TAIF-NK: new projects, assets and future strategy
The oil refining sector is going through a very complicated period now. It's especially tough for independent refineries that refine purchased oil and gas feedstock. Due to the execution of tax manoeuvres in the sector, prices for oil and gas condensate are growing at an incredible pace, without adjusting to the feedstock's quality. Good results of TAIF-NK in the production and sale of products are maintained in such conditions only thanks to the gradual fulfilment of a strategic programme. If in 2017 the enterprise's revenue grew by 13,8% and totalled 195,3bn rubles, it already amounted to 108,8bn rubles in the first half of 2018, having exceeded last year's analogous period by 37,2%. Construction and assembly works have been completed in the Heavy Residues High Conversion Complex – the biggest strategic investment project of the company – where equipment is gradually tested, the first lots of products have been manufactured. Realnoe Vremya talked with Deputy Director General on Economy and Finance at TAIF-NK Alla Yevstafieva about the state of the sector and results of work of the only independent oil refinery of Tatarstan.
Mrs Yevstafieva, could you tell about the last year for the sector and TAIF-NK PJSC? What's changed in 2018?
For TAIF-NK, probably as well as for all Russian oil refining, this time was uneasy. On the one hand, after a 3-year fall in prices for oil products in the world, prices finally started to grow in 2017. This, undoubtedly, revived and stimulated the sector. For TAIF-NK, the growth in price for its products made a significate positive contribution to the company's performance.
On the other hand, the tax manoeuvre that has been executed in our country in the oil and oil refining sector since 2011, which was first known as the 60-66 system, then as 60-66-90-100 and that was called the big tax manoeuvre in 2015, led to considerable growth in prices for oil and gas feedstock, which severely hit TAIF-NK's refining economy.
A gradual reduction in export duties on oil and gas feedstock presupposed by the tax manoeuvre stimulated growth in prices for oil and gas condensate in the domestic market providing oil companies with surplus profitability and simultaneously significantly increasing expenses on feedstock for independents refineries.
So oil production was, in fact, financed by Russian oil refining by reducing customs duties by 1 tonne of oil and has feedstock.
As a result, oil prices from 2010, that's to say, from the beginning of the execution of the tax manoeuvre, to September 2018 has grown by 220%, while growth in prices for oil products considerably falls behind.
Such a situation with the growth in prices for feedstock outstripping growth in prices for ready oil refining products inevitably influences financial results of TAIF-NK.
The situation is also complicated by growth in expenses on loans taken out by TAIF-NK to fulfil a large-scale expensive investment project – the Heavy Residues High Conversion Complex. As the project is at its final stage, the peak of the loan burden was in 2017. The beginning of operation of the HRHCC in a test regime allowed to reduce the size of loans of the company a bit in the first half of 2018.
As the company takes preventive measures to reduce the impact of possible negative factors including by updating the factory, optimising the structure of produced commodities, increasing the quality of oil products, searching new outlets, optimising refining expenses, structuring money flows, TAIF-NK managed to conserve the stability of production and financial and economic indicators and didn't allow a loss last year and in the first half of 2018, though we were very close to it.
Did oil refining bear the brunt of the tax manoeuvre?
As a result of the tax manoeuvre, oil refining bore the brunt twice – feedstock prices grew and simultaneously customs duties on oil products and excises on light oil products increased. By January 2017, export duties on mazut and vacuum gas oil reached 100% of oil export duties and continue remaining at this level until now. Petrol excises increased to 11,213 rubles per 1 tonne of petrol and to 7,665 rubles per 1 tonne of diesel fuel in 2018. Though it was temporarily decided to reduce excised by 3,000 rubles per 1 tonne of petrol and 2,000 rubles of diesel fuel from 1 June 2018, they are considerably expected to grow from 2019.
Oil refineries have to not only work with such a serious burden but also develop investing big money in new projects. In addition, if Vertically Integrated Oil Companies may not only cover these losses in the oil refining sector but also get additional income in oil production by selling oil and gas condensate due to price growth, TAIF-NK, as one of the few independent oil refineries, carried direct non-compensated losses of profitability from the growth in prices for feedstock, excises, petrol and export duties on heavy oil products.
The loss of an oil refinery's profitability, especially independent oil refineries, due to constant and considerable growth in prices for feedstock, rise in tax burden and additional costs linked with the necessity to take measures to maintain industrial safety can increase the risk of sunk costs on production modernisation and even become a reason for bankruptcy of specific factories, which took out considerable loans for this purpose and aren't able to complete the projects they undertook in such conditions.
The emerging situation demonstrated that the fulfilment of such expensive investment projects must be accompanied by stimulating and compensating state support measures, which, undoubtedly, need to be chosen and fixed for the project before it's fulfiled, so that an investor will feel stability and confidence in its successful realisation and be as much as possible protected from the influence of negative factors arising throughout the project.
Does the quality of purchased and refined feedstock influence the performance of your company?
TAIF-NK refines only heavy Tatarstan oil with a high sulfur content, so-called high-sulfur oil. In addition, such oil also has a high level of residual tar, low content of light distillates (benzene, kerosene and diesel). That's to say the quality of the oil refined by TAIF-NK is considerably worse than the quality of Urals.
Due to economic prerequisites, lighter oil is exported by oil companies, while heavy oil, which is less profitable from a perspective of export, is sold in Russia's domestic market before its refining. And the quality of feedstock that can be bought in the domestic market constantly worsens, while its price only grows because of the tax manoeuvre and becomes equal to the price for the high-quality Urals without foundation.
Heavy high-sulfur oil refining at TAIF-NK brings to an excess, uncontrolled wear of equipment, which makes us carry huge additional costs to reconstruct and maintain the equipment in working order, have more frequent repairs, substitute units, plants and pipes, implement the latest methods to diagnose non-destructive testing and failure detection.
In other words, there is an imbalance where there are incomparably more profits in oil production than oil refining. And it's incorrect. Unlike simple export of crude oil, investments in oil refining bring greater growth in GDP by producing high-quality oil products with a higher added value. Part of oil refining products – straight-run benzene and hydrocarbon gases – is a very important feedstock for the petrochemical sector. This allows to augment the production of marketable and demanded petrochemical products more by increasing competitiveness and well-being of the country.
Modern oil refining in Russia is a very investment-intensive sector, serious investments in modern technologies to implement secondary refining processes aimed to increase the conversion rate of light high-quality oil products with a higher added value are needed here. Resources to organise a better and safer technological process, purchase of catalysts and effective new-generation reagents, implementation of very complicated technological process management systems, creation of multi-level industrial safety systems are needed. These measures require quite big capital investments, money for them, in fact, is taken from the enterprise's working capital.
At the same time, we should note that our rivals in developed countries refine quality light oil to avoid their considerable additional capital and variable costs on premature wear and loss of production of light oil products.
How have feedstock refining volumes changed at TAIF-NK?
In 2017, TAIF-NK refined 8,2m tonnes of feedstock. TAIF-NK's capacities of primary oil and gas feedstock refining were 98% full last year, which allowed us to be fifth among 35 biggest oil refineries of Russia. In the first half of 2018, the company refined 4,4m tonnes of feedstock having exceeded last year's refining volumes for the analogous period.
Due to growth in oil and gas feedstock rate in the world, a simultaneous reduction in export duties on it, as it was mentioned above, oil companies augment oil production and export volumes to get an excess profit from sales. For instance, if we compare oil and gas feedstock production and its refining in 1995 and 2017, it's illustrative that feedstock production almost doubled (+240m tonnes), while its refining is only a half higher (+98m tonnes).
Due to high feedstock prices in the domestic market, independent oil refineries have to reduce feedstock refining, especially gas condensate by optimising the use of production capacities.
As for commodities, how have their production and supply to the domestic and foreign markets changed?
Even if TAIF-NK uses heavy high-sulfur oil in production, our indicator of selection of high-quality light oil products is constantly maintained at the level of at least 75% thanks to the measures taken to stabilise the technology, maintain the equipment in working order, modernisation and reconstruction projects.
I should say that the conversion rate, which is often widely used, was established as early as 1986 by the USSR Ministry of Oil Refining and Petrochemical Industry. Its value is calculated by dividing the volume of all oil products except mazut by the volume of refined feedstock.
However, this indicator is already obsolete in the world practice, as it tells about the efficiency and technology of feedstock refining processes only indirectly. When mazut production is substituted by, for instance, vacuum gas oil, heavy gas oil, asphalt, coke or other heavy distillates, the refining rate increases. But the real refining efficiency doesn't change. This is why when calculating the efficiency of projects and technologies, it's necessary to look at the indicator of production of light oil products and liquefied gases, a very important feedstock for petrochemistry.
TAIF-NK produces over 25 types of oil products. The core products are: high-quality naphtha (straight-run benzene), which is a very important feedstock for petrochemistry and is supplied to Nizhnekamskneftekhim PJSC, petrol and diesel fuel, which meet all Euro 5 world quality standards, jet kerosene, which is in demand by passenger air travel and meets needs of the Russian Ministry of Defence, and mazut. We also produced vacuum gas oil as a commodity until recently, but it's in the past, as now it's completely refined in the oil feedstock's heavy residues high conversion complex – HRHCC – which was built again.
We should note that TAIF-NK, first of all, works to satisfy the demand of Russian consumers and exports its products only then. The Volga Federal District is still the target segment for us. Moreover, all demands of the Republic of Tatarstan are met as a priority.
Almost all volume of petrol – 0,5m tonnes – made at TAIF-NK in 2017, which is 1,2% of all-Russian production of petrol, is sold in the domestic market. Petrol production in the first half of 2018 rose by 57,8% in comparison with the first half last year – by 0,3m tonnes – which is 1,7% of its production volume in the sector. Diesel fuel, kerosene, jet fuel and mazut supplies are also carried out to meet the domestic demand as a priority, the surplus is forcedly exported. In addition, due to the high quality, TAIF-NK's products are always in high demand in fuel markets.
TAIF-NK sells its products on open trade platforms providing a competitive market price. Our products can be purchased through the Saint Petersburg International Mercantile Exchange and on OnlineContract trade platform.
How has the situation of TAIF-NK changed from a perspective of tax payments?
The company always was and is an honest taxpayer that made all budget level payments on time and fully. We've been the biggest taxpayer not only in the Republic of Tatarstan but also the Russian Federation since 2007. Most tax payments like customs export duties and excises go to the federal budget. Moreover, TAIF-NK also increased payments to Tatarstan's consolidated budget more than twice compared to 2016, although TAIF-NK's load considerably increased due to higher feedstock prices.
As we already discussed with you, the tax system of the oil refining sector keeps remaining tense in both 2017 and 2018, customs export duties on heavy oil products have increased, excise rates on petrol don't stop augmenting. The constantly growing tax load is an acute problem for oil refining that many oil refineries already can't handle. Federal laws on gradual execution of the tax manoeuvre, which began in the oil sector, were adopted in early August this year. A complete cancellation of export duties on oil and gas feedstock is expected, which will automatically lead to the next sudden rise in prices for oil and gas feedstock. And we wouldn't like this initiative to become the next continuation of the development of commodity economy and make feedstock export more attractive and its refining less and less profitable. At the moment it's unknown whether there will be taken any additional measures to support the development of oil refining, including any concessions to reduce the tax burden on heavy high-sulfur feedstock refining. We can just hope that the decisions will be balanced and consider interests of independent refineries working with a low-quality feedstock and simultaneously fulfilling big investment projects to increase the oil refining rate.
2017 was the Year of Ecology in Russia. What environment protection measures did TAIF-NK take?
In the era of scientific and technological breakthrough, production develops with the simultaneous implementation of the latest technological processes to protect the environment. TAIF-NK is on the path chosen in the civilised world fulfilling investment projects to develop the industry without doing harm to the environment, updating existing and expanding the construction of new facilities to reduce ecological risks.
In addition, working with the feedstock whose quality isn't the best, TAIF-NK provides the best ecological conditions in comparison with the enterprises working with light oil that don't invest money to create a pleasant ecological environment in factories.
During the Year of Ecology announced by Russian President Vladimir Putin, there was signed an agreement between the Russian Ministry of Natural Resources and Ecology, the Federal Service for the Supervision of Natural Resources, the Government of the Republic of Tatarstan and TAIF-NK PJSC, according to which the company accepted and met all obligations to take four environment protection measures with a total value of 3,8bn rubles. Most part of them – 3,7bn rubles – was sent to put local biological treatment plant (BTP) of the oil refinery into operation. The official launch of the BTP was on 8 June 2017 with the participation of Tatarstan President Rustam Minnikhanov, Deputy Prime Minister of the Republic of Tatarstan and Tatarstan Minister of Industry and Trade Albert Karimov, Tatarstan Minister of Ecology and Natural Resources Farid Abdulganiyev, TAIF PJSC Director General Albert Shigabutdinov, TAIF-NK PJSC Director General Rushan Shamgunov, head of Nizhnekamsk Municipal District Aydar Metshin and the complex's staff.
The shop has been stably operating for more than a year processing all industrial sewage and rainwater of the Heavy Residues High Conversion Complex of the oil refinery. The final treatment technology with activated sludge in combination with mechanical filtration in a membrane biological reactor is unique for Russian oil refining. It allows to get 100% of treated sewage back to production and at the same time remove 99,99% of oil products and polluting substances from them. Thanks to it, a ''closed water rotation cycle'' was created in the enterprise where all industrial sewage is treated and goes back to production. The launch of the up-to-date and highly effective environment protection facility enabled our company to reduce external recharge of water rotation systems with fresh clarified water from the river five times!
I also want to say that there was implemented an integrated management system at TAIF-NK based on ISO 9001:2015 Quality Management Systems, ISO 14001:2015 Ecological Management Systems, OHSAS 18001:2007 Occupational Health and Safety Management Systems. We confirm its successful operation with regular independent re-certification audits.
Every year our company wins in Best Commodities and Services of the Republic of Tatarstan and 100 Best Commodities of Russia contests and gets awards for producing quality products with improved ecological characteristics and implementing environmental technologies. And TAIF-NK's product has just recently been awarded a quality seal in Best Commodities and Services of the Republic of Tatarstan competition in 2018. Our Euro 5 diesel fuel became a laureate, and Euro 5 RON95 leadless petrol got the first-degree diploma in Industrial and Technology Products. The federal stage awaits us – 100 Best Commodities of Russia – whose conclusions are drawn and winners are awarded at the end of each year.
TAIF-NK is implementing the major project of HRCC, which has no analogues in the world. What is the peculiarity and uniqueness of this project?
We are implementing, perhaps, one of the most significant and ambitious projects not only in our history, but also entire oil refining industry, which has no analogues in the world. So TAIF-NK is the pioneer!
The main objective of the project is to increase the production of light oil products through the processing of heavy residues of primary processing — tar and vacuum gas oil, with the achievement of the depth of extraction of light high-quality oil products throughout the refining complex of TAIF-NK above 98%. The production capacity of the HRCC for raw materials is 3,7 million tonnes.
The main share in the basket of commercial products of the new complex will be occupied by diesel fuel of the Euro 5 environmental standard and high-quality naphtha, which have a high added value of production. Besides, the HRCC will allow to extract additional volumes of liquefied hydrocarbon gases from dark petroleum products — the most valuable raw material for the petrochemical industry. Thus, with the launch of the HRCC, Nizhnekamskneftekhim PJSC will get more reliable, stable source of high-quality materials for its new ethylene complex, which expands and opens new horizons for the development of Nizhnekamskneftekhim as well as of the republic.
The HRCC project is based on the unique innovative technology VCC, which is the combination of two processes: liquid-phase hydrogenation of tar with the process of its subsequent gas-phase hydrocracking.
In 2017, all construction and installation works were completed at the HRCC, the comprehensive testing of the main and auxiliary productions involving the processing of vacuum gasoil began, technological regimes were adjusted and the first commercial batch of products that meets the requirements of the highest standards — propane and butane fractions, HRCC naphtha, diesel fuel and hydrotreated vacuum gas oil – were received.
Already in the first half of 2018, thanks to the work of the HRCC in the testing mode, the selection of light fractions was significantly increased, and today the entire volume of produced vacuum gas oil is processed at TAIF-NK, turning into light oil products — diesel fuel, naphtha, kerosene.
Given the difficult economic situation, does TAIF-NK continues social and charitable programmes? What has been implemented?
The social investments aimed at the formation of healthy lifestyle of our employees, protection of their health, improvement of living conditions and quality of life — one of the fundamental activities of TAIF-NK.
For the past 14 years, the company has been providing all its employees with comfortable housing on preferential terms under a social mortgage programme, making monthly payments to the State Housing Fund. At the same time, part of the payments of TAIF-NK is directed from the fund for housing construction and for employees of public sector and agriculture of the republic.
In 2015, TAIF-NK launched an additional mortgage programme with the support of the shareholders. The new programme has increased the number of employees whose families had the opportunity to improve their living conditions.
For the initial payment for the purchase of housing, employees are provided with a corporate loan. In addition, the workers are provided with additional support in the amount of 200,000 rubles for each new born child. Thanks to the support of this programme at the state level, first President of the Republic of Tatarstan Mintimer Shaimiev, and now current President of the Republic Rustam Minnikhanov, already 740 families of TAIF-NK workers have improved their housing conditions.
Continuously over 5 years TAIF-NK has participated in the socially significant project of the Volga Federal District KaDetstvo, which is aimed at instilling the sense of patriotism from school. The Tatarstan cadet corps named after Hero of the Soviet Union Gani Safiullin is one of the most prestigious educational institutions of the republic. Thanks to the support of TAIF-NK, in this cadet corps, located in the city of Nizhnekamsk, a complete overhaul of the main building was carried out, a large sports complex with a swimming pool was built, an obstacle course was equipped, universal sports grounds for mini-football and basketball, a street sports town for workout classes were installed, the territory of the building was landscaped.
Socially unprotected segments of the population do not remain unnoticed as well. Every year TAIF-NK provides assistance to veterans of the Great Patriotic War, participates in the republican campaign ''Helping to get ready for school'' for large and poor families, allocates funds to support people with disabilities.
TAIF-NK is the most active participant of city events such as Maslenitsa, Nowruz, Sabantuy, City Day, New Year. With the financial support of TAIF-NK, numerous sports tournaments are held, including those of international level, aimed at the development of mass sports and healthy lifestyle of Nizhnekamsk residents.
For active participation in the restoration of the ancient city of Bolgar and the island-town of Sviyazhsk, the construction of the Bolgarian Islamic Academy and the reconstruction of the Cathedral of the Kazan Icon of the Mother of God, TAIF-NK and Director General of TAIF-NK PSC Rushan Shamgunov have been listed in the 7th volume of the book of benefactors, as well as marked by the letter of appreciation of the Republican Fund for the revival of historical and cultural monuments.
The company's management believes that the active participation of TAIF-NK in significant social projects is an investment for the development of not only our company, employees and all members of their families, but also a significant contribution to the formation of a strong, stable, reliable region, which our Republic of Tatarstan is, and improving the quality of life of all peoples living on its territory.
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