Kazakhstan's "social" fuel prices lead to shortages for all

By bne IntelliNews September 29, 2014

Jacopo Dettoni in Almaty -

 

Kazakhstan, a growing oil powerhouse, is suffering domestic petrol shortages leading to kilometre-long queues at the pumps because of low, government-set fuel prices. 

“Today’s pricing structure doesn't make sense,” Sergey Smirnov, an independent oil expert based in Astana, tells bne. “In the past, international oil prices and the dollar exchange rate featured among the major parameters of the formula used to determine price caps on retail sales of petroleum products. Not even such methods are being used any longer."

The “social” regulated price regime for gasoline A80, A92 and diesel has made the business unviable for fuel importers that normally cover one-third of domestic demand. Today, the wholesale price of gasoline AI-92 on the Russian-Kazakh border is KZT125 per litre, whereas its  price at the pump in Kazakhstan is KZT128. Taking into account transport, storage and operating costs, its actual retails price should exceed KZT150, Smirnov estimates. 

As private companies have quit the market, the government has been forced to get involved. With petrol  stations running short of petrol, “we decided to entrust [state oil firm] KazMunaiGas with supplying fuel to the Kazakh market at a loss”, said first deputy minister of Energy Uzakbai Karabalin, according to local press reports. 

“There is likely to be another increase in the prices of gasoline and diesel fuel during the remaining months of 2014” to enable importers to get back into the black, Oleg Yegorov, a senior researcher at the Institute of economics of the ministry of Education and science, tells bne

Devaluation effects

The current market crisis was triggered by a 19% devaluation of the tenge carried out by the Kazakh central bank in February. As energy authorities did not immediately adjust fuel retail prices accordingly, importers’  margins were squeezed and they pulled out of the market. The situation escalated with the beginning of the grain harvesting seasons between August and September, when dozens of gas stations across the country ran out of petrol and kilometre-long queues formed outside those with some fuel left. 

Only an ongoing overhaul of the country's three old-fashioned refineries will address fuel the shortages once for all. “The modernisation of Kazakhstan’s three oil refineries will fully cover the needs of the domestic fuel market,” Yegorov said.  

The Atyrau, Pavlodar and Shymkent refineries are undergoing upgrading works aimed at raising their total capacity from 14.4m tonnes per year to 17.5m tonnes per year, according to figures from KazMunaiGas. Their efficiency of oil refining will increase to 87%, whereas the Atyrau facility, for example, currently operates at just 63% capacity. At the same time, President Nursultan Nazarbayev urged the government back in January to find a location for a fourth, brand-new refinery, which could be ready in 2025. KazMunaiGaz, which fully owns the Atyrau and Pavlodar facilities and retains a 49.72% in the Shymkent plant, expects work at the refineries to be wrapped up in 2016. 

Until the modernised facilities come online, the government will have to keep tapping the Russian market. President Nazarbayev has labelled as “ridiculous” Kazakhstan's dependence on imported Russian fuels. 

Kazakhstan produced 1.78m barrels per day (b/d) in 2013, more than six-times as much as needed in the domestic market, according to figures from BP's 2014 Statistical Review of World Energy. However, because of the country's poor refining infrastructure, crude oil and petroleum products are the two largest single import items. 

Specifically, A92 imports from Russia in 2013 made up 37% of the demand, government figures show. At the same time, imports made up around 15% of the demand for A80 and diesel. The refineries' themselves rely on Russian crude for half of their needs (they processed around 12m tonnes in 2013) as they date back to  Soviet times and were originally designed to process West Siberian crude.

Khanat Shaku contributed research to this article.

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