Mr. Gutseriev Stakes on Galoline

RussNeft increases the capacity of Orsknefteorgsinetz (ONOS). The company has developed ONOS modernization project. If the project is performed production of high-octane gasoline at the plant is to increase twice and reach the point of 1.4 mln tons annually by 2010; the depth of crude processing is to amount from 60% to 92%. The experts say gasoline consumption in Russia will grow in the long run.

OAO Oil and Gas Company RussNeft comprises 30 producing entities developing fields with total recoverable reserves of over 600 mln tons, two oil refineries – Orsknefteorgsintez and Krasnodarekoneft (total capacity – around 10 mln tons annually), 300 fuel stations in five Russian regions, a lube oil plant in the Orenburg region and two transporting entities. Last year the company produced 16 mln tons of oil. The consolidated revenue for 2005 by Russian Accounting Standards was 100 bln rubles, net profit – 6.49 bln rubles. 100% of RussNeft is controlled by company’s President Mikhail Gutseriev and his family. RussNeft owns over 95% of ONOS. ONOS produces gasolines, diesel, lubes, jet fuel, bitumen, fuel oil. Revenue for 2005 was 2.2 bln rubles, net profit – 336.1 bln rubles. After three quarters of 2006 the profit was 2.6 bln rubles, net profit – 448 bln rubles.

RussNeft has developed a three year plan of ONOS modernization. According to the plan production of gasolines at the Orsk entity will be increased twice from 723 000 tons to 1.4 mln tons, diesel production will increase from 1.4 mln tons to 1.9 mln tons, RussNeft spokesman said. Fuel oil and diesel have over 60% of the total amount of ONOS production. By 2010 ONOS will reach its full capacity and will start producing 6 mln tons of oil, the processing depth will reach the point of 92%, according to the press service. For those purposes, new equipment will be installed in 2007. It will allow increasing the yield of high-octane gasolines Euro-3, -4, -5; the catalyst of hydrofining will be replaced. ONOS is mastering Euro-4 standard diesel and is planning to bring the production to the world market. RussNeft Vice President for public relations Eduard Sarkisov confirmed the plans on ONOS modernization. The press service says RussNeft is carrying out ONOS modernization at its own expense but did not specify the amount of investment. The source familiar with the project said that in 2007 the investment will amount to 1.3 bln rubles; the amount of investment until 2010 has not been defined yet. As Finam analyst Mikhail Frolov puts it, to reach the announced results by 2010 not less than $200 mln investment is needed. The governor of the Orenburg region Igor Dmitrochkov’s spokesman is aware of the plan to increase ONOS capacity.

In the late January RussNeft announced a construction of a light petroleum products on-spot loading platform complex in 2007. This will allow to load the company by at least 500 000 tons annually and reach the planned capacity rate of 5.5 mln tons annually. Mr. Sarkisov explained that RussNeft will allocate around 1.2 bln rubles to the project.

‘ONOS desperately needs modernization, - Mr. Frolov says. – The depth of processing at the plant is not more than 60%, the average for the industry is 71%’. His data says that the deepest processing belongs to Omsk oil refinery (Gazprom neft) and Permnefteorgsintez (Lukoil), with the rate 85% each.

To reach 92% processing depth by 2010 – is an ambitious plan thinks the head of oil gas and energy branch in Russia and CIS from A.T. Kearney Mikhail Belzer. All major companies try to achieve this index.

Last year Novokuibyshevskiy oil refinery (Nk oil refinery, 100% subsidiary of Yukos) refined 7.2 mln tons of oil and produced 1.4 mln tons of gasoline and 2.2 mln tons of diesel, Nk oil refinery spokesman Larisa Starostina says. Saratov oil refinery (owned by TNK-BP) will allocate 1.3 bln rubles into modernization of production in 2007; this will let to refine 7 mln tons of oil annually, spokesman of TNK-BP Povolzhye branch says. 5.9 mln tons of oil were refined by the company in 2006.

Mr. Belzer says gasoline consumption in Russia is currently at the rate of 27 mln tons annually, surplus is 4 mln tons but it is forecasted that by 2015 there will be an increase in gasoline consumption up to 38 mln tons annually and the shortage will be around 5-8 mln tons.

In January 2007 it was reported that Mikhail Gutseriev’s RussNeft failed to pay taxes to the budget. Investigators from Ministry of the Interior concluded that the amount was 740 mln rubles and initiated criminal proceedings upon tax evasion in large amounts. Then at a range of searches took place at RussNeft office.

Valeriy Nesterov, Troyka-Dialog analyst found it difficult to forecast whether this situation will have an impact on RussNeft long-term ONOS investment plans. Mr. Nesterov pointed it out that any problems of such major companies may result in an increase of crediting rates or postponing investment programs. Mr. Nesterov was quoted as saying ‘Nobody can guarantee the feasibility of long-term investment at the oil market nowadays.’