The new energy and mineral resources minister, Sauat Mynbayev, has headed a working group for stabilising domestic prices of petroleum products and does not now recall the memorandum.
Old Songs
The old “price score” is replayed every year: as soon as one of the country’s three oil refineries stops for repairs, the prices of fuel and lubricants go up. At the same time, oil refineries swear that the scheduled suspension of a refinery’s operations will not lead to shortages because petrol stations create sufficient stocks in advance to ensure uninterrupted supplies of petrol. All this actually results in a hike in the price. For example, despite the end of agricultural activities and a reduction in demand for fuel and lubricants, the suspension of the Shymkent oil refinery for scheduled repairs in October 2007 almost immediately pushed the price of petrol up. As a result, the price of certain types of petrol went up by 8-10 tenge in Kostanay Region in November alone: 92 octane petrol cost 73 tenge a litre in early November, whereas it cost 9 tenge more in mid-December, while the retail price of winter diesel fuel went up from 69 to 87 tenge a litre. In Pavlodar Region, where there is an oil refinery, the price of 93 octane petrol went up by 6 tenge to 87 tenge a litre within two weeks and the price of 80 octane petrol also grew by 6 tenge to 76 tenge a litre. Similar increases in prices were observed on the Almaty petrol market.
In general, over the past year, the price of 80 octane petrol grew by 20 tenge on average in the country, while 93 and 96 octane petrol by 10 tenge and diesel fuel by 13 tenge. This growth seems not to be last, pushing up the prices of other goods and services, which are so far under control of the government, too. It should be noted that the 2008 budget has a very moderate growth in spending on social allowances which will hardly compensate last year’s growth in prices and tariffs.
What We Have, What They Have
The price of petrol depends on its production costs, 50% of which, in turn, are made up of the domestic price of oil and the other 50% depend on other factors, including the processing technology (the more petrol is produced from a tonne of oil the lower is its price). According to the German Gessellschaft Technische Zusammenarbeit (GTZ) rating agency, which analysed the price of petrol in 171 countries in 2006, the price mainly depends on the country’s taxation. For example, in oil-exporting countries the government subsidises petrol (Iran 38% of the cost of petrol, Venezuela 28%, Egypt 25% and Saudi Arabia 10%), so it is cheap for people in these countries.
In Kazakhstan (like Russia), despite high export potential, not only does the government subsidise producers and consumers of petrol but also imposes taxes on petrol, pushing its price up. In comparison, in the USA, which imports petrol, the portion of taxes (both federal and local) in the price of petrol is only 22%. However, in force majeure situations (for example, a growth in oil prices) the state authorities can cut their share of taxes to zero in order to prevent voters’ discontent with extreme growths in the price of petrol.
Prominent Kazakh economist Kanat Berentayev believes that the situation in Kazakhstan can only qualitatively change if the economic policy is changed. A new model, he thinks, should aim to develop production, not trade. Other experts believe that in order to reverse the growing trend of fuel prices, taxes should be cut for oil refineries and petrol consumers through abolishing excises and VAT. There have also been proposals to abolish customs duties on importing oil refinery equipment.
Who Is To Blame?
Heads of both government agencies and business structures, explaining a sharp rise in the price of petrol (also, bread, by the way), unequivocally cite market factors or changes on the world markets. In particular, the adviser to the director of the KazMunayGas Trade House, Galym Tumabayev, believes that the main reasons for the growth in the price of petrol are the following: “Firstly, the growth in the price of Brent crude from $53 per barrel at the beginning of the year to $95-96 in November 2007. Secondly, a growth in prices of petroleum products in Russia. Thirdly, a 30% growth on average in prices of fuel and lubricants in Central Asian countries in 2007. And, finally, a sharp increase in petrol and fuel diesel consumption in Kazakhstan in 2006-2007.” Regrettably, these arguments contain nothing new and have been cited for a number of years now.
However, the explanation that petrol went up in price as a result of a growth in world oil prices is extremely unconvincing – Kazakhstan is an exporter not importer of oil. A growth in the oil price may only encourage exports, whose extreme growth should be countered by fiscal instruments possessed by the government. Buying and selling petroleum products to make interventions on the market and maintain desirable prices can serve as a regulation mechanism. Moreover, the government’s active involvement in ensuring energy security is observed in any market-economy country.
There is another negative trend observed on the domestic petrol market: major players are trying to monopolise retailing through destroying independent operators. For example, 18 petrol stations belonging to the K-Bastau chain (in South Kazakhstan Region) received about 72 tonnes of petrol a day in early 2007, whereas only 20-25 tonnes at the end of the year. At the same time, the Shymkent oil refinery said that it was still supplying 20,000-25,000 tonnes of petrol a month to the region. This means that the bulk of petrol is being supplied to petrol stations affiliated to the oil refinery.
Experts believe that oil companies are currently controlling less than 40% of the retail petrol market. However, this figure may grow to 70% within two or three years. The KazMunaiGas national oil and gas company alone intends to increase its share on the retail market from 4% to 15% by 2010. On the one hand, this will make the market more controllable, but, on the other hand, it will be impossible to control prices in private petrol stations, especially when high octane petrol accounts for a very low percentage of domestic production.
Petrol Statistics
Analysts that follow the problem of petrol shortages have repeatedly stressed that the situation repeats itself regularly. And this is quite understandable. According to the Energy and Mineral Resources Ministry, domestic production fully meets demand for diesel fuel and heating oil, while only 87% of the demand for petrol. The president of the Energy and Mineral Resources Ministry’s main directorate for the oil and gas industry, Kayrat Kaypiyev, states that the Kazakh market now strongly depends on Russian supplies, given the quality of almost all petroleum products produced by the three Kazakh oil refineries is lower than that of Russian products. Kaypiyev said that domestic production met only 74% of the domestic demand for high octane petrol in 2007.
Despite this, the volume of oil refined is growing: it stood at 8.8 million tonnes in 2003, whereas it reached 12 million tonnes in 2007. However, if we exclude Russian oil imports (3-4 million tonnes a year), it turns out that the country refines no more than 8 million tonnes of local oil a year. In general, the percentage of oil processed out of the total oil output has remained frozen at about 18% for the past few years.
Kazakhstan produced 3.9 million tonnes of diesel fuel, 2.6 million tonnes of heating oil and 258,900 tonnes of kerosene in 2007. As for petrol, its output grew from 1.84 million tonnes in 2003 to 2.6 million tonnes in 2007.
The paradox is that as the production of petroleum products is growing, so is a shortage of them. It seems that part of the petrol produced is exported, while the rest is sold on the local market through a chain of intermediary firms affiliated with oil refineries. At the same time, all oil refineries are not working to their full capacities. Of course, they could produce more petrol, but this would damage oil exports, which remains the priority for oil companies: it is much more profitable to export oil than process it in the country.
One of the main reasons for a growth in prices of oil products local government officials see is in price fixing. For example, Industry and Trade Minister Galym Orazbakov has said: “We have studied the fuel and lubricants market and arrived at conclusion that there are traders operating in it that are affiliated with one another and, in essence, fix prices, which results in a hike in prices of fuel and lubricants.” Mr Kaypiyev has not ruled out price fixing by retailers either.
In this situation, one of the ways of significantly curbing fuel price hikes, if not stopping them, is to increase export duties. Another measure is to set up a mercantile exchange. Selling fuel and lubricants through the exchange will increase the transparency of the petroleum products market, because the price of petrol at petrol stations is currently significantly higher than the sale prices at oil refineries. Of course, both the Energy and Mineral Resources Ministry and the government clearly realise that fuel price surges are linked to, above all, numerous intermediaries, but they have done nothing about this to date, as the idea of setting up a mercantile exchange has been discussed for several years now.
Their Prices, Our Quality
A big problem is also the quality of petrol, which does not meet international standards. The practice shows that short-term “quality raids” do not produce the desired results: those guilty are punished, while those who excel are awarded prizes, and that is it… A law on a switch to new higher standards of the quality of petrol, like the proposal of switching to Euro-2 standards from January 2008, is still being drafted. The main thing is that the country lacks a clear system of quality control of petroleum products supplied, stored and sold. Monitoring bodies can only conduct checks once a year or when they receive complaints from clients.
The head of the Kostanay Region antimonopoly department, Gulmira Dildibekova, has said that no-one is currently monitoring the petrol market. Her department included several major oil companies on its watch list last spring, but this decision has been revoked.
In a report made at the Kazakh Petroleum Products Market conference, the director of the Organic company and petroleum products expert, Akmaral Kalmuratova, provided the following figures: 10 out of 17 petrol stations checked in 2007 had irregularities relating to their petrol’s octane number. For example, petrol with supposed octane numbers of 85 and 80 had numbers of 76 and 75 respectively. However, this is just a detail, because the main problem is that while the EU is switching to Euro-5 standards in 2008, Kazakhstan is only planning to adopt Euro-2 standards. As a result, our petrol costs as much as European petrol, but its quality has not changed.
Is the Door to Europe Open?
In late 2007, having bought 75% of shares in Romania’s Rompetrol Group NV (TRG) for $2.7bn, KazMunaiGas fulfilled its cherished desire to own oil-processing capacities in Europe. However, some experts believe that this is a very high price, especially in comparison with the privatisation of the Romanian Petrom state-run oil company which, being far greater than TRG in terms of assets, was sold to OMV for $1bn.
This major deal in KazMunaiGas’s history will enable the national company to double its refining capacities through two Romanian oil refiners (Vega and Petromidia). In addition, having acquired a chain of 630 petrol stations in seven European countries, it will be able to enter the petrol market in central and eastern Europe. Both oil refineries will process mostly Kazakh oil at a rate of about 5 million tonnes a year, i.e. half of the oil currently exported by KazMunaiGas.
Over the next few years, the national oil and gas company intends to invest $400m in Rompetrol, including modernising (the oil refinery’s products should meet the Euro-5 standards by 2009), developing production capacities and expanding the retail chain. It turns out that in pursuit of profits KazMunaiGas will supply oil to foreign refineries and not saturate the Kazakh market. Usually, this is a private, not state-owned, company’s policy.
Using Old Capacities
Governments come and go, but problems persist, which is why we can predict that the situation will repeat itself in 2009 too. Meanwhile, petrol consumption is growing fast in Kazakhstan, so the capacities of the existing oil refineries will be exhausted by 2015. Bearing in mind that the construction of an oil refinery takes seven years, the country should start constructing a new state-owned oil refinery now, which will work for the domestic market and influence the price of petrol in the country. However, the list of “breakthrough” projects does not include a project to build a new refinery. As a result, the country will be “breaking through” to join the world’s top 50 most competitive countries on old capacities.
Our oil businessmen, who are active in buying and building refineries abroad, for some reason are indifferent to investing in similar projects in Kazakhstan itself. Moreover, at the time, the former energy and mineral resources minister, Vladimir Shkolnik, said that “it is ridiculous to have only three oil refineries for the whole of Kazakhstan”. This way, with laughter through our tears, we are moving towards a great future.
By Sergey Smirnov

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