Russias Ministry of Economic Development yesterday said the government will review exempting base oil from the new export duty, which one analyst says if enforced could lead to a painful and slow death for some base oil refiners in Russia.
Moscow legislators last year introduced a flat export duty for petroleum products such as bitumen, fuel oil, tar oil and vacuum gas oil, as well as base oils and lubricants. The government increased the export duty from the current 66 percent to 100 percent of crude oil export duty, effective by 2015. The export duty for many petrochemical products, excluding gasoline which stays at the current 90 percent of the crude oil export duty, will be equal to the crude oil export duty.
Some market observers believe the increase is aimed at stabilizing domestic energy prices and stimulating refiners to offer more and higher-quality products at competitive prices. However, if the export duty applies to base oils, it will hamper upgrading projects on many refiners because their managements could focus on production of gasoline or diesel fuel, products that have higher profit margins. A lower export duty, however, could stimulate base oil production and help increase finished product exports, analysts suggest.
Lukoil, Garzpromneft and TNK-BP addressed the issue recently with Deputy Prime Minister Igor Sechin, Izvestia daily newspaper reported. Lukoil and Gazpromneft did not respond to Lube Reports requests for comment by deadline.
The oil majors reportedly told government officials that base oil production technology is much more complex compared to the production of other derivatives. Some, such as fuel oil and vacuum gas oil, are feedstock for base oil refining. Base oil production employs several very costly technological processes, the refiners reportedly told Sechin. Base oil production has a deeper refining complexity resulting in high-value added finished products.
The economic development ministry backs the oil majors claim and initiated a review of the government decision, proposing that lubricants be removed from the petrochemical products list subject to the new export duty. Lubricants should be taxed at the current level of 66 percent of the crude oil export duty, the ministry proposed.
Compared to other petrochemical products, base oil margins can be small, Alexandr Bylkin, an analyst at the Moscow consulting firm Petromarket, told Lube Report in emailed comments Monday. Lubricant producers are special branches of the main companies with their own production facilities and own budget. A high export duty might give them a serious blow.
With the refiners current technological performance level and if the proposed export duty is imposed right now, base oil sales margins would be even lower, Bylkin contended, or around $4 per barrel of base oil sold if crude oil prices reach $120 to $140 per barrel, which is an unlikely scenario. This could lead to a painful and slow death for some base oil refiners in Russia.