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Petrol Prices Rising. Why?

заправка
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Russia, along with Saudi Arabia and the United States, is the top-3 largest oil producer. Yet despite this, petrol prices at filling stations keep rising. So Forpost Press decided to look into the issue.

On why selling fuel in Russia is unprofitable

People in Russia are generally irritated at seeing fuel prices rising. There is a reason: we have a plethora of hydrocarbons, and we have learnt how to extract them on an industrial scale back in the Soviet times. The same applies to transportation and refinery. However, it is getting more expensive to fill up a car with petrol every year — even though oil prices have often been at their lowest.

The latter is easy to explain. Oil & gas companies make most of their income from exporting raw materials; hence, the domestic market is of little interest. When prices go down globally, revenues go down accordingly, and even the most socially responsible manager finds themselves tempted to offset lost earnings at the expense of the compatriots.

Yet this is not the main reason for inflation. Instead, its primary driver is the lack of a high margin on fuel sales at Russian petrol stations, meaning foreign trade activities may generate higher profits. Therefore the authorities, faced with the need to avoid a domestic deficit and keep prices at reasonable levels, have no other choice but to compensate for lost profits to oil companies.

Руснефть
© russneft.ru

The regulator can also use sticks in addition to carrots. For example, in April, the government once again discussed whether to temporarily restrict the exports of petroleum products in case oil operators fail to increase domestic sales voluntarily. They, fortunately, did not adopt such harsh measures, but the overall trend is evident.

Blaming business for the attempts to earn more is like blaming bees for gathering nectar. After all, any commercial organisation exists to make profits — the more, the better. If not for the regulatory authorities and their efforts to sustain prices, we would probably end up paying considerable sums of money for refuelling. The cost per litre of petrol is unlikely to have reached 1.5-2€ — the level seen in Germany, France, Italy, Finland, and the majority of European countries. We could be paying as much as the Moldavans do, though — 90 euro cents per litre.

Production costs on the rise

When talking about the profitability of the domestic market, it is good to think of so-called golden handshakes, not to mention the enormously huge salaries of top managers at oil corporations. However, had they "limited their appetites", as Tatyana Golikova – a Russian politician and economist – once recommended, and been "more modest", as Vladimir Putin urged them to, selling petrol within the country could be somewhat more profitable.

Let us be frank regardless. Executive compensation does not make up the most significant expenditure item of state and private companies. There are other reasons why the price of fuel is rising, and one of them is that technologies required to extract and process hydrocarbons are getting more expensive.

газпром нефть
© gazprom-neft.ru

Many people think oil extraction is a simple process — just like getting water in one's kitchen: turn on the tap, and there it is. It explains why few get surprised at seeing that half a litre of mineral water in a grocery costs more than the same amount of petrol at a filling station. It is not, in fact, that simple. Fields that were easy to access, with oil gushing forth, have become depleted by now. There are oil reserves, but they mainly lie at a depth of several kilometres, often in hard-to-get-at, uninhabited locations. As extracting these reserves from the ground is becoming increasingly complicated, the equipment follows the same pattern, becoming more complex. The machinery in use is, by its complexity, already comparable to space technologies, which inevitably affects the price, contributing to its growth.

Repair costs are on the rise as well. Machines break down — and not just because of the lack of competent engineers who can ensure failure-free operation of wells. Petroleum occurs within so-called traps, blocked by impermeable shale interlayers that prevent it from upward migration. So this is not analogous to a reservoir at an oil refinery — rock fills most of the basin, with oil contained inside its pores. In other words, the geological conditions are such that oil production equipment occasionally comes in contact with a very corrosive environment. Sand and salt precipitating from stratal water can render machines inoperative in a matter of few weeks.

Inhibition of salt blockages

Сайченко
© Форпост Северо-Запад

"The primary cause of scaling is water encroachment. Water is a suitable solvent for many substances, and it can also carry along mineral salts in large quantities. As a result, they clog perforations, production casing and tubing, and valves. Salt blockages reduce the productivity of oil & gas wells, but more importantly, they cause the premature failure of downhole pumping equipment, result in off-schedule, routine repairs and expensive overhauls. Consequently, technical and economic indicators of industry-specific enterprises decline," says Liliya Saichenko, associate professor at St. Petersburg Mining University, Department of Development and Exploitation of Oil and Gas Fields.

Prevention of scale in downhole equipment is Liliya's area of expertise. For most Russian oil companies, the results of such studies are of exceptionally high value. It is not surprising: the longer an underground reservoir is in operation, the more likely it becomes waterlogged. As for Russia, the percentage of deposits where the exploitation started decades ago is very high here.

For example, the share of salt-contaminated wells at Gazprom Neft's fields in Tomsk exceeds 40%. Without preventive measures taken, equipment may break down in 20-30 days. It would cost over a million roubles to lift and replace just one pumping unit. Let us count: if almost half of the wells are of this type, the operator's losses will be huge, and the extraction volumes will drop to a minimum.

Сайченко
© Форпост Северо-Запад

"The most common way of preventing sediments from accumulating is to use inhibitors. The efficiency of this method depends on several factors: the correct choice of a reagent and its optimum concentration in the treated medium. But oil- and gas-bearing rocks' wettability and sorption capacity vary, thus the inhibitor must be subject to sufficiently stringent requirements. It must quickly, and in large quantities, adsorb to the surface of pay rock during the injection. At the same time, it should be slowly desorbing from the rock surface whilst the well is in operation, regardless of the characteristics of the latter," explains Liliya Saichenko.

The inhibitor developed by Mining University's research team has all of these properties. The scientists managed to leap forward as a result of injecting acid additives. Laboratory studies have shown that the new inhibitor's desorption from the rock lasts longer than it does with other similar products. The inhibitor goes along with a one-year guarantee for the prevention of scale in a well, with the best efficiency ensured when injecting it into a terrigenous reservoir.

Purchasing reagents, let alone financing scientific research on how to improve their efficiency, is, of course, an additional financial burden on an oil & gas operator. Yet saving on these expenses means potentially having a lot higher losses.

Is there a way to reduce fuel costs?

Газпром нефть
© gazprom-neft.ru

Innovations in the oil & gas industry, including digital solutions, make it possible to increase extraction efficiency whilst reducing operating expenses. It will not help lower the cost of fuel, though. The increasing complexity of technologies used to develop hydrocarbon deposits and the rising cost of specialised equipment are likely to offset the positive effect of digitalisation, alongside the adoption of new scientific solutions.

Tighter environmental regulations will also contribute to higher petrol prices. As known, petroleum contains dissolved gas. People used to flare it, not even thinking that it results in substantial emissions of CO2 into the atmosphere. In the future, oil companies, notwithstanding whether they approve it or not, will have to utilise carbon dioxide — either by pumping it into storage tanks or shipping it to petrochemical companies for use as raw material. The end consumer will indeed be the one to pay the expenses.