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CONFERENCE 2008
The Fifth Annual Conference
OIL REFINING, TRANSIT AND EXPORTS IN THE CIS AND BALTIC STATES

12-14 June 2008 Odessa Hotel, Odessa, Ukraine

Sponsored by

OilMarket magazine and VNIPIneft engineering company



With official support of
Ukraine's ministry of fuel and energy

Official sponsor DINAZ



Session sponsor: Ridan



Media partner: Argus Media


ODESSA BONANZA

The legendary city on the Black Sea Odessa has long been proud of its traditions in the oil business. At the turn of the 19th century just over 100 years ago, the first tank farms for storing and loading Baku crude appeared. It is not surprising that an oil conference dedicated to refining, transport and supplies of crude and products has also become a tradition. This year on 12-14 June the Oil Refining, Transit and Export in the CIS and Baltics conference was held in the centre of the Odessa port in the Odessa Hotel for the fifth time. The forum gathered 100 participants from 14 countries, including Belarus, Kazakhstan, Latvia, Lithuania, Poland, Russia, Ukraine, Estonia.

The Odessa-born writer Isaac Babel, writing as the Soviet economy was nascent, penned a prescient tale in his social-psychological story Neft (Oil). Just relish the phrase Shamsovich was given a bonus for cracking!

Today, 80 years since the story was written, cracking processes are as topical as ever in terms of developing the supply of products on markets in Russia, Ukraine, Belarus, the Baltic states and for export to the United States and Europe. Having built and improved catalytic and hydrocracking units at refineries in Ryazan, Perm, Nizhnekamsk and Novopolotsk, Russian and Belarussian refiners are today able to earn good margines refining crude and supplying gasoline blends and diesel fuel to the domestic market and for export. Their Ukrainian colleagues can only hope as they sadly watch their neighbours' active work. The political battles of bureaucrats poorly informed not only about cracking, but about the economy in general, have left the once-formidable oil traditions of Ukraine out to pasture in the back. The sector has not got tax breaks or economic stimulus needed for development. A detailed analysis of Ukrainian refining today and the oil product market was the subject of a presentation by the executive director of UkrPetrolConsulting, Sergey Kuyun.

Ukrainian realities
His presentation was even titled Why Ukrainian refineries are closing. The situation Ukraine finds itself in is no joking matter. From 2003 to 2008 refining volume dropped 51% from 423,800 b/d (21.19mn t) to 207,800 b/d 10.39mn t* (* a forecast based on the work of Ukrainian refineries in the first six months).

As a result, product output fell 42%, while imports grew by a factor of 20! Naturally, these trends come on the back of growth in motor fuel consumption on the Ukrainian market. In 2007, 10.2mn t of motor fuels was pumped into cars and other machinery in Ukraine while 3.24mn t of this was imported. During this time, four of six Ukrainian refineries were stopped for lengthy periods of time.
One of the reasons the facilities stopped operating was the fact they were not ready to produce the volume and quality of motor fuel consumers are demanding. Recent years have seen dynamic growth in demand for high-octane gasoline and falling demand for low-octane fuels. This was provoked by the number of new cars on the road a trend characteristic of all countries in the post-Soviet region.
Another problem refineries faced was their inability to make low-sulphur blends of diesel fuel, despite the fact more and more consumers are using it and are willing to pay high prices for it.

The expert said the main reasons for this situation was the lack of a state strategy to develop the refining sector:
- There is no clear programme for strengthening quality standards;
- There is uncertainty regarding state-owned shares in refineries.

Kuyun cited the following steps as the more pressing priorities needed to stimulate the modernisation of

Ukrainian facilities:
The need to act to defend Ukrainian refiner:
- creating a legislative base;
- stilling order on the border to ensure a balance between the interests of importers and refiners.

Forum participants listened with great interest in a review of the condition of key Ukrainian oil and gas refineries. The table below gives an idea of how slowly modernisation has been carried out at these sites. The table shows the main projects which have been completed and the resulting new capacities.

Built in 1966, the Kremenchug refinery remains the largest in Ukraine today. It has a capacity of 336,000 b/d (16.8mn t) but only one of its four 160,000 b/d primary distillation units is operating today, though the enterprise still has the ability to launch another two primaries. Priorities in developing this refinery include setting up capacity to handle the hydrotreatment of catalytic cracking gasoline blends. The catalytic cracking unit installed in Soviet times enables the enterprise today operate at a profit selling high-octane gasoline, despite a number of serious problems. Still, the profit from producing this top-selling fuel would increase significantly if an isomerisation unit was installed at the site.

Ukrtatanafta (Kremenchug refinery) management is aware of the rising price of diesel fuel, but hydrotreatment for the diesel fuel needs to be rebuilt in order to produce this product. The estimated prices for this work is about $150mn. (Deputy General Director of the enterprise, Sergey Koshelyuk, spoke at the forum in more detail about these plans. An interview with him will be published in our next issue.)

The need to deepen refining has matured at another large Ukrainian facility the 320,000 b/d Linik refinery, which is located in Lisichansk and belongs to TNK-BP. This refinery is operating far below maximum capacity at present only one 160,000 b/d ADU is in operation. Here one can sympathise with the management of the British-Russian holding with the high price of crude and Russian export duties at $341/t, the company is better off developing and loading its own refining capacity in Russia. (Read more in Octane symphony, on page 52). The problem is exacerbated by the high output of fuel oil at Linik refinery. The enterprise's managers prefer to buy vacuum gasoil (VGO) in Russia and Kazakhstan, to load the catalytic cracking unit and wait while company management begin to carry out modernisation plans. Specifically, the enterprise plans to install depth of refining enhancing processes. The cost of this work is estimated to be about $300mn.

It would probably not be an exaggeration to say that Lukoil refinery in Odessa is developing production the most dynamically in these conditions on the Ukrainian market. After two and a half years of modernisation, the refinery was launched in April this year, and in June the visbreaking unit came on line. Head technologist at the facility, Sergey Bliznechenko spoke in detail about work carried out at the enterprise, while Sergey Kuyun's presentation highlighted the priorities which the refinery still needs to bring to life.

The facility today has a capacity of 54,000 b/d (2.8mn t/yr). A VGO water treatment unit still needs to be built, along with the catalytic cracking unit and a gas fractionation unit, a power block, a sulfur production unit. The latter is one more source that can be used to improve the facility's profitability sulfur, which reaches weight of 1.8% in Ural blend today has significantly increased in price on world market. Besides this, the processes mentioned above require building a hydrogen production unit at the site. The overall cost of this work is estimated to be about $500mn.

Given the fact Ukraine refineries cannot make enough motor fuel, it is also important to note the work of the Shebelinka gas refinery, owned by UkrGazVydobuvannya.
The gas refinery's capacity is 1.2mn t of gas condensate today. Work planned at the facility includes finishing construction of an isomerisation unit and a hydro treatment unit for diesel fuel. This work will cost $50mn.
Concern is also warranted by the situation at two western Ukrainian refineries in Nadvirna and Drogobych, where capacity is 52,000 b/d (2.6mn t) and 66,000 b/d (3.3mn t) respectively. These refineries have not received Russian crude since 2006. At Nadvirna, talk is of plans to build a hydrocracking unit. However, specialists say priorities include completing construction of a diesel fuel hydrotreatment unit and an isomerisation unit for gasoline blends. Motor fuels at both these refineries today arrive on the market only under an exception made by the Ukrainian government since otherwise they would simply not meet new technical conditions for motor fuels. The fact these privileges exist cannot be considered normal and executives from other refineries are extremely irritated by the situation and so this decision must be viewed as only a short-term fix.

Finally, decisive steps need to be taken in the agriculturally important region in the south of Ukraine at the Kherson refinery, which has a capacity of 50,000 b/d (2,5mn t) (once 7.5mn t). The refinery has been idle since 2005. Experts say priorities in Kherson include building a new hydrotreatment unit for diesel fuel, a hydrocracking unit and hydrogen unit and an isomerisation unit for high octane gasoline blends production. A primary refining unit also needs to be rebuilt. In the hallways, people say the Kherson refinery's owner, Igor Yeremeyev, who sold his assets in refineries in Nadvirna and Drogobych to the Privat group, fell hostage to the rocketing prices of refining equipment which have struck around the world.
The rising demand for high-octane gasoline and diesel fuel in many regions of the planet have led to lines many years long at key equipment manufacturers and naturally this has led to significantly higher prices for goods and services. If two or three years ago it cost $300mn to bring Kherson out of its coma, now, as people in Odessa would say, there's nothing even to talk about for less than $1bn.

After this review, when it became completely clear that Ukraine yet for many years cannot live without imported motor fuels, the lead engineer of the MASMA-SEPRO oil products and systems certification body, Sergey Veremeyenko took the floor. His presentation was dedicated to the requirements placed on imported fuels. Today, the Ukrainian market has been inundated with supplies from Azerbaijan, Belarus, Italy, Kazakhstan, Lithuania, Poland, Russia, Romania and Turkmenistan. All these fuels are certified to see if they meet Ukrainian technical norms and this sheds light on many interesting nuances. Gasoline from Belarussian and Lithuanian refineries meets European norms.

Good quality, hydrotreated diesel fuel comes from the Turkmenbashi refinery, but it fails to meet just one parameter lubrication properties, which keeps it from meeting European standards.

Veremeyenko spoke in particular on gasoline blends made at oil farms using various additives from imported raw material as so-called trademark gasoline blends which nearly every self-respecting operator in Ukraine has today. Ventus, V-Power, Mustang and other trademark gasoline blends and a number of other issues will be the topic of an interview with Veremeyenko in an upcoming issue of OILMARKET.

On Shkodova Hill
Unsurprisingly, the presentation by Odessa Refinery Head technologist Sergey Bliznichenko was met with heightened interest. Located on Shkodova Hill Street in Odessa, Lukoil's refinery has endured many collisions in the past two and a half years, and the team at the refinery overcame many hardships before the facility was launched in April this year. Again one subconsciously recalls a line from Babel: Viktor Andreyevich, your conclusions and this whole situation are unacceptable to me, but I do not feel it is my right to advise you to hide your views

Viktor Andreyevich Yushchenko and Vagit Yusupovich Alekperov opened the modernised refinery with much fanfare the country needs the gasoline and diesel fuel from the enterprise. In June a visbreaking unit was launched, enabling the depth of refining to be increased by nearly 20% to 72% the average number in Russia and quite a good figure in Ukraine. The management of the Russian company which operates the Odessa refinery was able to retain the core staff at the site, solve a number of unique technical problems such as re-launching a UOP Penex isomerisation unit after two years of standing idle while retaining the pace of development and bringing a number of modernisation projects to fruition.

Managers of the refinery gave conference participants the chance to tour the facility on Shkodova Hill and see for themselves how the enterprise operates today while learning about units both new and under construction. We will give Oilmarket readers a closer look at development at the Odessa refinery in the next issue of the magazine.
The prominent Russian specialist on refining and petrochemicals Vladislav Bazhenov gave high marks to the Odessa refinery team's work. He is very well acquainted with developments in Lukoil's refining, both in Russia and in the CIS in general. Read an interview with the expert on page 46.

Finding truth in practical terms
A number of presentations at the forum were dedicated to creating new refining capacity and technological solutions. A speech by deputy director of science at the Sumy Machine Tooling plant, Aleksander Shvindin was very interesting. Leading pumping technologies for the refining and petrochemical industries which are being developed and implemented at this enterprise have now been proven in practice including at Lukoil's refinery in Odessa and Volgograd (read special material on this new generation of pumping technology from Sumy in the next issue of Oilmarket).

The fact that practical use is the best criteria of truth was repeatedly confirmed during presentations at the forum. Much interest was seen in the presentation by representatives from Nizhny Novgorod based (central Russia) Ridan, one of the leading Russian manufacturers of heat exchange technologies. A presentation by Dmitriy Kokorin, the manager of the Oil, Gas and Chemical department at Ridan On optimising heat exchange the path to effective investment was notable for its innovative nature. Today, as the costs of energy spiral, energy saving technologies are more important as ever.

That the company's plate-type heat exchangers have been installed at a number of refineries and petrochemical facilities in Russia is the best proof that the company's solutions are in demand. In the context of spiralling prices for equipment and the huge number of old and dilapidated heat exchangers at enterprises in Russia and the CIS, Ridan's solutions attracted a large audience. The scepticism many experts felt about plate-type heat exchangers was dispersed by Ridan specialists' objective presentation of facts culled from the experience of operational projects and the systemic approach to helping clients make the correct choices in choosing heat exchange equipment. During the conference, Sergey Pudov, the head of Ridan's accounting department, spoke on this topic in a presentation entitled Effective heat exchange: criteria for selecting equipment and a supplier.

Ridan's work illustrated the words of VNIPIneft Design Institute General Director Dr. Vladimir Kapustin that a number of Russian manufacturers are perfectly capable today of manufacturing equipment that meets the highest international standards and begin carrying out projects in Russia and the CIS.

Dr. Kapustin's presentation provoked great interest in his audience and he was forced to give up his coffee breaks during intermissions to autograph the classic textbooks he wrote together with his team, Oil refining technology.
It should be emphasised here that forum participants were not narrow patriots and expressed genuine interest in leading technologies developed by foreign companies.

Specifically, practical approaches and operating projects attracted clients to Emerson, the supplier of equipment for refining and petrochemical industries. Devices for measuring and analysis, systems and programs, engineering solutions, valves and dampers made by the company were all woven into a single whole.

In his presentation, Yevgeny Goldin demonstrated nearly fantastic developments such as sensors placed on units, pipes and other refinery infrastructure making it possible to watch a refinery's operations in real time, like a single organism. Lukoil specialists in particular, are well acquainted with Emerson equipment. A number of Emerson devices are used at the Odessa refinery and at Norsi in Kstovo and other Lukoil enterprises.

Another company proving the effectiveness of its technologies in practice was French Carbovac, which supplies oil and gasoline vapour recovery units (VRU) to refineries, tank farms and loading facilities.
As Carbovac representative Vitaly Sysoy noted in his presentation, these units not only enable keeping pollution within EU And US norms, at current crude and product prices, they also make it possible to save significant sums on investment and this makes the ROI on a VRU quite attractive.

New horizons
The format of the Odessa conference traditionally encompasses a number of downstream topics along with refining, attention was given to developing new loading capacity, pipe supplies and creating and operating new trading companies.

Presentations on the second day of the conference were especially rich in content. Triton Executive Director Igor Kozlov spoke about new possibilities for tugboats in the Danube-Black Sea region thanks to the new terminal in Izmail which was built and launched by the company he represents.

Traditional interest was shown in the work of the Latvian company, Dinaz. Dinaz is building a new refinery in Daugavpils and a new loading complex in the mouth of the Daugava river in Riga. Dinaz announced both these projects during our 2007 conference in Odessa. Since then a huge amount of negotiations have been conducted with both crude and product suppliers from Russia, Kazakhstan and other countries as well as with technological and engineering companies. There is huge interest in Dinaz' projects no new refinery has been built in the EU for 11 years and yet demand for products is continually rising. It is no secret that as part of their energy security strategy, EU leaders are extremely interested in keeping as big a share of motor fuel production as possible on their own territory. This tactic not only guarantees the energy security of the Old World, it also allows for many European refiners highly-profitable gasoline exports to the United States.
As well, a powerful refining asset in the EU is good for producers in the former Soviet Union. Arguments about this objective reality diluted the initial scepticism of a number of experts.

Information on the work of a new powerful Belarussian trader BelOil (the Belarussian Oil company BNK) attracted genuine interest as well. A presentation by BelOil representative Viktor Krasnyanskiy was a revelation for many participants.

Growing interest in the Ukrainian market of liquified petroleum gas (LPG) was underscored by a number of speeches on the subject. Traders and retailers found a presentation by Argus LPG editor Svetlana Novolodskaya very helpful. Argus LPG is the leading international publication on LPG supplies and trade and is published by Argus Media. Mrs Novolodskaya's insight into the correlation between prices on LPG and crude and LPG and naphtha and the international context she gave to them as well her comments on the prospects for growth in the LPG market and its supplies to address the needs of the petrochemicals industry attracted a great amount of interest from conference attendees. Still, far from all her assessments were met without question.

A presentation by Nord Gas representative Mark Eivin on the work his company is doing to set up an interregional LPG hub in Estonia for export and domestic markets in the Baltics states, Scandinavia and eastern Europe, not only attracted the interest of many LPG traders, refiners and suppliers, it was the subject of a hot debate with Mrs Novolodskaya.

Meanwhile, presentations by Ukrainian LPG Association head Sergey Piven and Belorusneft company representative Vladimir Tretyakov gave additional proof the market is developing and the need for more terminals and storages is growing. Growth in the demand for and price of LPG and logistical problems all this changes the trading format and it is clear that building new LPG storage facilities and terminals will not be the highest price paid to lower risks.

Discussion during the roundtable Technology and management what is holding back development? provided more proof that the complicated organism of the refining sector and related issues of crude and product supplies, trading, financing and investment does not adhere to linear logic.

A presentation by Ventech representative Yulia Tskhvlediani provided interesting insight into prospects for development in refining in Russia, Ukraine and Kazakhstan and a number of other countries in the FSU (read an interview with Mrs Tskhvlediani in an upcoming issue of Oilmarket). Deputy General Director of Major Construction at Ukrtatnafta Sergey Koshelyuk gave a systemic assessment of the crises Ukrainian refining is experiencing in particular and the entire product supply system in general.

Without doubt, next year will open new horizons in the development of refining in the Russian Federation and other CIS countries as well as in issues related to crude and product supplies and the development of trading.
The 6th Annual conference Refining, Transit and Trading in the CIS and Baltic states will take place in the Odessa hotel in Odessa on 18-19 June 2009.
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