April 3, 2015 / 2:20 PM / 4 years ago

Russia's refinery modernisation push slowed by sanctions

MOSCOW (Reuters) - Faced with plummeting oil prices and sanctions restricting their access to Western finance, Russian oil companies have asked the government for permission to delay a vast oil refinery modernisation programme.

“Due to the sanctions and related financial constraints, contracts (for modernisation) are either being delayed or frozen,” Vladimir Kapustin, head of leading Russian oil and gas institute VNIPIneft, told an oil conference earlier this week.

The institute oversees the refinery modernisation programme.

Kapustin also said foreign companies are delaying equipment supplies for the refineries in fear of breaching sanctions.

In 2011, Russian oil firms and the government agreed on plans to modernise Russia’s refineries, which were predominantly built in the 1940s and 1970s. Russia’s gasoline supplies almost ran dry in 2011 due to a lack of modern refining capacity, riling a portion of the electorate not long before Putin’s election to a third term as president.

“Companies have again applied to correct the timetable of modernisation,” Dmitry Makhonin, an official with the Federal Anti-Monopoly Service (FAS), told the same conference.

In 2011, oil companies had pledged to install 130 new units by 2020 that will enable Russia to increase yields of lighter products.

A further snag for the new modernisation programme was that Russia introduced a new tax regime last year, encouraging production of high-quality fuel. The tax regime favours some oil producers over others.

Gazprom Neft (GAZP.MM) and Bashneft (BANE.MM) have been most affected by the tax changes due to their high exposure to the downstream sector. Russia’s top oil producer Rosneft (ROSN.MM) is the most active in plans to modernise its plants, such as the Kuibyshev and Syzran refineries.

Since 2000, refinery output in Russia has grown by over 45 percent, reaching 294 million tonnes in 2014. Until now, the growth in refinery production and improvements in oil product quality has not been slowed by sanctions.

According to the Energy Ministry, 19 new units are expected to be commissioned at Russian refineries in 2015 compared with eight in 2014.

Writing by Vladimir Soldatkin; Editing by Alexander Winning and David Holmes

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