Kazakhstan to upgrade refineries by 2016 to prevent repeat of fuel shortages

By bne IntelliNews October 7, 2014

Naubet Bisenov in Almaty -


Kazakhstan’s government has vowed to make the country more self-reliant on petroleum products after it completes the overhaul of the country's three Soviet-era refineries in 2016, in a bid to prevent a repeat of September’s chronic fuel shortages. However, the energy ministry said on October 7 it had decided not to build a fourth refinery, instead opting to expand the existing Shymkent refinery.

Deputy Energy Minister Magzum Mirzagaliyev told the KIOGE international oil and gas conference in Almaty on October 1 that the country was implementing a programme to reconstruct the Atyrau, Pavlodar and Shymkent refineries, whose combined capacity is too low to satisfy domestic demand for light petroleum products. After the modernisation programme, Kazakhstan will raise the level of demand met by domestic production from the current 70% to 88%.

"We expect the modernisation of the refineries to be completed in 2016. As a result, the country will be able to satisfy its needs in petroleum products that we now have to import from the Russian Federation," Mirzagaliyev said.

The oil-rich Central Asian nation currently has to cover around 30% of demand with imports from Russia. This causes problems because wholesale prices of some types of petrol and diesel supplied in Russia are higher than Kazakhstan's domestic retail prices, which are set by the government. This discrepancy makes imports of fuel unprofitable, which in September led to acute fuel shortages and kilometre-long queues at the pumps.

There had been some uncertainty about whether the government would opt to expand the Shymkent refinery or build a fourth refinery to deal with any fuel shortages after 2023. Alisher Argimbayev, deputy chairman of the Energy Ministry's department for the development of the oil industry, told bne that shortages of diesel are estimated at 91,000 tonnes in 2023 and 160,000 tonnes in 2025.

However, on October 7, First Deputy Energy Minister Uzakbay Karabalin told MPs that the government had opted for expanding the Shymkent refinery, because for a new refinery to be feasible its capacity would have to be at least 10m tonnes. “The government has suggested the expansion of the Shymkent refinery instead of building a fourth one, and the head of state [President Nursultan Nazarbayev] has approved this proposal,” Karabalin told hearings in parliament. “This is the most favourable option.”

Mirzagaliyev told the KIOGE conference that an expansion of the Shymkent was more feasible than the construction of a fourth refinery, because Shymkent has room for capacity to be expanded as well as the necessary logistics and customers to handle the extra product.

Speaking at the KIOGE conference on October 2, Kadyrberdi Elevsinov, managing director at KazMunaiGas Refining and Marketing, said that following the reconstruction of the existing refineries, capacity would increase from 14.3m tonnes in 2013 to 18.5m tonnes in 2017. This translates into 115.3% growth in high-octane petrol production to 5.73m tonnes, a 38.3% increase in diesel output to 5.63m tonnes, and a 138% jump in jet fuel production to 957,000 tonnes. The reconstruction programme will also see the northern Pavlodar refinery completely switch to refining domestic oil instead of Siberian oil.

Domestic petrol prices to rise

Since the Kazakh government caps the prices of 80 octane and 92 octane petrol and diesel in order to keep inflation under control (transport costs are believed to make up up to 50% of the price of finished products in Kazakhstan), a 19% devaluation of the tenge in February has made Kazakh domestic retail fuel prices lower than the wholesale prices in Russia.

Mirzagaliyev admitted that this discouraged independent traders from importing fuel from Russia, leading to the recent shortages. The situation is improving because KazMunaiGas, the national oil and gas company, agreed to import 180,000 tonnes of light petroleum products from Russia and 10,000 tonnes from Azerbaijan at a loss, he said. "However, we are not ready and are not planning to abandon the state regulation of fuel prices," the deputy energy minister conceded.

On October 1, First Deputy Energy Minister Uzakbay Karabalin complained that the low prices of petrol meant Kazakhstan was "in essence a cheap petrol station in the entire Eurasian space" for vehicles transiting through the country. "The issue is how long we will be able to continue this. I believe there should be an increase in price in the future," Karabalin said.

The first deputy energy ministry suggested that Kazakhstan might bring petrol prices to the Russian levels by 2019, but stressed that the current prices would be maintained until the end of this year.


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