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Where Did All The Crude Go? Can Russian Prime Minister Vladimir Putin and his Government Avoid a Fresh Fuel Crisis?

Russian Gas Pump with Nozzle in Tank of VehicleAngered by unceasing reports of gasoline shortages around the country, Russian Prime Minister Vladimir Putin has again reminded oil-industry executives of the dire consequences of their failure to upgrade the country's oil refineries. "It is absurd to talk of gasoline shortages in a country that's the world's leading oil producer," Putin told a meeting of oil-industry executives and regulators in Kirishi, Leningrad Region, on Friday.

Putin's government has been trying to avoid a repeat of the crisis that hit the oil industry this spring, when refiners failed to meet their tight supply schedule, even after prohibitive new tariffs slowed fuel exports. The government responded to shortages in fuel supply in May by hiking gasoline duties by 44 percent to $408 per ton to keep more fuel on the domestic market. The prime minister said then that oil firms were colluding in a price-fixing conspiracy. He kept up the pressure on Friday, slamming oil-industry executives for failing to modernize domestic oil refineries, while fully benefiting from a government oil-tax reprieve.

The prime minister hinted at the possibility of oil companies losing access to export pipelines if they neglect domestic refining. Experts say the government's willingness to adopt such extreme measures demonstrates the chokehold that it has on oil companies, most of which have their oil delivery schedules approved by the Energy Ministry. "If the government decides to control the oil delivery schedule, the oil companies have no choice but to comply," said Igor Demin, CEO of Russian oil giant Transneft.

Putin also said licenses for deposits with more than 5 million tons of reserves should henceforth reflect the crude-oil to refined-oil ratio. Oil companies that fail to upgrade their plants to produce lighter fuels, he said, could have their "unearned profits confiscated." "Producers should have the responsibility to supply the domestic market (with oil products) with an amount proportional to the crude they pump," Putin told oil company officials. "Oil companies in the past assured the state that the difference in excise duties on crude oil and heavy oil will be invested to develop deep oil drilling. This was far from being the case: there was no qualitative upgrade of Russian oil refineries," Putin said. He added that, in the meantime, there has been a sharp increase in the export of crude and sub-standard diesel fuel, causing the Russian budget to sustain direct losses from such schemes.

Putin noted that while oil extraction increased by as much as 28.7 percent in the past year, the volume of gasoline available for domestic consumption decreased by 20 percent. "Where did all the crude go?" Putin asked rhetorically before giving the obvious answer: "It was shipped overseas for refinement." Putin said it was regrettable that most of the domestic oil companies "have not fulfilled their obligations to increase crude-oil refining capacity even while taking full advantage of state benefits." "Remember that you are working in the Russian Federation. The mineral resources that you use remain the property of the Russian people," Putin said.

Industry executives said however that government price controls introduced earlier this year have crushed Russian refinery margins, once some of the world's highest. Inventories have fallen to minimal levels over the past several weeks, while refiners have the capacity to supply just enough gasoline to cover consumption in the summer, Reuters reported. A major gasoline deficit early this year forced motorists to queue for petrol and pushed some petrol station chains to the brink of closure. Traders said lines at gasoline stations could lengthen this summer while some stations could close for good as the wholesale market had all but seized up. Meanwhile, lack of sophisticated equipment has also meant that Russia will continue to export more crude and heavy fuel than high-grade products.

Russia overtook Saudi Arabia to become the world's leading oil producer in 2009, after increasing production by 1.5 percent, to claim a 12.9 percent stake of the global market. Last year, Russia produced around 505 million tons of crude and may inch up production by one percent this year to hit 508-509 million tons, Putin told the industry meeting on export duties for oil and oil product exports on Friday. "Last year Russia became the world's top oil producer," Reuters quoted Putin as saying. "This is exactly the level of crude which allows us to cover our own needs as well as meet export requirements. This year we expect 508-509 million tons."

The only good news for oil-industry executives on Friday was the Prime Minister's decision to back a proposal by the Finance Ministry to restructure taxes on crude oil and refined oil products. Putin said government officials must submit a plan to implement the measure within two weeks. Dubbed "60-66," the plan envisages lowering the coefficient used in setting the crude export duty to 60 percent, from the current 65 percent, while taxing oil products at 66 percent of the crude levy. Fuel oil has long been subject to a low rate of export duty, which has in turn encouraged refiners to produce large volumes of the straight-run product for export as a crude oil surrogate. The 60/66 regime was designed not only to encourage crude production but to prompt oil companies to build more modern gasoline and diesel units, which would consume such residues.

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