From the Volga to Eastern Siberia

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The annual refining volumes will grow up to 50 million tons

The article is published by courtesy of the Rosneft Magazine

During the recent auctions that took place as part of YUKOS’ bankruptcy proceedings, Rosneft acquired a number of new assets, including several large refineries in the Samara Region and Eastern Siberia. Alexander SAPRONOV, vice president responsible for logistics, refining and marketing at Rosneft, tells the Rosneft Magazine about the competitive advantages the company will gain from these acquisitions.

Rosneft Magazine:  Mr. Sapronov,  how  will  the company’s refining volumes grow following these acquisitions?

Alexander Sapronov: Until recently, Rosneft’s refining potential lagged far behind its potential for crude oil production. The acquisition of these assets gives us the opportunity to better balance our oil production and oil refining volumes. The capacity of our new refineries brings our total refining capacity to approximately 50 million tons per year, the highest in Russia’s refining sector. 

RM: Tell us a little about the company’s newly acquired refineries. How modern are they? Do you see a need for reconstruction? Is there reserve capacity available for expanded production?

Sapronov: The refineries are all in need of investment programs, and the enterprises themselves, recognizing this fact, have already drafted their own development plans. Right now, however, each refinery’s individual development program does not account for the company’s general refining interests and prospective development. As a result, in order to align interests, all current investment projects need to be carefully evaluated and subjected to a thorough audit, from which we will try to determine how the investment plan of each refinery fits into the general development strategy for our refining business. Careful analysis of each separate factor is needed in order to properly direct investments and reformulate our overall business plan.

I’ll talk about one example in order to illustrate our approach to modernizing the company’s refining business. At the Komsomolsk Refinery, the level of depreciation is currently 21 percent. According to this indicator, the refinery can be considered one of Russia’s youngest. In reality, however, this is a very old refinery with a long history. This discrepancy can be explained by the fact that Rosneft has pursued a thorough and balanced investment program to maintain and expand the refinery’s operating assets. The result is an obvious example of what we consider to be effective investment.

I’d like to point out one especially important stage in the work that lies ahead. In July, Rosneft will begin developing a business plan for 2008–2012. All of the company’s divisions, from those involved in production to those that handle social programs, will take part in preparing this document. Each enterprise, including the newly acquired assets, will have to show how they see their own development during this five-year period. All reasonably argued projects will be included in the company’s business plan, which will then be confirmed by the board of directors and be integrated into our corporate policy.

RM: What effect will the acquisition of the new refineries have on the company’s reconstruction plans for its existing refineries? Furthermore, how will it affect plans to build two new refineries in Russia’s Far East and in China?

Sapronov: All of our previous plans will remain as they were. Take, for example, the Tuapse Refinery. For two years now, we have been working to completely reconstruct enterprise in order to increase its refining capacity to 12 million tons per year. A tender is currently underway to select a general contractor to build a new refinery on the site of the current Tuapse Refinery. More than ten competitors, including three Russian companies, underwent the preliminary selection process. The winner will be announced over the summer, and this fall, construction itself will begin.

Our plans to build new refineries haven’t changed either. In the Far East, for example, we have fully declared our intentions to build a new refinery and are developing a preliminary feasibility study for it. Likewise, together with our Chinese partners, we are surveying the preliminary technical specifications for a refinery in China and plan to announce a tender to select a company that will prepare a feasibility study for this project. Overall, both the Russian and Chinese sides have conceived well-coordinated plans and are strictly overseeing their implementation.

RM: To what extent will the newly acquired refineries fit into the company’s existing production and transport plans? Will these plans have to be amended?

Sapronov: As for the Samara group of refineries – the Kuibyshev, Novokuibyshev and Syzran Refineries – their location and logistics infrastructure are quite favorable. Their products can be shipped to both domestic and foreign markets via rail, pipeline and, depending on the season, water-based transport.
With the Achinsk Refinery and the Angarsk Petrochemical Company the situation is a little different. We are currently studying several projects to improve the logistics and economic efficiency of these refineries.

RM: How will the acquisition of Tomskneft and Samaraneftegaz affect the company’s transport systems?

Sapronov: These enterprises already have well-established delivery channels available to them. Tomskneft traditionally sends its oil to the Achninsk Refinery and the Angarsk Petrochemical Company. This delivery scheme will remain as we go forward. The same can be said for Samaraneftegaz, which supplies its oil to the Samara group of refineries. Everything here should also remain as it was.

RM: How will the company’s export opportunities change as a result of the acquisitions? Will output of oil products for export increase?

Sapronov: In the immediate future, this will mainly depend on the nature of domestic demand. We will try to export anything that we’re not able to sell domestically.

RM: So, there is a preference to sell products on the Russian market? Does this mean that this market is more advantageous for the company?

Sapronov: Market situations are never fixed, as there are periods when exporting oil products is more advantageous than selling them domestically. The opposite happens as well. Right now we are experiencing the second situation.

RM: Marketing units are among the assets recently acquired by the company. How will they affect the development of Rosneft’s marketing network?

Sapronov: In Siberia, the сompany has acquired Tomsknefteprodukt, Irkutsknefteprodukt, Khakasnefteprodukt, Buryatnefteprodukt, as well as a corresponding network of terminals to deliver oil products to the retail market. Moreover, in European Russia, we have acquired Samaranefteprodukt, adding yet another new region for our operations.

RM: How many regions does Rosneft’s marketing network currently cover? How does it compare to those of Russia’s seven other oil companies?

Sapronov: Our retail marketing network covers approximately 20 regions across Russia. Excluding the newly acquired assets, this network includes roughly 700 proprietary service stations. As for our competitors, each company has its own market development strategy. For example, some companies favor franchising, whereby they send partners their products and give them rights to their brand names. Others, like Rosneft, develop their own networks of service stations. I would say that at present our network basically has the same regional scope as our main competitors.

RM: What can you say about the popularity of the Rosneft brand today and the extent to which customers trust it?

Sapronov: I can say unequivocally that the Rosneft brand has earned a solid reputation on the market. My confidence is based on consumer survey results, which we constantly study in order to gauge consumer opinion. In 2006, for example, we worked together with the Boston Consulting Group to conduct a survey, the results of which showed that our brand enjoys a high level of consumer confidence. This is especially true in Southern Russia, where our marketing units, such as Kubannefteprodukt, Rosneft- Stavropolye, and those located in the Northern Caucasus, are working very successfully.

RM: Things are reaching the point that the owners of some service stations in Russia’s southern regions are reproducing the brand name, colors and even Rosneft’s emblem with little distinction from the original…

Sapronov: I would call this brand counterfeiting, and although we are strongly battling these encroachments on our brand, they do speak of our popularity.

RM: It’s well known that the new refining assets will allow the company to expand its line of refined products, as well as the presence of its brand on the market.

Sapronov: This is absolutely correct. Among the new assets is the Angarsk Polymer Plant, which produces a number of different petrochemicals. These products are generally intended for export to China. Production of motor oils takes place at two enterprises – the Novokuibyshev Oils and Additives Plant and the Angarsk Petrochemical Company. As for the сompany’s new products, I would mention the production of bitumen. Rosneft faces the task of developing all these new market segments.

RM: We already talked about the сompany’s export potential, which will grow significantly as a result of the newly acquired production and refining assets. In this sense, it’s perhaps necessary to mention Rosneft’s offshore terminals as well?

Sapronov: Our export terminals are a competitive advantage and an important part of our transport infrastructure. Tuapsenefteprodukt, for example, has the annual capacity of 10-11 million tons and is the largest terminal in Russia for transshipment of oil products. Its re-equipment and expansion under a program, which envisages the annual throughput increase up to 17-20 million tons are the integral part of the Tuapse Refinery reconstruction plans.

The capacity of our terminal in Nakhodka is currently 6-7 million tons per year, which is primarily used to transship products from the Komsomolsk Refinery. The newly acquired Achinsk Refinery and Angarsk Petrochemical company also use this terminal. I should also mention the company’s acquisition of the Nakhodka Commercial Oil-Loading Port last year, which allowed us to reconnect the port itself with our waterside facilities, which had previously been disconnected. The port and these facilities are now working again as a single transport complex.

Rosneft’s terminal in Northwestern Russia plays a particularly important role in the company’s transport infrastructure. The entire transport complex there includes the Privodino rail transshipment facility, where oil delivered by pipeline is loaded into tanks. Then there is the terminal itself in Arkhangelsk, where transshipment of oil to tankers takes place. Finally, we have the Belokamenka floating reservoir in the ice-free Bay of Kola.

RM: To what extent has this complex system paid off?

Sapronov: It has paid off and continues to pay off. The company faced the choice to either maintain or even reduce production levels at Severnaya Neft in light of limited transport capacity in the region or, alternatively, to develop a fundamentally new system for transporting crude oil. We chose the second path and the numbers show that we were correct. Severnaya Neft is growing dynamically and oil production is increasing, which means that the company’s earnings are also increasing.

RM:  Mr. Sapronov, you have already managed to visit most of the newly acquired assets. How has their new owner been received there?
Sapronov: Conversations that we had were productive and interesting. I didn’t encounter any difficulties when speaking with both management and employees. After numerous meetings, I got the impression that people were expecting Rosneft to give them opportunities to work more effectively with more predictable and guaranteed prospects. I would even venture to say that people have been waiting for our arrival.

New assets

100 percent of Samaraneftegaz;
100 percent  of the Kuibyshev Refinery;
100 percent of the Novokuibyshev Refinery;
100 percent of the Syzran Oil Refinery;
100 percent of the Novokuibyshev Oils and Additives Plant.
Various stakes in a group of gas refining and oil product marketing companies located throughout Russia’s Central Federal District. These include the Neftegorsk Gas Processing Plant (98.1 percent), Otradnoye Gas Processing Plant (98.1 percent), Samaranefteprodukt (100 percent) and the Samara Terminal (100 percent).
100 percent of Tomskneft-VNK;
70.78 percent of the East Siberian Oil and Gas Company;
100 percent of the Angarsk Petrochemical Company;
100 percent of the Achinsk Refinery-VNK;
100 percent of the Angarsk Polymer Plant;
100 percent of the Strejevskoy Refinery;
25.88 percent in entities operating in the energy sector at the Tomsk Region, including Tomskenergo, Tomsk Distribution Company, Tomsk Energy Retail Company, Tomsk Transmission Networks and others.

Stakes in enterprises supplying oil products and owning networks of service stations and oil product storage facilities in Siberia’s regions including Irkutsknefteprodukt (100 percent), Buryatnefteprodukt (95.11 percent), Khakasnefteprodukt VNK (100 percent), and Tomsknefteprodukt (100 percent). 
Stakes in service enterprises in the Nefteyugansk region: 64 percent of Manoil, 10 percent of Yuganskoil, 41 percent of Rosneftetrans, 100 percent of Yuganskneftegeofizika-GEOFIMP, 100 percent of YuganskNIPIneft, 100 percent of Imushchestvo-Service-Nefteyugansk, 100 percent of YuganskEPUservice, 100 percent of MamontovEPUservice and 50 percent of EvroKoop.

100 percent of registered ordinary shares in Neftepromstroiservice; 100 percent of Imuschestvo-Service-SSK and of Alnas-Tsunar; 100 percent of Alnas Electron; 100 percent of Alnasmash; 100 percent of Alnasmashservice; 100 percent of ALNAS RD and of SIBINTEK-Leasing; 48.99 percent of Siberian Internet Company; 99 percent of Business-Resource; 51 percent of Control-Service.

Rosneft Vice President Alexander Sapronov

Born in 1953.

Graduated from the All-Union Judicial Institute and the Russian Academy of Management.

From 1994–1995, served as deputy chairman of the Russian State Committee for Anti-Monopoly Policy and New Economic Development.
From 1995–2001, served as president of Russky Mir.
From 2001–2005, served as vice president of YUKOS RM.
In July 2005, he was appointed vice president at Rosneft. He handles issues related to refining, logistics and the company’s marketing network.

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