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Besides, the most economically attractive way of oil utilization for vertically integrated oil companies (VIOC) is currently not oil export but oil refining. Profitability of the sector has increased significantly and export taxes for oil products are lower than for oil.

In 2007 LUKOIL assigned almost $800 million in the oil refining segment. According to the new corporate Strategy of Intensive Growth for 2007-2016, LUKOIL’s oil refining capacity is to increase up to 100 million tons of crude oil per year. The average Nelson complexity index at LUKOIL oil refineries will be 8.8 points that will allow producing two-fold more high quality engine fuels from the same amount of crude oil. The Strategy also envisages the output of products all of which are compliant with the Euro-5 standard.

The company continues the construction of a catalytic cracking complex for vacuum gas oil at the Nizhegorodsky oil refinery. The overall amount of investments in implementing this project is about $600 million. Upgrade of the refinery, that is to be accomplished by 2016, will increase its capacity from 15 to 17 million tons per year.

LUKOIL will also invest $200 million into the upgrade of the Volgograd Oil Refinery. It is planned to increase the production of high-octane petrol. The enterprise’s capacity will increase from 10.5 to 12-14 million tons per year by 2016. This will allow satisfying the needs of the Southern federal region. As a result of a complete upgrade of the enterprise, the depth of oil refining will increase from 83 to 95 percent.

LUKOIL plans to increase all its oil refining capacities in Russia by 15-20 million tons per year by 2016 and produce only high-octane petrol. All the products will be compliant with the Euro-5 standard.

The new strategy envisages large-scale investments in the processing and distribution business segment. Depending on the development of market situation, either a conservative or an optimistic scenario, the investments will be from $13.5 billion to $24.3 billion.

Rosneft plans to invest $350 million in the upgrade of Komsomolsk Oil Refinery before 2010. As a result of reconstruction, the refinery will be oriented mainly at production of petrol and diesel fuel. The share of fuel oil in the production will significantly decrease.

Komsomolsk facilities of primary and deep oil refining will be upgraded under the project. Depth of refining will reach 90 percent by 2010, showing a 1.5-fold increase. Within the same period, the capacity will grow from 6.4 to 7.4 million tons per year. About $17 million will be invested into the reconstruction of technical petrol production units according to Euro-3 and Euro-4 standards. It is planned to construct a benzene production facility with a capacity of 391,000 tons in 2009–2011. The cost of the project is $176 million.

As a result of upgrading a Rosneft oil refinery located in Tuapse, by 2012 its capacity will grow from the current 4.3 to 12 million tons per year. Depth of refining will increase from 56 to 95 percent. Up to 80 percent of products are to be exported.

Other projects include:
The upgrade of Orsknefteorgsintez by Russneft enabling to increase the oil refining depth from 60 to 92 percent by 2010;
The upgrade of Saratov Oil Refinery by TNK-BP planned for 2008 enabling to increase its capacity from 6 to 7 million tons of oil per year.

However, the upgrade does not allow a significant increase of production capacity in oil refining. Besides, the possibilities of production expansion at the existing enterprises are also limited. Due to this fact a few companies plan to start or have already started design and construction of new oil refineries that have not been constructed in Russia for over 20 years. 

Some of the new projects should be mentioned here as well. For example, Tatneft is building an oil refinery near Nizhnekamsk with a capacity of 7 million tons of oil per year and a refining depth of 95 percent. The construction project of a Rosneft oil refinery with a capacity of 20 million tons in the Far East is currently at the designing stage. It is also currently planned to construct the third oil refinery with a capacity of 7 million tons in the Nizhnekamsk region of Tatarstan. The implementation of this project and crude supply will be provided by minor oil companies of the Republic.

Nevertheless, such projects are still very rare in Russia. Over half of oil product output in Russia is exported and the construction of new oil refineries should mainly target replacement of crude export by oil products export. However, many oil companies refuse to construct oil refineries on the Russian territory and prefer to locate their refineries abroad (in Turkey, China, EU countries, Armenia, etc).

According to the analysts of Unikon, a center for macroeconomic research, there are the following main factors obstructing the construction of oil refineries in Russia:
remoteness from consumers by thousands of miles that entails a considerable price increase for the end product due to transportation expenses;
lack of tax benefits and a favourable tax treatment for oil refineries;
overload of transport capacities and their absence in many directions.

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