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Q&A: Rosneft Deutschland on strategy, European refining

06 Mar 2018 13:24 GMT
Q&A: Rosneft Deutschland on strategy, European refining

London, 6 March (Argus) — 
Rosneft Deutschland, the German subsidiary of Russian oil major Rosneft, has stakes in the 208,000 b/d PCK refinery in Schwedt, the 301,000 b/d Miro refinery in Karlsruhe and the 210,000 b/d Bayernoil refinery. Since the unwinding of its joint venture with BP, Rosneft Deutschland has been following a trajectory towards marketing a full products portfolio in the German downstream market. Argus spoke with managing director Brian Chesterman on the process of starting operations and the future of European refining.

How has the process of starting up operations in Germany been? Which aspects have proved easier or more difficult than expected? What is your planned start date for trading across the product slate?

We agreed with BP on the separation of the joint venture and we started operations on 1 January 2017. What that meant was that we could bring in our own crude oil, refine it, and instruct the refineries on what products to make. During the joint venture with BP we had no office, no systems, no people. So, it was a joint venture that was really operated by BP. So, we had to really establish our own business.

We decided to do this in two phases. The first step was just to manage our shareholding in the three refineries we have shareholdings in, which we implemented on 1 January, that went more smoothly than we might have expected. At that time, all the product was sold to BP and they marketed everything. This year we decided we could manage bitumen by ourselves, […] it was also an opportunity for us to step into the market with something this year and learn a bit more about the process. That has actually gone remarkably well. On 1 January 2019 we will be marketing everything. We are well on track for delivering on that, and we have hit all of the milestones that we need to hit.

With the start of direct marketing of Rosneft's volumes in Schwedt, Miro and Bayernoil, are you looking at buying or even building a petrol station network or storage facilities?

We get asked this question a lot. Right now, our number one job is marketing the product as a wholesaler in the German market. We will always look at opportunities, but right now, in the short term, we are not evaluating that. Most of the depots around Germany are fairly open to third parties, you do not need to own depots as a wholesaler. And most of the big retail outlets are already supplied by someone else! One thing to remember is that we are not bringing new product into the market, it is product that the market has been absorbing one way or another. We just need to market it in the most efficient way that we can.

Will you be focusing trading on a particular region in Germany?

You need to be strong in your home region. So, the region around your refineries is where you would be concentrating to be very efficient. But we expect there will be demand all over Germany as well as in Austria, Poland, Switzerland, and our products already go into these markets. We will continue to deliver along what we consider to be the most efficient route.

Do you see additional potential to expand Rosneft's refinery share in Germany in the future?

We always evaluate opportunities. If someone is interested in selling something, we always need to be ready to think about whether we would like to expand or not. We have not got an immediate plan to expand our presence in Germany but it is always an option.

Some refiners are looking to upgrade their capacity in the run-up to the approaching IMO 2020 regulations. What impact do you think the change will have on refining in Germany and beyond? Will Rosneft support further investments into desulphurisation units in the refineries it holds stakes in?

We are going to see a disruption in the balance. Industry analysts coalesce around a view that says the low sulphur bunkers will be satisfied by more marine diesel, we will see more gasoil demand end up in the fuel oil market and very good margins for refiners producing diesel. Of course, high sulphur fuel oil will need to clear somewhere, which will probably be the power market in Asia and other places. We will end up in a very interesting margin environment in the next few years.

We are always looking at investments in our refineries. We are investing €600mn [$745mn] over the next five years, probably two-thirds of that ends up in PCK where we are longest high sulphur fuel oil. The good news is we are in quite a good position in Bayernoil and Miro with relatively low fuel production. The Miro coke drums are being replaced, and that is going very well, so we are well positioned there. In PCK, we will look at opportunities for further investments, particularly at the heavy end of the barrel. But it is impossible to do anything before 2020, we just do not have time now. Nobody has time to build anything for 2020, so this will be more in the medium term.

What other investment projects are you looking at for PCK?

There is a full range. Everything from improving energy efficiency and emissions reductions — we take seriously our responsibility for improving the environment — and also commercial investments, like aiming to increase the yield and the efficiency of the operations. There are many projects these investments are spread across. Also digitalisation, we invest in our control systems to take advantage of modern technology. There are investments planned in other refineries for improving the control systems.

There has also been talk of extending the Druzhba pipeline to the Miro and Bayernoil refineries — is Rosneft still considering that?

It is in discussion. This is the southern Druzhba, not to be confused with the northern Druzhba. We have heard people say ‘they will build a pipeline from PCK down to Bayernoil' and that is definitely not happening. The southern part of the Druzhba runs from Russia down to the Czech Republic. It is possible to link that across to the TAL pipeline. There is interest in this from other stakeholders. It is interesting from a diversity and security of supply perspective. The refineries in the southern part of Germany are all supplied by the TAL pipeline system. Having a second option would be good from a security point of view.

The connection that you need to make into the TAL system is not that long. Urals comes down the Druzhba, the refineries in the southern part of Germany also process Urals but it comes via the TAL system. So it is just another crude that would feed into the TAL system, just from a different point. This would not be limited to Rosneft, it is also for those interested in buying from this source.

The German downstream sector in the last few years has been marked by increasing consolidation. How do you think this trend will affect your business in the long run?

In the end it is all about satisfying demand. That demand does not change. The ownership and structure of it might change. We are talking to various customers, people are interested in working with us and selling our product in their locations, and we expect that to continue. We will manage everything in Berlin — in an era of modern technology I do not think we need to have various sales offices.

Do you think that a rising biofuel quota — 6pc from 2020 — has the potential to significantly increase the market share of E10 in Germany?

Selling more E10 would be a good thing for us, because that makes it easier to meet the biofuels quota. Our expectation is that more E10 will be sold. But let me ask you a question, let us talk about the history. What happened when E10 was introduced in Germany?

It was a PR disaster. But there is always a chance of politics mandating the use of E10, as has happened in other countries in Europe.

We do need to see a shift to E10 to support the level of greenhouse gas reduction targets that are required, and we expect that to happen. And as an industry we support the PR effort that might be required to do that.

How would you do that?

We have a few years to work that out.

Would the inclusion of Upstream Emissions Reductions into the compliance calculation put Rosneft and other fully integrated businesses at an advantage?

This will be a part of the bigger topic of linking all the various emissions schemes in CO2 emissions trading in Europe. I think connecting all of those things is a good idea. We should do as much as we can to encourage lower greenhouse gas emissions. We need to come together as an industry to do this. These things are best discussed with, say, a Fuels Europe group that has thought about how those areas connect up and what would be in the best interest of the environment, as well as the long term sustainability of the industry. The automotive industry has a role to play in that discussion, too.

Do you see any other key resolutions being made that will drastically impact refining and trading in Europe, similar to the IMO 2020 decision?

The IMO decision was quite a shock — everyone was expecting it for 2025. I think that has certainly been the biggest change since 2010-2011 when we saw the last sulphur reduction in main fuels. I do not think people are expecting specification changes that are so dramatic. The well-signalled ones are in biofuels and everyone has the right amount of time to prepare for those. The industry is right now looking at IMO 2020 and what is happening there, and that is where our focus is. I do not think there is anything else on the horizon, but you never know.

We have heard the news of a potential merger between PKN and Lotos in Poland. Would it make a big difference to Rosneft's operations, particularly since you are already exporting into Poland?

This has been talked about for quite a while; it will be interesting to see how it plays out in the market. People get together, but in the end, they are not increasing the capacity of the refineries. Nothing is changing in the supply and demand balance. Poland is a short market for distillates — that will be true whether they merge or do not, that is not going to make any difference. My initial reaction would be we will see it as an attractive market, particularly because we have the PCK refinery on the Polish border, product already goes from PCK into Poland.

Do you see an upward trend of rail exports into Poland?

Yes, because there has been a lot of change in the Polish market. There has been some legislation […] that has enabled the market to be more transparent. We expect there will be more demand for people like ourselves to satisfy. Anything that forces everybody to comply with what is legal is a good thing.

Where do you see the main challenges for German and European refining in the next few years?

In Germany, demand is slowly declining, and it is a short market for middle distillates, a long market for gasoline, so the challenge is always to cope with the shifting change in demand. The good news is it does not change overnight. It has been well forecast and it will continue that way. But we live in a global world, and last year we saw good refining margins in Germany. One of the drivers was a hurricane in the US. All of these exogenous events [drive margins]— weather-related events, global supply and demand. Analysts predict global demand this year will grow by about 1.5 mn b/d; global growth is relatively strong. China and India have two-thirds of that, and it will continue to pull demand up. A wave of new refineries came on, particularly in places like the Middle East, in the last five years, but in Europe I think we have one new refinery coming on this year or next year, which is the Turkish refinery from Socar. There will be no new capacity added in Germany.

But I do not think there will be any capacity decreases, either. Anything is possible, but I think if we are going to see reasonable margins for the short term, you know, a rising tide lifts all ships. I think that will sustain the refineries for a while. Demand in Europe over time will fall and some of the less efficient refineries will close, it is just a question of when. Fortunately, our refineries are among the very best in Europe from a complexity point of view, so they are well-suited to be very competitive for the long term.

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