Why raise prices for gasoline?

Kazakhstan will have to change its price policy to greater extent than other countries of Eurasian Economic Union (EEU) in order to ensure formation of appropriate market within organization. The basic reason is that as of today the Republic has the lowest retail prices for gasoline and diesel fuel in comparison with other Union members.

Common market

Kazakhstan to date actually keeps rather high level of price regulation, “which far exceeds limits deemed as necessary for protection of consumer interests in neighboring countries”. This conclusion was made by analysts of  IHS Markit research company – one of participants of preparing the 2019 National energy report for KAZENERGY Association.

We remind that common market of petroleum and petroleum products in EEU will start operation since the 1st of  January 2025. By this date the states – members of the Union have to harmonize legislation in this industry.

The principles for formation of  the common market foresee market price setting, ensuring fair competition, elimination of  technical, administrative and other obstacles in trade of petroleum and petroleum products as well as of the relevant equipment, technologies and services. EEA countries agreed to provide all companies with equal access to infrastructure of petroleum and petroleum products transportation. It is planned that transportation rates will be established by each country separately. Whereas the rates level for companies of other states-members shall not exceed the rates for national economic entities. Also the parties will refuse from quantitative restrictions or export dues in mutual trade. Export and customs dues to be levied from petroleum and petroleum products outside of the EEU are regulated by separate agreements.

Whereas in the opinion of  IHS Markit experts one of the main problems of Kazakhstan integration into the EEA is lack of complementarity between economy of Kazakhstan and Russia, which are large producers and exporters of the Union hydrocarbons. Whereas Belarus, Kyrgyzstan and Armenia are consumers of petroleum and petroleum products instead and their operation is in many aspects consistent with Russian economy. Belarus for example purchases hydrocarbons from Russia, processes it and sells back in form of petroleum products. The experts believe that the process of  harmonization with Russia will be more difficult particularly for Kazakhstan.

Liberalize prices (recommendations)

IHS Market believes that Kazakhstan has to allow prices for crude oil to rise to the level of export parity on the domestic market. As a result oil producing companies will have a sufficient stimulus for oil supply to domestic oil refineries.

Besides it is necessary to gradually reduce refining prices for oil refineries and completely refuse from refining system by middle of 2020 years.

“Oil refineries shall operate as commercial enterprises, which purchase crude oil and sell products made therefrom earning through the margin as they do it in other countries”, – experts believe.

Also it is necessary to perform large scale liberalization of domestic prices for petroleum products so that retail prices for them can freely rise to middle level of prices on EEA countries’ markets. It means that price regulation has to be officially removed from АИ-80 gasoline and regulation of prices for other petroleum products has to be stopped.

In the opinion of experts it is possible to compensate increase of retail prices to consumers of motor vehicles fuel through proportional reduction of tax rate on vehicles. It is necessary to agree excise rates with Russian ones within frames of common economic space, to bring taxes of oil refining industry in correspondence in order to minimize the risk of significant price dispersion on end consumption markets and complications related thereto. It is necessary to bring restrictions on import and export of petroleum products to the minimum.

Without hesitation (explanation)

In the meanwhile representatives of  KAZENERGY Association have noted in the comments to experts’ recommendations that equation of export and domestic prices for crude oil in the nearest future is inevitable and is a sufficient step in the direction of fuel and lubricants market liberalization.

“However this process requires gradual and phased transition”, – they say in the association. Cancellation of the tax on production of minerals in case of crude oil supply to the domestic market may become the first step of this transition.

The organization says that “reduction of rate for refining is impossible at one moment and for all factories at once”. The effective rate has been approved within frames of the relevant investment programs of oil refineries with consideration of received loans for modernization. Consequently as the debt is canceled it is planned to reduce the refining price. Creation of special customs points for stopping of illegal export of motor vehicles fuel and monitoring at filling stations are not able to drastically change the situation with prices for petroleum products in the border regions. It is necessary to ensure price parity in Kazakhstan and Russia through economic action.

“However taking into consideration that this is a critical social issue it is necessary to deal with it stepwise and deliberately with consideration of interests of all market participants: in the first turn with interests of consumers among population”, – say experts and add that “the most acceptable tool for synchronization of retail prices for fuel and lubricants are fiscal tools, in particular, excises, as well as liberalization of trade”.

According to KAZENERGY data as of today the excise rate in the Republic of Kazakhstan  for wholesale of motor vehicles gasoline is 27,3 US dollars for 1 ton, retail price is 1,3 US dollars for 1 ton, which in total is from 1/6 to 1/7 of the similar index in Russia – 189 US dollars for 1 ton.

Thus growth of retail price for fuel and lubricants in Kazakhstan will be ensured basically through raising of taxes without any significant increase of price for basic commodity goods and margin of petroleum products market players: mineral resources users, oil refineries, traders, distribution companies and filling stations.

“Assumed increase of proceeds to the budget through excises can be compensated to the population through reduction of socially imposed taxes with the purpose of increasing actual amount of salaries as well as through cancellation of tax on vehicles”, – experts believe.

Oil refineries

According to IHS Market data the modernization of oil refineries as a whole has allowed to the Republic to significantly reduce traditional dependency of the country from import of light petroleum products from Russia. Current production capacities might be sufficient for satisfaction of domestic demand for petroleum products by 2030 as a minimum.

The volume of oil refining at Kazakhstan oil refineries in 2018 grew by 10,2% to 16,4 millions of tons. It is conditioned upon growth of domestic consumption along with expansion of refining capacities after completion of the upgrade program, which cost 6 billion of  US dollars.

Visible domestic demand for petroleum production in 2018 grew by 11,1% to 14,3 millions of tons. At the same time export of petroleum products decreased by 16,3% to 3,3 millions of tons; import decreased by 37,9% to 1,2 millions of tons. According to IHS Markit data last year Kazakhstan oil refineries provided around 93% of total supplies to domestic gasoline market, 91% of diesel fuel and 62% of aviation kerosene.

To the share of three main oil refineries of Kazakhstan – Atyrau, Pavlodar and Shymkent – fell 93,6% of total oil refining output in the country in 2018. Besides three main oil refineries 34 small oil refineries are operating in Kazakhstan, which basically produce small quantities of low quality products or semi-finished goods. However they play an important role in provision of low-octane gasoline (АИ-80), production of which was canceled at three large oil refineries after upgrade. This kind of fuel is used mainly in agriculture and the price for it is still regulated. As a a result of performed upgrade the depth of oil refining at Atyrau oil refinery increased to 85%, at Pavlodar oil refinery – to 84%, at Shymkent oil refinery – to 89%.

All three factories currently produce gasoline of K4 and K5 classes (similar to Euro-4 and Euro-5 standards) in compliance with EEA requirements. Naphta residues make the main part of export of Kazakhstan petroleum products as before.

In accordance with basic scenario the refining output at Kazakhstan oil refineries in the period from 2019 to 2040 will grow by 17,5% to 21 millions of tons per year.

The main part of crude oil being supplied to oil refineries and the main part of petroleum products manufactured from it belong to producing enterprises of KazMunaiGas NC JSC.