Rosneft may refuse to build oil refinery at ESPO's destination point

With the existing tax regime, Russia's state-controlled oil major Rosneft could find it unprofitable to build an oil refinery in Nakhodka, the final destination of the East Siberia - Pacific Ocean (ESPO) oil pipeline. The company has already sent its proposals to ease the tax burden to the government. However, the question of a choice between an oil refinery and a petrochemical plant is still open. Experts think Rosneft will totally give up its previously voiced plans.
According to Sergei Kudryashov, Rosneft's first vice president, high-level oil processing is ineffective under the current tax legislation.

In early June, Rosneft asked the government to give it an opportunity to import special equipment necessary for building and equipping the new plant. It counted on zero tax duties and profit tax cuts for several years until the project starts recouping the investment.

Back in March, Rosneft's president Sergei Bogdanchikov talked about the construction of a petrochemical plant instead of an oil refinery. According to him, a petrochemical plant would be more preferable considering that Japan, Korea and China, where the plant's products could be sold later, can meet their fuel requirements from their own oil refineries.

Konstantin Simonov, director general of the National Energy Security Fund, doubts that Rosneft is interested in building an oil refinery or a petrochemical plant in Nakhodka. "It is more interested in the Chinese market than the markets of Japan and the Far East where it will appear after an ESPO branch to China is commissioned," the expert says. He believes that Rosneft managers' statements made on June 24 look like an attempt to justify the company's refusal to implement this project in the future.

Vitaly Kryukov of Kapital Investment Group thinks that the company will have to refuse to build an oil refinery anyway because of the country's export policy. According to him, Rosneft should choose a petrochemical plant. With the current prices, it is more profitable to export dark petrochemicals (mazut or vacuum gasoil) than light ones received through deeper conversion," Kryukov said.

Source: RBC daily (What the Russian papers say, RIA Novosti) - June 25, 2008