Refining Macroeconomics in Russia/Europe and … · Refining Macroeconomics in Russia/Europe and LUKOIL Refineries business development . ... Project is expected to save money and

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Refining Macroeconomics in Russia/Europe and LUKOIL Refineries business development

Mikhail Antonov Deputy Director of Refining, LUKOIL International Trade and Supply Company 24-25 September 2012


1

Market Environment: Crude Refining Gross Margin

$/bbl

2006 2007 2008 2009 2010 2011 2012

Ever since 2008 Europe there was a decline in refining margin, while in Russia it quickly recovered to pre-crisis levels


Global Supply / Demand balance

Source: BP 2012 Energy Outlook Source: Exxon 2012 Energy Outlook

2

Although robust motor fuel consumption growth is forecasted, the most of it comes from non-OECD contries. Whereas in OECD transport consumption some decline is expected


3

Demand of Quality Gasoline in Russia

• Over a last decade Russia experienced a 50 % growth in gasoline consumption.

• Structurally, high octane gasoline almost replaced a low octane one

• To meet the growing demand, LUKOIIL increased gasoline production by 73% ahead of competition

+73%

Russian Gasoline Consumption Gasoline production at LUKOIL refineries in Russia, mmt

Russian Gasoline Consumption Structure


1

2011 2017

DIESEL SUPPLY FORECAST

Producer Production, Mln. t. Main projects Capacity, kT/year

Commissioning year

ROSNEFT LUKOIL GAZPROM BASHNEFT TNK OTHERS1

VGO hydrocracking complex

4350

2014

Distillates hydrocracking complex 2000 2014

Residue HCK 3500 2015

2d FCC complex 3000 2015

Crude distillates 5500 2016

HCK complex 2000 2016

Coker 1600 2016

Crude distillates 900 2015

VGO HCK (Kirishi) 2930 2012

HCK complex («Taneko») 2900 2013

+5%

+7%

+5%

+3%

+3%

+1%

+3%

15,4

12,3

8,7

7,7

6,0

17,5

23,7

16,4

10,2

9,1

6,3

21,2

(1) Include: Surgutneftegas, Slavneft, Alians Oil, TAIF, Krasnodarekoneft, Neftegasindustria, Tatneft

68

87

19 mln.t diesel production increase will come mostly from investments into hydro cracking installations


DIESEL DEMAND FORECAST

2011 2017

Consumers Consumption, Mln. t. Main Drivers Autotransport Bunkering Agriculture Railways Passengers Freight and commercial transport

GDP average annual growth (per capita) by 2017

increasing diesel cars fleet by 2017 - from 13 to 22 vehicles per 1,000 people, or 69%

average annual growth of bunker fuel consumption - 4% due to the river transport growth

average slight increase of fuel efficiency in the agricultural sector for the same arable land area

average annual growth of consumption in Railways 1% with turnover increase of about 4% with target fuel efficiency 5% in 2020

The slight decrease in passenger bus transport and the current level of consumption of diesel

Fleet of diesel trucks increased from 2.9 to 4.1 million vehicles (+29%)

The average annual fleet growth - 6%, the new trucks are used more intensively than fleet average

Annual average mileage of new diesel trucks - 40000 km, average fuel consumption - 28l/100km

+9%

+4%

0%

+1%

0%

+6% 64%

12%

9%

6% 4% 4%

69%

9%

7% 5% 4% 5% +5

%

2

34

44

Domestic diesel demand is to increase by 10 mln.t.p.a due to both truck fleet growth and increased usage


6

Export tariffs for products in Russia

Introduction of 60-66 export regime

30.09.2011 245 USD

03.10.2011 325 USD

Diesel - Fuel Oil Differential

Since 2004 Russsian goverment created a big incentive to export VGO and fuel oil by lowering a export tariff to 40% of the crude one. In 2011 the tariff was raised to 66% and made a universal one for both dark and light products. A further toughening of export tariffs for the products is expected to bring them on par with a crude one


7

Motor Fuel Quality in Russia

Excise tax savings, $/t Transition to European quality standards in Russia

Over the last 3 years Russian government set up a road map to motor fuel specs. The original plan was adjusted to accommodate a gasoline deficit in 2010 LUKOIL has a competitive advantage in fuel quality

• Excise tax quality differentiation allows LUKOIL to monetize this difference today

Euro

EURO-4

EURO-5

EURO-3

Diesel

Gasoline Regulations


8

What Next?

Change in export regime (60/66 ) with simultaneous mandatory refinery upgrades will change a product slate and export profile

Long term tendency-100% export duty for heavy-ends Growth of gasoline consumption in Russia will allow to absorb all

incremental production growth but diesel surplus will increase

Differentiated export tariffs will create a positive incentive and healthy margins in Russia and additional pressure for European refiners


Downstream in Europe and Russia

Russia • 4 refineries, total capacity 914 kbpd • 2 gas plants, total capacity 1 bcm/year • 2 petrochemicals plants • More than 2,000 stations • Power generation 4,700 MW*

Europe • 5 refineries, total capacity 572 kbpd • More than 3,000 stations in 23 countries • Power generation 400 MW • 1 petrochemical plant


10

Refining throughput

Refining Volumes (2005-2011)

Downstream/Upstream Integration

40% increase of refining volumes (more than 1/3 is

increase of Russian refineries

capacity)

20 percentage points increase


11

Refining Contribution to Total EBITDA of the Group

Refining segment is a large profitable business


12

LUKOIL Refineries strategic program 2012-2020

Project Capacity, mta Beginning Completion

Nizhny: construction of second FCC hydrocracking complex 2000 2012 2015

Nizhny: construction of hydrocracking complex

4800 2014 2018

Volgograd: construction of VGO hydrocracker

3500 2011 2015

Perm: construction of delayed coking complex 1 800 2011 2015

List of main projects

0

10000

20000

30000

40000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

тыс. т

Other FO VGO DF Fasoline Kero LPG

5,8

9,4

0

2

4

6

8

10

2010 2020

Strategy: Production structure Strategy: Refineries Indexes,%

Strategy: Nelson Index

0

100

2010 2020

Conversion Light products output

Gasoline + 3,8 mta

Diesel Fuel + 5,0 mta

Fuel Oil – 5,7 mta

LUKOIL Refineries strategic program is oriented at:

GROUP А. Gaps closure program (Solomon system), production automation (IT) – minimum investments – maximum efficiency; GROUP В. Products quality improvement; GROUP С. Increase of conversion, increased share of products with a high added value;

12


13

2001

2004

2006 2008 2010

2011

Investment Performance: Successfully Implemented Projects

2007 2009

Alkylation

• Capital expenditure since 2001 totals over 6.2 billion USD

• Nelson Index* increased from 4.6 to 6.7

Reformer

Hydrotreater

Catalytic Cracking

Visbreaking

Isomerization T-Star

Hydrotreater

Hydrotreater

Hydrotreater

Hydrotreater

Reformer

Isomerization

Isomerization

Isomerization

Visbreaking

Visbreaking Isomerization

Alkylation

Coker

* Excluding stakes in ISAB and Zeeland refineries.

gasoline

diesel

gasoline

diesel Euro

Euro

Euro-4

Euro-4

Euro-3 gasoline


14

70

242262

298

441

180215

208271

260

459

297

587

377432

581

731

199

0

450

900

2004 2006 2008 2010

134 79 99

14

82

130

146

110110

117

161

116

133120

162

123

137

152

187

118

70

110

150

190

2004 2006 2008 2010

LUKOIL Russian refineries Solomon performance dynamics for 2004-2010

91,692,7

85,1

90,6

83,083,6

80,3

84,5

82,3

85,083,7

82,7

90,188,5

83,7

88,5

84,084,1

75,0

85,0

95,0

2004 2006 2008 2010

97,4 97,4

96,6

88,6

95,094,8

95,5

92,4

96,0 96,6

94,0

95,395,695,1

91,7

95,3

86,0

90,0

94,0

98,0

2004 2006 2008 2010

28

37

81

54 53

46

33

48

31

34

44

56

4542

49

68

58

50

20

55

90

2004 2006 2008 2010

Beginning from 2004 survey it is observed a positive dynamics of Energy Intensity and Personnel indexes

Reduction in Refinery Utilization index in 2010 comparing to 2008 is aligned with: Volgograd – turnaround; Perm – productive capacity increase

and unscheduled shutdown of units Reduction of Mechanical Availability at

Perm Refinery is mainly aligned with unscheduled shutdown of Catalytic Reforming units (35-8), Hydrocracking and Catalytic Cracking

Calculation of indexes according to investigation methodology for 2008 resulted in the reduction of Cash Operating Expenses in comparison with 2008, based on the results for 2010, correction of index is expected Perm Perm* Nizhny Volgograd Ukhta TRN

Q1

Q2 Q4 Q4

Q1 Q2 Q3

Q1

Q3

Q2

Q4

Q3 Q3

Indexes and quartiles are estimated according to investigation methodology for 2008

* Calculation of indexes for Perm Refinery according to the change of hydrocracking unit type into High Speed Diesel

85,7

81,6 104

96,9 96,0

94,6 67

Q2 Q1 86

93

Q1

80 Q3

Refinery Utilization (RU), %

Energy Intensity Index (EII) Personnel Index (PI), hours/100EDC

Mechanical Availability (MA), %

Cash Operating Expenses (OPEX/UEDC), USA cents / UEDC


Refining strategy update

New macroeconomic changes affected LUKOIL refining strategy with more focus on conversion and creating “super sites”: - New second FCC installation in NORSI refinery - New super sized resid hydrocracker in NORSI - New coker complex in Perm refinery

- New hydro cracking installation in Burgas

• Staging of big projects into separate stand alone projects for the purpose of managing a cash flow (residual hydrocracker in Burgas, FCC installation in Volgograd)

• Cancelation or minimising capex for marginal refineries (Odessa, Petrotel)

Execution of new refining strategy is to allow LUKOIL: • Increase distillation capacity to 67 mln .t.p.a. (1, 340 tbd) • Increase Nelson complexity index from 7,5 to 9,4; • Increase conversion ( “depth of refining”) from 79% to 92%; • Increase light yeilds produciotn from 60% to 73%; • Improve overall quality of refined products and meet all the spec requirements ; • Make a significant progress on Solomon benchmarking


16

Future Opportunities: Nizhny Novgorod Refinery Supersite

• To address the shortage of gasoline in the domestic market of Russia Second FCC Project was launched.

Project is expected to save money and time by duplication of existing design

• Advantageous market logistics ( product pipeline and river terminal access). Synergy with Perm Refinery (LS VGO)

Light products growth

Capacity, mmt/year

Investment, $ bn

IRR Launch

Catalytic cracking of VGO +1.2 mmt/year gasoline 2.0 0.7 16% 2016

Residue hydrocracking

+ 1.7 mmt/year diesel

+ 0.5 mmt/year gasoline

4.8 3.1 >20% 2018

Capacity – 345 kbpd Nelson index (2011) – 6.3


17

Future Opportunities: Volgograd Refinery Upgrade


Capacity, mmt/year

Investment, $ bn

IRR Launch

VGO hydrocracking

+ 1.8 mmt/year diesel

+ 0.6 mmt/year gasoline

3.5

1.8

>20%

2016

• VGO Hydro cracking into high-quality distillates and gasoline: +0,9 mln tpa of Euro 5 gasoline, +2,4 mln tpa Euro 5 diesel • Enable production of high-quality Base III for lubricants • Opportunity for second phase VGO FCC with gas fractionation and propylene concentration units

• Integration with marketing sales and power generation network

Capacity – 223 kbpd Nelson Index (2011) – 5.4


18

Future Opportunities: Perm Refinery Upgrade

• High conversion residue processing to light products and coke

• Market synergy with metallurgical industry

• Synergy with Nizhny Novgorod Refinery (LS VGO processing)

Capacity – 264 kbpd Nelson index (2011) – 7.9


Capacity, mmt/year

Investment, $ bn

IRR Launch

Coking complex +1.2 mmt/year 2.1 0.7 >20% 2015


19

Future Opportunities: Burgas Refinery Upgrade

Light products growth Capacity, mmt/year

Investment, $ bn

IRR Launch

H-oil complex

+ 1.2 mmt/year diesel + 0.5 mmt/year

Gasoline 2.5 1.4 >20% 2015

• The only refinery in Bulgaria, enjoys solid position in domestic market

• Costal location and good infrastructure for exports

• Resid HCK project will turn Burgas into best-in-class refinery

• HCK EPC contract is signed , completion expected in 2015

Capacity – 199 kbpd Nelson Index (2011) – 8.9


20

Logistics Optimization allows LUKOIL to reduce transportation costs

LUKOIL export by transportation mode

2011 2021 Project “South” diesel pipeline

Planned commissioning–

2015

Exports by river via Kerch

Project “North” diesel pipeline

Commissioning – 2010

Kstovo-Nagornaya gasoline/diesel

pipeline

Exports by river via St-

Petersburg

Ukhta Refinery

Perm Refinery

Nizhny Novgorod Refinery

Volgograd Refinery

Novorossiysk

Moscow

Ventspils

Primorsk

• Russian refineries generally have significant transportation costs moving products mostly by rail road to export ports.

• Product pipelines «Transneftproduct» network development are to reduce transportation costs (project «South», «Kstovo-Nagornaya»)

• 2 LUKOIL refineries in PERM and N. Novgorod enjoy access to product pipeline, while refinery in Volgograd is expected to have it by 2015

Railway 81 %

Pipeline 11 %

2021

Pipeline 33 %

River16 %

Railway 51 %

River 8 %


21 21

LUKOIL Western European Refineries

ISAB refinery, Italy (LUKOIL share increased to 80% recently)

• 16 MMTA crude distillation capacity (156 kbbl/d) • Nelson index 9,3 • Good logistics and large infrastructure at Augusta Bay,

Sicily • Integration with ISAB Energy for asphalt/resid

gasification • Energy efficiency and cost optimization programms are

in progress to improve a profitability

Zeeland (ex.TRN) refinery, the Netherlands

(LUKOIL share – 45%) 8 MMTA crude distillation capacity (70 kbbl/d)

Nelson index 9,8-oversized VGO/resid Hydrocracker

Large infrastructure: own Borselle terminal and pipeline to Maasvlakte oil terminal in Rotterdamfor

1 st Solomon quartile perfomer

Synergy with LUKOIL refineries: dedicated VGO and resid fuel stram for TRN

HCK expansion project is in progress


22 22

Conclusions

• Since 2008 there was a decline in refining margin in Europe, while in Russia it recovered quickly to pre-

crisis levels

• Although a global motor fuel consumption growth is forecasted, the most of it comes from non-OECD

contries. Whereas in OECD transport consumption some decline is expected

• Change in Russian export regime (60/66 ) with simultaneous mandatory refinery upgrades will change a

product slate and export profile

• Long term tendency-100% export duty introduction for heavy-ends

• Growth of gasoline consumption in Russia will allow to absorb all incremental production growth but

diesel surplus will increase

• Differentiated export tariffs will create a positive incentive and healthy margins for Russia refineries in

and additional pressure for European ones

• LUKOIL refineries have executed a number of investment projects to benefit from these changes.

Further investment are expected to bring them on par with world class refineries

Implementation of Solomon gaps closure program in 2006-2010: impressive results in all Solomon metrics

Successful integration of newly acquired refineries in Western Europe


23

THANK YOU FOR YOUR ATTENTION!

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Refining Macroeconomics in Russia/Europe and … · Refining Macroeconomics in Russia/Europe and LUKOIL Refineries business development . ... Project is expected to save money and