Company’s position in the industry
EVENTS AND FACTORS SIGNIFICANT FOR THE INDUSTRY AND INFLUENCING THE COMPANY’S ACTIVITY
The key factors influencing the performance of the Company and the oil and gas industry as a whole are the price situation on the world market of oil and oil products, international economic processes, changes in the Russian economy and in the industry (tax policy, inflation).
The main external factor affecting the activities of Tatneft is the behavior of oil prices. As a result of the growth of energy efficiency of the world economy, the slowdown in the growth of the working population and the decline in total consumption, while increasing the efficiency of production, the world faced a structural crisis of oil overproduction. The possibility of overcoming this crisis in the short term is limited by fundamental factors: the growth of shale oil production in North America; the growth of traditional oil production in the Middle East; the slowdown in the economies of India and China (therefore, the decline in oil demand); the decline in the growth of the working-age population (age of 15-64 years) worldwide; the growth of global energy efficiency and the development of alternative energy sources.
The agreements reached between the OPEC countries and Russia in 2016 to stabilize oil production had a positive impact on the dynamics of world oil and oil products reserves, which, in the end, gave impetus to the rise in world oil prices. However, the price increase inevitably led to the revival of shale oil production in North America, which, amid an intensive increase in hydrocarbon supplies from Iraq, Iran and Libya, continues to be a key risk factor for the decline in the price of an oil barrel.
The latest price crisis in the oil market became an additional stimulus for the development of alternative technologies. Some products, such as low-cost electric cars, are already having an impact on the mass market, creating a threat to the demand for traditional fuel. In the worst-case scenario for the industry, by 2040, about 20% of hydrocarbon automotive fuel will be replaced by electricity. These factors are a great challenge for oil companies and increase the competition.
Another important factor influencing the world oil prices is the exchange trade in oil futures contracts — it creates prerequisites for high volatility of prices in the future and increases the risk of a significant drop in prices in case of cancellation of the OPEC+ Agreement.
Successful development of the Company’s production business and the entire oil industry is impossible without stable taxation rules. Due to the nature of the raw material base, the preservation of incentive tax regimes for the developed fields, as well as for the fields of super-viscous oil, remains a priority for the Company.
The main uncertainty factor for the Company’s oil-refining sector is the changing Russian legislation in the field of taxation of oil and oil products export. There is a risk of changes in tax legislation and levelling of export duties on oil and oil products (including light oil products), which complicates the effective planning of long-term investment projects in oil refineries, increases the payback period (due to the growth of the discount rate).
In the reporting year, there were a number of tax changes that had an impact on the Company’s performance. At the beginning of 2017, there was a one-time three-year increase in the Mineral Extraction Tax. Consequently, additional costs for the Company will be more than 300 rubles per ton of extracted oil.
Also in 2017, excise duties on motor gasoline and diesel fuel were increased, which led to a reduction in the margin of retail sales of fuels in Russia.
A factor that may negatively affect the pace of development of the Company in the near future is the considered by the Ministry of Energy allocation of a high-sulfur flow in the direction of Ust-Luga port, where part of the Company’s oil export volumes may be directed. The lower quality of raw materials in Ust-Luga (sulfur content is about 2.5%) will inevitably lead to the discount on Urals oil brand price, which can cause a decrease in the Company’s export revenue, and, as a result, a decrease in tax payments to the budgets of the Russian Federation and the Republic of Tatarstan. Tatneft is working on several scenarios for responding to the possible implementation of this initiative, and is actively cooperating with the responsible state bodies and other interested parties in order to completely eliminate or minimize possible losses.
The main factors that may have a negative impact on the development of Tatneft’s tire business in the coming years are: sharp rise in prices for raw materials; general decline in demand for tire products in Russia, primarily in the market of primary packaging; return to the Russian market of Chinese truck tires due to the strengthening of the ruble; launch of new tire plants in the Russian Federation, expansion and modernization of capacities at existing Russian plants of foreign manufacturers; natural retirement of the car park — the target consumer of certain groups of KAMA tires (passenger and truck combined tires).
The electric power industry will be influenced by the principle of equal profitability of natural gas supplies to the domestic and foreign markets proclaimed in the updated Energy Strategy of Russia until 2035″. Gradual convergence of domestic gas prices with an export parity price means an accelerated growth of natural gas prices for Russian consumers, including for power-generating facilities. Due to the completion of construction of new power plants and the withdrawal of old facilities, the reduction in the capacity surplus is expected in the coming years. In 2017, the commissioning of power-generating facilities under the Power Supply Contracts program was actually completed. In this regard, the government of the Russian Federation discusses the state program Power Supply Contracts-2, which involves a large-scale modernization of the heat generation system after 2020. This is largely due to the critical excess of outdated facilities in the heat generation system. However, the large-scale commissioning of new and modernized power-generating facilities amid the low growth of demand for electricity in the Russian Federation is likely to lead to increased competition in the industry in the medium term.
FACTORS THAT ENSURE THE COMPETITIVENESS OF THE COMPANY AND MEASURES AIMED AT STABILIZING OR IMPROVING THE COMPANY’S POSITION IN THE INDUSTRY
In the conditions of instability of the world oil and gas market, the factors ensuring high competitiveness of the Company among domestic and foreign producers of hydrocarbons, first of all, include:
- The Company has one of the largest hydrocarbon supply in the industry — the Company’s resource base allows to maintain the current production volume for more than 30 years.
- Despite the significant depletion of reserves, the Company, due the use of advanced innovative technologies increasing oil recovery, from year to year increases the volume of oil production, while maintaining a competitive level of costs.
- Geographical proximity of the oil production center to the main regions of sales and processing of oil and oil products — the Company has the lowest weighted average tariff for oil transportation to European markets among the major Russian vertically integrated oil companies.
- Development of own oil and gas processing and petrochemical plants;
- The Group has units engaged in geological exploration, drilling, well construction, transportation, engineering and research, which increases the efficiency of management and control over capital and operating costs.
- Developed network of retail of petroleum products that operates under the Tatneft corporate brand and covers almost all the most attractive regions of Russia with high growth prospects and high retail margin, especially the Volga Region and the Central Federal District. An additional competitive advantage is the availability of the own high-quality and highly competitive product — TANECO diesel fuel — which has no analogues in Russia and exceeds the Euro-5 Standard in many respects.
- Development of own power-generating facilities, ensuring reliable supply of electricity and heat to production and social infrastructure facilities.
PROSPECTS OF DEVELOPMENT OF THE COMPANY’S BUSINESS AREAS
Exploration and Production segment — expansion of oil production through increasing oil recovery at old fields in Tatarstan due to the expanded introduction of new technologies; active development of a larger number of deposits of super-viscous oil and reaching the level of production up to 3 million tons; implementation of the program of pilot production of shale oil; growth of profitable production outside the Republic of Tatarstan (and outside Russia), including in new regions; reduction of specific operating and investment costs for oil production.
Oil Refining segment — improving competitiveness and market stability due to the high produceability of TANECO Complex of Oil Refineries and Petrochemical Plants; optimization of oil products basket on the basis of the flexible adaptation to changes in demand and the development of premium channels for the sale of petroleum products; reduction of processing costs.
Retail Business segment — modernization of existing filling stations; expansion of the network of filling stations; increase in daily sales of filling stations; improving the quality of product offering at filling stations, including through the development of non-fuel offering at filling stations; increase in sales of branded fuel. One of the main priorities of the Company is to ensure the high quality of oil products sold and services provided throughout the Tatneft filling station network. The guaranteed quality of oil products is achieved by the sale of own-produced motor fuel at the filling stations.
Tire Business segment — maintaining the position of the leader of the Russian market of production and sale of tires. To maintain and strengthen its position, the Company plans to upgrade and expand existing production facilities with a focus on promising market niches: solid metal cord tires, special tires, and modern tires of sub-premium price segment of Viatti brand.
Energy segment — programs on diversification of sources of raw materials (natural gas, oil residue, oil coke) in Nizhnekamsk HPP are developed and implemented, which will improve the operational efficiency of the plant through selecting the optimal type of fuel depending on market conditions, as well as reduce the risks of failure of electricity and heat supply.