FSU refineries: Bashkortostan's refineries

by Heiko Pleines

There are four major oil refineries in the Russian republic of Bashkortostan: Novo-Ufa (with a crude processing capacity of 380,000 bpd), Ufaneftekhim (250,000 bpd), Salavatnefteorgsintez (250,000 bpd) and the Ufa refinery (235,000 bpd).
The four refineries, like most of Bashkortostan's enterprises, have been victims of the Soviet-style management of the republican economy. Most of the republic's enterprises have in fact been renationalized and are being governed by the regional administration. Without regard for considerations of efficiency, they have been united into mega-companies. In 1996, dubious share emissions were used to increase the region's stake in three of the major oil refineries from 51% to 90%. After that, most of Bashkortostan's petrochemical industry was united into the state-run holding, Bashneftekhim. Of the refineries, only Salavatnefteorgsintez -- still only 54% owned by the region -- remained outside the holding, as it was instead a part of the regionaloil company Bashneft.

As of the late 1990s, the Bashkir leadership had achieved its goal of getting all major revenue producers in the republic under its control. This control has offered the republic's president, Murtaza Rakhimov, the chance to ensure political as well as personal access to the republic's resources. The result is a system of personal dependencies and arbitrary rewards. This system, however, has proved rather unfit to solve the refineries' main problems -- namely missing crude supplies and lack of funds for necessary modernization. As a result, the regional oil industry has had to look for strategic partners, which in turn demanded some say in the industry, thus trying to reduce the dominance of the regional leadership in economic matters.
Production levels at the regional oil company, Bashneft, have been declining for years because the company's main fields in Bashkortostan are being depleted and funds for further prospecting are lacking. As a result, the region's refineries were working at some 30% of capacity as of summer 1999.
In response to these problems, Bashneft decided to expand its production base to western Siberia. A new branch, Bashsibneft, was set up and won 25-year concessions for the Khazarsky block and the Kirsko-Kotynskoye field, both situated in the Khanty-Mansi autonomous district. Moreover, in 1998 Bashneft signed agreements with Tyumenneft (TNK) and British Crown Investment that provide for the joint development of oil and gas deposits in the Tyumen region and the supply of oil to Bashkortostan's petrochemical industry.

In early 1999, a general cooperation accord was signed between Bashkortostan and LUKoil. With deliveries of 4 mm tons of crude per year, LUKoil is one of the main suppliers of the region's refineries. As part of its expansionist downstream strategy, LUKoil announced plans to build 30 retail outlets in the region until the end of 2001. This, however, was not enough to make LUKoil a major player in the Bashkir oil industry.
In the summer of 1999, Bashkortostan found another strategic partner in Tatneft. A protocol signed last August formalized business relations between Tatneft and Bashneft. A key feature of the deal was the development of oil fields in Western Siberia. The sides also agreed to cooperate in order to jointly expand markets for their oil and oil products and to coordinate their pricing policies. After Tatneft's plans to take over the Norsi refinery failed, Tatarstan promised to supply oil to Bashkir refineries and expressed an interest in acquiring a stake in the Ufa refinery.

The Ufa refinery is interesting to Tatneft for a number of reasons. First, acquisition of a refinery in Bashkortostan would help to deepen the strategic partnership with the region's oil industry.
Second, the Bashkir government demands annual crude supplies of no more than 6 mm tons, much less than Norsi-Oil did. This would allow Tatneft to keep up its more profitable oil exports.
Third, Tatneft will have no problems with the refinery's management since it is under the tight control of the regional government.
Fourth, in economic terms the Ufa refinery, which is capable of deep oil processing (up to 75%) and which has a developed marketing network, might be relatively attractive, at least when compared to other options Tatneft could chose to increase its refining capacity.

However, it should be remembered that Bashneft's first strategic partner, TNK, had also started negotiations to take over the Ufa refinery after a cooperation agreement had been signed with Bashkortostan. At that time it was rumored that the TNK-Bashneft joint venture would receive a majority stake in the refinery in trust in return for guaranteed crude supplies. By now, one might already suspect that some nice words about the future of Bashkortostan's refineries are a must for everybody engaging in business with the regional oil industry.
In any case, it seems that the only chance for Bashkortostan's refineries to receive not only crude supplies but substantialinvestments as well is to find a new owner that is independent of the regional leadership. At least that is what the fate of Bashneft's refinery, Salavatnefteorgsintez, seems to indicate.

In January 1999, the regional government had to hand over its 54% stake in the refinery to Gazprom as compensation for unpaid gas deliveries to Bashkortostan. In autumn of the same year, the share was transferred to Sibur, a petrochemical holding with close ties to Gazprom. In November, Sibur's President Yakov Goldovsky was elected chairman of the board of directors of Salavatnefteorgsintez. At the same time, Sibur announced plans to build several complexes for the production of suspension polyethylene and ethylbenzenestyrene at the plant.