Market Overview and Competitive Landscape

Refining and Commerce

Rosneft is the largest refiner in Russia. Its refining business includes 13 large refineries, as well as petrochemical and gas processing plants in five federal districts – Central, Volga, Southern, Siberian, and Far Eastern. The Company’s oil refining operations are focused on the strategic task of supplying high-quality petroleum products to the Russian domestic market, including remote regions. The Achinsk, Komsomolsk, and Angarsk Refineries are the key suppliers of motor fuels for the Eastern Siberian and the Far Eastern regions, ensuring uninterrupted supply and curbing price growth that would inevitably be the case if petroleum products were delivered from Central Russian refineries. In 2019, as the largest supplier of motor fuels to the Far Eastern Federal District, Rosneft ensured stability of small-scale wholesale and retail prices in the region through building up its supplies (+15% vs. 2018). However, the Far Eastern increment to the damper was not introduced after all since there were no executive orders by Russia’s Government and Federal Antimonopoly Service that would set forth the procedure for its application.

In general, unlike those of most of the Russian producers, the Company’s oil refineries are located far from export markets, which limits the economic efficiency of oil refining. Meanwhile, the Company continues its efforts to connect the refineries to Transneft’s oil trunk pipeline system. In the third quarter of 2019, a 8 mmt oil pipeline section between the ESPO and the Komsomolsk Refinery was commissioned. The completion of this project will enable he Company to enhance the reliability of petroleum product supplies to the Far Eastern Federal District. The project was financed under a long-term tariff agreement with Transneft, with the total investment for connecting the Komsomolsk Refinery to the trunk pipeline system amounting to RUB 50 bln.

The oil refineries continue upgrade and maintenance projects related to their existing capacities. In March 2019, the Ryazan Refinery, a subsidiary of Rosneft, completed the upgrade of a catalytic reforming unit, replacing reactors on the reformer. As a result, the octane grade of the motor gasoline component increased to 97 according to the research method. Moreover, the unit was switched to a three-year run between repairs, significantly improving its economic, environmental and safety performance.

As an environmentally responsible company, Rosneft is consistent in improving and expanding the development and output of high-tech petroleum products with enhanced environmental performance.

The Company was the first in Russia to start the production and sale of Euro 6 gasoline in 2018, gradually expanding the sales geography in 2019. Currently, Euro 6 gasoline is offered at 727 filling stations of Rosneft in the Republic of Bashkortostan, Krasnodar Territory, Republic of Adygeya, Tula, Kaluga, Ryazan and Vladimir Regions,in Moscow and the Moscow Region, as well as in small-scale wholesale quantities. The Ufa Refinery launched the production of AI-100 motor gasoline. Retail sales of AI-100 gasolines have started in the Republic of Bashkortostan, Republic of Mordovia, Orenburg, Sverdlovsk, Bryansk, Voronezh, Lipetsk, Orel, Penza, Rostov, Archangelsk, Samara and Ulianovsk Regions, and also in the Krasnodar Territory.

In 2019, the Komsomolsk Refinery started the production of RLMS, a low-sulphur marine fuel compliant with the IMO 2020 requirements.

In March 2019, RN-TsIR (a Rosneft R&D unit), with the help of RN-Lubricants, patented a know-how to produce eco-friendly technical TDAE (treatment distillated aromatic extract) oil, which is used for the production of synthetic rubbers, tyres, and industrial rubber products. This know-how will enable the Company to become a leading producer and supplier of safe and high-quality TDAE oil for the production of synthetic rubbers, tyres and industrial rubber products.

Rosneft’s Innovation Development Programme is aimed at substituting imported technologies for the production of high-quality petroleum products. Its key objective is for the Company’s refineries to start using catalysts produced in-house in order to mitigate the exposure to foreign-made products, cut refining costs and boost the competitiveness of Rosneft’s refining segment.

Currently, the Company’s specialist enterprises play a key role in the import substitution programme for additives and catalysts. In particular, the Angarsk Plant of Catalysts and Organic Synthesis, the Novokuibyshevsk Catalyst Plant, RN-Kat and corporate R&D units (RN-TsIR and VNII NP) develop and manufacture samples of high-tech products for the oil refining industry.

In 2018, the Company started using catalysts made by the Angarsk Plant of Catalysts and Organic Synthesis at hydrogen units of the Kuibyshev Refinery and the Ryazan Refinery. Before that, Angarsk Plant’s catalysts replaced foreign-made steam methane reforming analogues at hydrogen units of Bashneft-Ufaneftekhim Bashneft-Novoil and Syzran Refinery. The share of own steam reforming catalysts in the production of hydrogen at the Company’s refineries reached 77% in 2019.

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The Ryazan Refinery has started using Angarsk Plant’s catalysts to produce Euro 5 gasoline, as well as innovative Euro 6 and AI-100 gasoline grades.

In 2019, RN-Kat, Rosneft’s specialist catalyst production subsidiary, conducted industrial tests at the Company’s Ufa refineries on the first batch of hydrotreating catalysts suitable for Euro 5 compliant diesel fuel. This is a unique hydrotreating agent capable of fully replacing its foreign peers for the Russian refining industry.

The Digital Plant system is being rolled out as part of Rosneft–2022 Strategy with a focus on qualitative changes across all business segments. In 2019, the Digital Plant was tested and implemented on units and systems at the refineries in Komsomolsk-on-Amur, Novokuibyshevsk, Ryazan, and Syzran.

Rosneft is an active player in the domestic and foreign oil and petroleum product markets and Russia’s largest oil exporter. Its crude oil is exported to European, Asia-Pacific, and CIS countries, sold on international markets, and supplied to the Company’s own refineries in Russia and abroad.

In general, the Company continues diversifying its oil supply channels, while increasing crude oil exports to the east. Amid growing competition in the oil market, the Company is focused on boosting export volumes under long-term contracts, including oil supplies to China National Petroleum Corporation (CNPC) and supplies to Europe under direct contracts. In 2018, Rosneft signed long-term contracts with Grupa Lotos to supply from 6.4 mmt to 12.6 mmt of oil to Poland and with Total Oil Trading to supply from 4.8 mmt to 10.8 mmt of oil to Germany. The Company also captures opportunities of expanding partnerships through short-term contracts. In November 2018, Rosneft and China National Chemical Corporation (ChemChina) signed a contract to supply up to 2.4 mmt of ESPO crude annually via the port of Kozmino. Thanks to the contract, the Company can increase direct oil supplies to China, which is a strategic market for Rosneft. It also signed annual contracts with Shell and Eni to export 3.9 mmt of crude oil to Germany, and with Socar Trading to supply up to 1 mmt of oil to Socar’s Turkish refinery. The Company continues its cooperation with the Republic of Belarus, and in 2019 it signed contracts with Naftan, Belarusian Oil Company and Mozyr Oil Refinery to supply them with up to 8.7 mmt of oil. In February 2017, Rosneft also signed a contract with the government of Iraqi Kurdistan for sale and purchase of oil in 2017–2019. This contract expands the Company’s trading opportunities and bolsters the efficiency of supplying feedstock to Rosneft’s refineries abroad.

The Company is consolidating its competitive position in the European market through the operation of its German refineries. As of 1 January 2017, following the restructuring of the ROG joint venture with BP Plc Rosneft’s indirect interest in the Bayernoil Refinery increased from 12.5% to 25%, in the MiRO Refinery from 12% to 24%, and in the PCK Refinery (Schwedt) from 35.42% to 54.17%. The Gelsenkirchen Refinery is now fully controlled by BP Plc. In December 2019, Rosneft Deutschland closed the deal to acquire 3.57% of shares in Bayernoil Raffineriegesellschaft mbH oil refinery from BP Europa SE, increasing its stake to 28.57%. As a result, the Company saw its share in the refining capacities of Bayernoil Refinery grow to almost 3 mmtpa, its total throughput in Germany now reaching 12.8 mmtpa, which strengthened its positions both in Bavaria, one of the largest industrial regions of Germany, and in Austria. Rosneft is currently the third largest player in the German refining market. Its capacities provide, on average, oil refining depth of 93% and refinery complexity of 9.0, according to the Nelson Index.

The local operator is Rosneft Deutschland GmbH. This subsidiary manages the supply of crude to Rosneft-owned refineries (PCK Raffinerie GmbH, MiRO, Bayernoil) and the sales of petroleum products.

Rosneft is consistent in its expansion efforts in the Asia-Pacific Region. Rosneft closed a strategic deal to acquire a 49% stake in Essar Oil Limited in August 2017 (Nayara Energy Limited since June 2018). The acquisition of a stake in the best-in-class asset with a significant upside potential enabled the Company to enter the oil refining market of India, one of the fastest growing emerging markets. The Vadinar Refinery strategy is currently being shaped, with a focus on the setup of petrochemical production and entry to the Indian petrochemical market. In March 2019, Nayara Energy Limited launched its first high-tech railway terminal for fuels and lubricants. Located in Wardha, the state of Maharashtra, it has an area of over 200 thousand sq m and a capacity of about 16 mln litres. Petroleum products will be supplied from the Vadinar Refinery, the state of Gujarat. Thanks to the unique location of the railway terminal, Nayara Energy will be able to meet the needs of customers and partners operating in the eastern Vidarbha region of Maharashtra. As an environmentally responsible company, Nayara Energy has launched a 300 kVA solar power plant at the terminal. The power plant is designed to generate 450 thousand kWh per year.

Rosneft’s main competitors in Russian oil exports are vertically integrated companies such as LUKOIL, Surgutneftegas, Gazprom Neft, and Tatneft. Meanwhile, all Russian oil producers have their own export schedule for oil transportation outside the Russian customs zone based on equal access to the oil trunk pipeline system and seaport terminals. Key competitors supplying other crude oil grades to export markets are international and national oil companies such as Shell, ВР, ExxonMobil, Chevron, Total, Equinor, Saudi Aramco, NIOC, etc.

The Company consistently supplies petroleum products to the domestic market in required quantities. Rosneft is a major player in the Russian wholesale motor gasoline and diesel fuel market. The Company expanded its Russian retail chain to 3,006 filling stations at year-end 2019, offering petroleum products in all federal districts. The Company relies on extensive proprietary and third-party infrastructure to market and distribute petroleum products (oil depots, filling stations), which takes into account the capacity of regional markets and consumer demand. The Rosneft trademark is one of the most recognisable for petroleum products across the regions where the Company operates and is associated with quality fuel on sale at filling stations.

In 2019, despite a year-on-year decrease in refining volumes in Russia due to major overhauls at the refineries in Saratov, Syzran, Kuibyshev, Tuapse and Achinsk, Rosneft increased supplies of Euro 5 gasoline to the domestic market against a backdrop of a negative domestic gasoline premium. Other Russian oil refining companies mostly cut their volumes of Euro 5 gasoline supply to the domestic market.

The Company exports its petroleum products, just like crude oil, to European, Asia-Pacific, and CIS countries. Its competitive advantage lies in its ability to maintain stable relations with foreign partners, and, specifically, expand and renew petroleum product supply contracts. In partnership with Petrocas Energy JV, in which Rosneft holds a 49% stake, the Company ships petroleum products to the Mediterranean market, primarily to Turkey and Greece. In the first quarter of 2017, Rosneft and Turkey’s Demiroren Group Companies signed a product supply agreement for 2018–2020. In 2019, the actual supply volume amounted to 0.6 mmt of diesel fuel with ultra low sulphur content of 10 ppm. As the Company seeks to expand cooperation with end consumers, it signed a contract with Japan’s JXTG Nippon for the supply of over 0.7 mmt of gasoline and gas mixture in 2019. In the first half of 2018, the Company signed long-term contracts for the supply of gasoline and diesel fuel with Mongolia’s largest importers of petroleum products. The total value of contracts amounts to USD 2.1 bln. For over 10 years on the Mongolian fuel market, Rosneft has boosted its share to 80%.

On 1 January 2019, Rosneft Deutschland GmbH initiated the direct sales of petroleum products manufactured at the three German refineries partially owned by Rosneft. The product mix includes gasoline, diesel, heating oil, jet fuel, LPG, bitumen, fuel oil and petrochemical products. The company is a leader in the German petroleum product wholesale market. The company supplies petroleum products directly from three German oil refineries partially owned by Rosneft, as well as from over 30 German terminals by road, rail, and river. The company’s customer base includes more than 500 enterprises in Germany, Poland, the Czech Republic, Switzerland, Austria, and France.

Over the past year, the company’s customer base has grown by 30%, with bitumen products delivered to Poland, Austria, the Czech Republic, Switzerland, France and other countries.

Russia’s Oil Refining Dynamics, mmt
* Source: CDU TEK, Rosneft’s reports

Apart from that, Rosneft Deutschland has signed contracts on into-plane fuelling with airports in Munich and Berlin (Tegel and Schönefeld) as part of its jet fuel market share expansion in Germany. Rosneft Deutschland owns a stake in the PCK Refinery in Brandenburg, which produces ca. 300 ktpa of jet fuel, accounting for almost a half of the total kerosene consumed at Berlin airports.

Alongside Rosneft, Russian oil majors LUKOIL, Surgutneftegas, Gazprom Neft, Tatneft and other oil companies offer petroleum products in the domestic market. Key competitors in export markets include transnational oil companies Shell, ВР, Total, ExxonMobil, Chevron, etc.

The Company is also developing its gas business, with a focus on production technologies, efficient gas monetisation by building a portfolio of long-term supply contracts and participating in LNG production projects as well as in Russia’s gas motor fuel development programme, and the work to create equal conditions for access to infrastructure facilities and consumers.

Developing an NGV filling station network in Russia is one of Rosneft’s key priorities in the retail business and one of the most important focus areas, since it enables the Company to expand its competitive advantages in the domestic market. In November 2018, Rosneft and Beijing Gas Group Company Limited (Beijing Gas) signed a joint venture agreement for construction and operation of an NGV filling station network in Russia based on Vankorskoye UTT. Under the terms of this agreement, Beijing Gas will own a 45% stake in the JV. The parties are planning to build about 170 NGV filling stations in Russia. They will also be considering options for using LNG as a motor fuel.

Rosneft is also building up its trading potential and trading competencies in the international LNG market.

Russia’s Oil Refining Breakdown, mmt
Russia’s Oil Refining Breakdown
* Source: CDU TEK, Rosneft’s reports
Russia’s motor fuel productionReporting data. Rosneft’s diesel fuel volumes do not include marine fuel., mmt
Russia’s motor fuel production
Source: CDU TEK