REVIEW: Belarusian refineries post losses in 2011, hope for profit in 2012
MINSK. Jan 16 (Interfax) - Poor conditions for oil supplies to Belarus in 2011 and the financial and economic crisis had a negative impact on results for refineries, but Belarus hopes that its refineries will post profits in 2012. Profit margins are to be increased through oil supplies from Russian tolling companies and thanks to recent amendments to the Tax Code.
Happiness so near
After an intergovernmental agreement between Russian and Belarus about oil supplies and export duties was signed and ratified by the Belarusian parliament at the end of 2010, Belarusian oil refineries hope to see profits and exports grow in 2011.
However, by early in January it became clear that Russian oil companies required additional agreements to crude supply contracts, containing supply premiums. Throughout 2011, Belarus in fact paid Russian oil companies a premium of $5.5-$6 per barrel. Belarusian state petrochemicals concern Belneftekhim said at the start of 2011 that it saw the premium as a de-facto export duty on the oil.
Thus, Russian oil, which was officially delivered to Belarus duty- and quota-free, went up by $45 per tonne for Belarusian refineries in 2011.
Belneftekhim maintained a ban on tolling companies fully disposing of finished products, so Russian companies refused to supply oil on tolling terms. Belarusian refineries refined crude from Belarusian tolling companies or crude bought by the refineries themselves. The price of tolling plunged from $60 to $1.5 per tonne so refineries were virtually stripped of the profits obtained from this service.
As a result when the Belarusian ruble saw its first devaluation of the year (May 2011), refineries already faced serious financial problems, even though refining volumes had been restored (after the January stoppage).
Industry representatives say that tolling in 2011 had a negative impact on company finances. "We suffered considerable losses due to tolling with balance sheets taking a turn for the worst," a spokesman for Mozyr Refinery said. The refinery's main losses were due to exchange rate differences and taxes on these sums, he said.
The financial crisis also led to lower export financing limits and loans became more expensive, he said. In addition, secondary investment projects were postponed or temporarily suspended.
Naftan holds a similar view.
Belarusian refineries say there was no opportunity to make profit or even break even on the domestic market in 2011. Despite a drop in the Belarusian ruble exchange rate, prices for motor fuel were not raised adequately, while refineries and Belarusian tolling companies had to pay oil importers in foreign currency.
Belarusian refineries held on to concessions on mandatory sales of foreign currency revenue to the currency-stock exchange in the second and third quarters, but these concessions were lifted in the fourth quarter.
Belarusian refineries were top of the list of companies with the highest losses in the first and second quarters of 2011. Refineries in the first half posted total net losses of 170.5 billion Belarusian rubles, compared with a profit in the same period of 2010. Refineries obtained a very slight net profit in the third quarter and then posted losses again in the fourth because socially acceptable prices were maintained on the domestic market.
Overall, 2011 was a loss making year for the refining industry.
Gross indicators sustained
Despite oil supply problems in January and production capacity not being fully utilized in the first four to five months of 2011, as well as closures for planned repairs, refining volume was increased 24.4% year-on-year in 2011 to 20.47 million tonnes. Production of gasoline, however, dropped 0.7%, while diesel fuel output climbed 26.3%.
Belarusian exports of petroleum products in physical terms grew 53.8% in January-October 2011 to 12.6 million tonnes. The average export contract price in the 10 months was $805 per tonne, up 36.9% on January-October 2010.
Industry experts say exports continued to grow in November and December 2011.
Belarusian crude exports also climbed in 2011. Belarus exported around 1.55 million tonnes of oil in 2011 and production volume was 1.68 million tonnes (down 1.1% on 2010). Due to the suspension of Russian oil supplies, Belarusian refineries in January-February 2011 had to refine oil produced in the country. Over the two months, refineries processed around 130,000 tonnes of Belarusian oil.
Azerbaijani crude: a humble minimum
Last year, Belarus intended to import up to 4 million tonnes of oil from Venezuela, some of it under swap deals with Azerbaijan. But Belarus actually imported just over 1.1 million tonnes, LLC BNK-Ukraine, a subsidiary of the Belarusian company, told Interfax.
Belarus imported quite a bit of Azerbaijani, oil in January and February, when it was not receiving enough from Russia. But the formula for paying bonuses to oil suppliers, introduced by Russian companies in 2011, did nothing to encourage Belarus to work actively in this area.
The Mozyr refinery said it did not refine more than 40,000-60,000 tonnes of Azerbaijani oil per month in October-December, and Naftan hardly refined any at all.
In addition, the tendency for oil prices to grow persisted in 2011. The average price of alternative oil (from non-CIS countries) was $465 a tonne in January-October, 7.5% more than in the same period of 2010.
At the same time Belarus, in keeping with its commitments to Ukraine's Ukrtransnafta, continued to pay for the transit of Azerbaijani crude along the Odessa-Brody trunk pipeline on the basis that up to 4 million tonnes are transported per year. This inflicted unsubstantiated financial losses on Belarus.
Raising prices without hurting the consumer
A record number of price increases was recorded for automobile fuel last year - diesel fuel and gasoline prices were raised on 11 occasions. Nevertheless, the price for diesel fuel on the domestic market stood at $0.6-$0.7 for one liter in equivalent in December, whereas the cost should be no less than $1 for break-even factories.
In neighboring countries, automobile fuel prices are significantly higher. In March of last year, this led to sharp growth in gray exports (by roughly a third) of automobile fuel and diesel fuel to adjacent countries, according to Belneftekhim. On the other hand, the concern and the Belarusian Economics Ministry have repeatedly noted that automobile fuel is part of a list of socially significant goods, and that this is why the government regulates prices on the domestic market.
The most significant price hike was the first June increase in automobile fuel prices - after the first devaluation of the Belarusian ruble, Belneftekhim raised the price by roughly 30%. This instigated massive protests in Minsk and other Belarusian cities, which were accompanied by closures on all of Minsk's main streets and a large number of detainees. As a result, Belarusian President Alexander Lukashenko demanded that Belneftekhim lower prices. The concern obeyed his request.
Despite such frequent price hikes, exports of Belarusian fuel continued, and in June 2011 the Belarusian government toughened the procedures for exporting it outside of the Customs Union. In keeping with a Council of Ministers resolution, citizens were afforded the opportunity to leave the Customs Union in a personal automobile no more than once every five days. However, this measure did not have the desired effect, and in the middle of November it was adjusted to once every eight days.
At the same time, in November and December, as well as throughout the entire year, regions bordering Russia noted growth in gray exports of automobile fuel, according to Belarusneft.
2012: a new golden age for Belarusian oil refining?
Belneftekhim is confident that agreements signed between Belarus and Russia for the terms to supply oil to the former country in 2012-2015 are the most favorable seen in the last five years.
According to the documents signed in mid-December in Moscow, Russia and Belarus are moving to a new pricing formula for crude oil. The two countries will also not apply quotas and duties in reciprocal trade, along with current taxes and collections with equivalent value.
According to Belarusian oil refineries, the premium for supplies in 2012 has been kept constant and reduced to $1.4 per tonne. Therefore, the price of Russian oil for Belarus has been lowered to roughly $35 per tonne this year.
Furthermore, the documents state that Russian oil companies, which will supply oil to Belarus 2012 for refining under processing terms, will also receive the right to export final production in full measure. Therefore, total refining output on a tolling basis will come to 10.75 million tonnes in 2012, which is no less than one half of total refining. At the same time, the cost of tolling for Russian companies has been increased to $40 per tonne.
Russian oil companies have also received the right for full disposal over end products from toll-refined crude (including supply to Russian companies' own filling stations in Belarus). The petroleum product balance for the two countries also caters for the option of importing no less than 5.8 million tonnes of petroleum products to Russia from Belarus.
In turn, the approved oil balance expects Belarus to import 21.5 million tonnes of oil from Russia through pipelines, as well as up to 3 million tonnes imported via railways if economically feasible.
Furthermore, Belarus plans to produce 1.6 million tonnes of oil this year compared to 1.68 million tonnes 2011. According to the country's indicative balance, exports of Belarusian oil might reach up to 1.66 million tonnes in 2012, which would be an increase in comparison with last year.
Continuing impact of devaluation
Despite the very beneficial terms for operating, the administration of Belarusian oil refineries have said that the lingering effects of currency devaluation in 2011 will still be felt in 2012.
For instance, oil refineries will face difficulties in raising loan resources in 2012 for direct purchases of oil while costs for servicing such loans will increase owing to the growing costs for financial resources.
The absence of intelligible forecasts for the Belarusian ruble's rate and demand for covering losses in 2011 will also hamper the development of investment programs for refineries.
Also, Belarusian oil refineries have been deprived of a discount on their mandatory sales of a portion of sales revenue in 2012. Therefore, these enterprises have been experiencing chronic shortages in forex working capital.
In addition, they also plan to defer 2011 losses to 2012 as specified in amendments to the Special Part of the Tax Code. The amendments were approved by the Belarusian parliament at the end of 2011.
Belarusian refining enterprises are confident that the preferential terms of operations will entirely cover for last year's losses.
However, they also noted that cross-subsidization between the domestic market and export will continue in 2012. Therefore, possible profit sources will be limited this year.
Official rate for January 16 - 8,400 Belarusian rubles/$1.