In the Republic of Tatarstan in central Russia, Tatneft has been extracting and refining crude oil and gas for 60 years. Today it is at the forefront of downstream technology in the region
Located at the centre of the Eastern European plains, Tatarstan is a beautiful and mysterious part of Russia; a varied and multicultural hotpot. Tatarstan has been the site of conflict and division in the past, primarily because of its key location at the foothills of the Urals – a gateway from the frozen eastern mountains into Europe. – but today it is a settled region, fully integrated into the Russian Federation. Tatneft is one of the most respected oil companies in Russia, and for the past 60 years it has been drilling into the depths of the central plains for crude oil and natural gas. Most recently, its downstream and refining operations have been at the forefront of refining technology.
In the years since its inception Tatneft has developed a sophisticated network of operations, ranging from drilling and extracting to cracking and refining. Most recently, the company has launched Taneco, a facility incorporating some of the key elements near downstream operations in the city of Nizhnekamsk. Taneco has been one of Tatneft’s key projects, and it is set to be one of its biggest. “Although certain assets, such as the hydrocracker facility currently under construction, are held directly by Tatneft, Taneco’s name is used to refer to the whole refining complex,” says Vasily Mozgovoi, Corporate Finance Aide to Tatneft’s CEO and Taneco’s Board member. “In December 2011 we started commercial crude oil processing at the refinery. Daily throughput capacity is approximately 140,000 barrels of crude oil. Today we operate a crude atmospheric distillation unit with vacuum distillation, naphtha stabilisation, visbreaking and sulphur production. We produce home heating oil, fuel oil, naphtha, vacuum gasoil and some other refined products. Currently our light product yield is 50 percent.”
Launching Taneco is a bold move for Tatneft, which has always been a prominent player in the upstream business. But recent Russian oil and gas taxation has moved towards incentivising refining, giving Tatneft a golden opportunity to branch out and develop its downstream activities to fulfil its maximum capabilities. When new tax legislation came into effect in 2005, Tatneft had a few options to take full advantage of the new tax system, but after deliberations with the local government – its main shareholder – it was decided that a new refinery equipped with cutting-edge technology was the best approach. It was an ambitious decision and the first project of its magnitude since the dissolution of the Soviet Union, but Tatneft counted on strong support locally and from the federal government. “We are talking not only about moral or political support, but also investments of over $550m from the Russian Federal Investment Fund to build and upgrade pipeline and railroad infrastructure for the refinery; Tatarstan granted us property tax and other breaks within its authority to assist in the project’s implementation,” explains Mozgovoi.
The choice of location at Nizhnekamsk was also pivotal for the success of the new enterprise. The city has been a centre for Tatneft’s petrochemical operations for years and the logistical centre for most industries in Tatarstan. A key factor for the success of the Taneco project was to insure that Tatneft could attract the best people for the jobs required. “Our employees are the company’s most important asset, and we provide very competitive pay and social packages to make sure that we attract experienced and capable people,” says Mozgovoi. The arrival of Taneco in the city has proved invaluable to the residents, many of whom are now employed directly or indirectly in the refinery. “The Government of Tatarstan provides strong support in connection with educating and training potential candidates for the refining sector,” says Mozgovoi.
Taneco has been an influential project for Tatneft in more ways than one. The company has invested in excess of $6bn in the new refinery and installations in Nizhnekamsk. Because of its longstanding reputation, robust upstream operations and strong profitability, Tatneft was able to finance this project partly through its own cash flow, but also in part through various international credit facilities and loans from Russian banks. Some of the transactions were so favourably executed that they earned ‘deal of the year’ awards.
However, Vladlen Voskoboinikov, Head of International Reporting at Tatneft and a member of the company’s Management Council, is adamant that these transactions did not result in the company becoming overleveraged, and as of March 2012 Tatneft’s net debt-to-earnings before interest, tax, depreciation and amortisation ratio, under the US’ Generally Accepted Accounting Principals, was 0.6. “It is very comfortable level for a company of our size,” Voskoboinikov adds. As a result, since July of this year the company has had its long-term credit ratings upgraded to BB+ by Fitch Ratings and Ba1 with a ‘stable’ outlook by Moody’s.
Despite the new commitments associated with the refinery project, Tatneft has been stringent in its payment of one of the highest dividends to shareholders in the Russian energy sector. Despite the substantial investment of time and resources committed to Taneco so far, Tatneft still has many plans for the development of the refinery. “We are in the process of building a hydrocracker facility, which will boost the output of light refined products to 62 percent,” says Mozgovoi. “The hydrocracker will process 58,000 barrels of vacuum gasoil per day. We expect to complete the construction of this facility in 2013, and with the hydrocracker’s launch Tatneft will start production of high-quality diesel and jet fuels.” When these developments are complete, there are plans to increase the complexity of the refinery by building hydrotreaters, a delayed coker, a catalytic cracker as well as reforming and isomerisation facilities, all of which are scheduled for completion before the end of 2016. Upon completion of this stage, Taneco expects to achieve light refined products output of 84 percent, so the project is certainly a long-term investment.
The developments are crucial for Tatneft, with Taneco now covering just over 27 percent of its crude oil production. The company extracts about 510,000 barrels of crude oil per day, and has proven reserves of 6.2 billion barrels, resulting in it having the longest projected period of activity among Russian oil producers. Taneco and the other downstream developments will ensure that Tatneft has the efficient operations for refining its output. Voskoboinikov is adamant that “as long as the economics make sense, we have the knowledge and expertise necessary to carry out such large projects.”
Surviving and thriving
Tatneft’s Taneco project is revolutionising the downstream industry in Russia. It was conceived as a full-scale deep crude oil conversion facility, at the cutting edge of technology and the most advanced in the industry. There are many challenges ahead, as the global oil sector is undergoing fundamental changes, but through intelligent enterprise risk management techniques Tatneft is prepared to face any obstacle put in its path. “Tatneft’s history goes back to 1950. Since then we have gone through many challenges, ranging from drilling and production complications, the collapse of the USSR and economic depressions, and always managed to come out of these crises stronger and better prepared for new tests,” says Voskoboinikov.
In order to counteract the fluctuating price of oil, the company has ensured that its operations run as efficiently as possible and that costs are reduced on a per barrel basis. This is achieved mainly through the use of new technologies. “This would be difficult to achieve without certain tax incentives,” says Voskoboinikov, “so the government’s attention to the sector’s development is very important. This is also the case for the production of unconventional and difficult to extract reserves in remote and offshore areas.”
The company has also developed a monitoring system deployed to help it stay abreast of macroeconomic developments in the region and globally, such as the debt crisis in Europe or the slowdown of other emerging economies, or any other trend that might have an impact on Tatneft’s business or investment plans. This has allowed the company to manage its resources in times of economic scarcity in Europe, as the price of oil drops and things seem uncertain. “We have also developed and effectively implemented a number of cost cutting and control measures,” says Voskoboinikov.
Tatneft is committed to preserving the full potential of its existing resource base, while at the same time increasing downstream capabilities to their maximum. It is also focused on developing new technologies such as in situ production of viscous oil reserves in Tatarstan, a technique the company plans to roll out to other sites in order to increase production. All of these developments have one goal in mind: to maximise the company’s profitability and its value for shareholders. “Our main target for major fields in Tatarstan is to maintain crude oil production as a minimum at the current level,” explains Mozgovoi, “and to explore new conventional and unconventional oil, through projects in Russia and abroad.”