‘The idea of refining Kazakhstani oil in Azerbaijan with a subsequent return of oil products to Kazakhstan to cover the internal deficit seems quite logical and elegant at first,’ says Oleg Chervinsky, oil and gas analyst and the publisher at Petroleum, Kazakhstani oil magazine, in his interview to AzVision.az.
He says KazMunayGas boasts such an experience. ‘KazMunayGas tolled one and a half million tons of crude oil to be processed at refineries in Xinjiang Uyghur Autonomous Region in the PRC in 2013. They received around a million tons of high-quality oil products in return, which covered the existing deficit. The arrangement stopped working literally a year later in early 2014, as Kazakhstan and Russia signed an intergovernmental agreement within the framework of the Customs Union on duty-free supplies of oil products from Russia to Kazakhstan’, the expert explains.
He notes that the oil products received from China turned out to be more costly than direct imports from Russia.
‘Kazakhstan has traditionally been covering its POL deficiency through direct imports from Russia since then. I believe at this stage the same fate awaits possible cooperation between Azerbaijan and Kazakhstan. The simple truth is that, apart from the crude oil cost, we must also account for the price of transporting it in tankers across the Caspian Sea to Baku, service fees to the Azerbaijani refineries for processing it and the cost of returning finished oil products to Kazakhstan.
If the current expenses are superimposed on the cost of crude oil, I am afraid the price for petroleum products will simply not be competitive. It will end up being higher than the current price level established in Kazakhstan, especially considering that the state has been actively regulating prices for gasoline, diesel, and liquefied gas, and they are much lower than in the neighbouring countries, and naturally, much lower than the current global prices. Such an arrangement is hardly economically attractive for Kazakhstan under these conditions, Chervinsky elaborates.
He goes on to say that Kazakhstan is planning to build another local oil refinery.
‘This is mainly because Kazakhstan periodically faces a shortage of fuels and lubricants, especially if one of the three largest refineries shuts down for scheduled or, which is worse, unplanned repairs. As a rule, it immediately impacts the market, while consumers feel a shortage of oil products at gas stations. Both the state and society have been discussing the need for building another oil refinery for ten years. They even offered various construction sites, such as the Karaganda and Mangistau regions. The government and KazMunayGas established five years ago that Kazakhstan needs another plant, but boosting the capacity of an existing refinery would cost much less than building a new one at a new location. What they meant was the Shymkent refinery, located in the most densely populated region of the country, near oil fields. It is quite a young plant with free lands and sites meant for expansion. They even developed a feasibility study for the expansion project in 2018. It currently runs at a capacity of 6 million tons. They developed a project to expand its capacity to 9 million. Unfortunately, while the approvals and examinations of the project moved rather slowly, the state updated their forecast for the socio-economic development of the country. They concluded that the consumption rate of petroleum products will grow much faster than the numbers expected 5 years ago and an expansion up to 9 million tons was no longer relevant. The feasibility study was revised and completed just last year, and they decided to double the capacity, from 6 to 12 million tons, at the Shymkent Refinery.
The idea is quite rational, as it will be both faster and cheaper. But then the key question of what the refinery will be loaded with arises. I mentioned earlier that the state regulates the prices for POL in Kazakhstan and keeps them at a low level to provide the population with cheap oil products and to maintain social stability. Accordingly, oil companies do not find it profitable to supply oil for processing at domestic prices. For example, in 2022, the domestic prices for oil supplied to local refineries stood at $30 per barrel. At the same time, exporting a barrel could earn you up to 70-80 dollars. Understandably, no one is eager to supply oil at this price. The state obliges subsoil users to supply certain volumes in their contracts, which is approximately 30-40% of produced oil, depending on the field, cost, etc.
The Chinese companies that operate in Aktobe and Kyzylorda regions supply up to 60% of the oil they produce to refineries. Naturally, they do not find this beneficial. They are losing profit. And the megaprojects in Kazakhstan, such as Tengiz, Kashagan and Karachaganak, which provide the lion’s share of the oil production, are exempt from the obligation to supply raw materials to the domestic market. What remains is the subsidiary of KazMunayGas, the Chinese investors, small and medium private Kazakh companies, which the government can force to supply oil. However, these companies will not find an additional 6 million tons in total for the Shymkent refinery. Accordingly, the most urgent question still stands. What do we load this refinery with?
The question remains answerless. The challenge of loading the oil refineries in Kazakhstan will persist if there are no changes in the economic mechanisms in the fuel sector; if we do not increase the prices for POL; and if we do not give up state regulation. The construction of a new plant remains doubtful. The deficit is traditionally covered through imports from Russia’, the expert concludes.
AzVision Analytical group
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