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Russian gasoline consumption seen steady, exports likely to grow

Consumption of gasoline in Russia is stagnating due to an economicslowdown and lower incomes, according to delegates at Creon Energy'sconference in Moscow on the prospects for motor fuel Monday.

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Domestic sales were 35.2 million mt in 2017, unchanged on the year,according to data provided at the conference. Meanwhile production in 2017 wasslightly down on the year at 39.2 million mt mostly due to refinerymaintenance, senior analyst at Creon Energy, Maria Dubinina, said.

But output is expected to grow in 2018, head of the Commodities MarketAnalytics (ATR) agency Mikhail Turukalov said on the sidelines of theconference. With domestic consumption expected to remain flat, the extravolumes are likely to head to exports.

At least three Russian refineries -- Kirishi, Antipinsky and Taneco --are due to launch gasoline units this year, which would result in highergasoline production.

Gasoline export netbacks have been exceeding domestic prices thus dentinginto refineries' profitability.

"Refineries suffered as the premium [to the netback] disappeared," seniorconsultant at Vygon Consulting Alexander Bylkin said. "Refineries buy crudebased on the netback, and its unprofitable for them to sell products below thenetback," he added.

However, Bylkin said regulators encourage refineries to sell domesticallyrather than to premium export markets. Last year gasoline exports dropped to4.1 million mt from 4.9 million mt in 2016, according to Creon Energy data.

"The market is 'catastrophically' unfavorable for gasoline producerssince about mid-2016, due to artificial price regulation," Turukalov said onthe sidelines of the conference.

Delegates also called for the government to reassess the impact oftaxation on the export netbacks, which had exacerbated the situation.

According to initial plans, the excise tax was due to drop to offset thehigher mineral extraction tax and lower export duties. But instead the exciseduties were raised in January with another hike due in July, both of whichcombined with the lower export duty had pushed the netbacks up.

However, while spot prices at refineries started to rebound in Februaryand broke historic records in March, retail prices have been held in check byregulators, delegates said.

Retail margins fell from Rb4/liter (7 cents/liter) before to zero orRb1/liter on average, said Bylkin.

Low margins hurt independent retailers in particular because, unlike oilmajors, they cannot offset their losses. Hence many opt to sell counterfeitproduct, with counterfeit accounting for 5%-30% of motor fuel, according todata from Rosstandard.

Many retailers sell products such as technological diesel fraction, whichis Rb4-Rb5/liter cheaper than 10 ppm diesel.

Separately, diesel consumption grew marginally by 2% in 2017 to 33million mt, while exports were flat on the year at 43.7 million mt, accordingto Creon Energy data.

Production grew by 1% to 77 million mt, with exports accounting foraround 57% of it. In 2015 and 2016 exports and output were lower than in 2014but production rebounded again in 2017.

Domestic refining fell in 2015 and 2016 due to the lower crude price, butrose in 2017, according to Creon Energy data.

Typically lower crude prices lead to a lower subsidy for Russianrefineries which benefit from the spread between crude and product exportduties which narrows at a lower crude price.

However, in 2017, processing has increased at many refineries, apart fromthose affected by maintenance.

Mini refineries increased their processing by 15%. Mini refineriesbenefit from access to cheaper or lighter crude but some also sell productswithout paying excise or export duty, Bylkin said.

--Elza Turner, elza.turner@spglobal.com

--Nastassia Astrasheuskaya, nastia.astrasheuska@spglobal.com

--Edited by Jonathan Dart, jonathan.dart@spglobal.com