Returning to post-Soviet level of crude production this year, Russia now strives to secure its position on the European energy market. The government is pinning its hopes on exports of high-quality diesel, and urging investments in refining to nearly double in 2013. Recent data from the Energy Ministry revealed that the figure will rise to $11 billion next year, demonstrating a 93% surge in 2012.

Over the past few years, the government has been pushing the envelope to modernize the industry in an attempt to spike diesel production in the country. Through the introduction of a differentiated excise tax based on fuel quality, they should have added impetus for the companies to invest in refining facilities.

Bloomberg Businessweek reported that export duties on fuel were also adjusted starting in October last year, "with the levy raised for fuel oil to stem its production and reduced on diesel to spur higher output and to act as an incentive to make upgrades." Though the correction was only minor, "diesel duty was cut to 66% of the crude tariff, from 67% previously."

So far progress has been muted and raising investment in refining was long overdue. "The move was expected. To be honest, it should have been made a couple of years ago, and not just now"- Vyacheslav Bunkov, an oil and gas analyst at Aton said by the phone on Thursday.

"The government planned to put a ban on diesel and gasoline of Euro-2 standard, but the majority of oil companies fell short to upgrade their facilities and failed to produce enough high-quality petroleum. At some point, the country faced deficits of Euro-5 standard fuel and the ban was postponed."

Recently the country's top oil majors made yet another attempt to buy time for modernization. Rosneft, TNK-BP, Lukoil and Bashneft were among the 16 producers, which appealed to the Cabinet of Ministers last week, asking to postpone the deadline for the upgrade of refineries. Only Surgutneftegaz however has received permission to shift the timing.

While the government appears to hold its ground firmly, at the end of the day massive investments in technological improvement will lie heavily on the shoulders of the oil companies.

"Such a high volume of capital investments in a fairly short period of time is not necessarily a good thing for a publicly traded company, as investors could get concerned that there may not be funds left to distribute as dividends, or to invest in much more profitable projects than refining," noted Grigory Birg, oil and gas analyst at InvestCafe via the phone.

Retreating demand for oil in Europe backed by sluggish economic recovery in the union, is becoming yet another concern for the Russian producers. "It's hard to say now if the supply will find demand in Europe, but nevertheless this is a long-term program. The demand will grow within the horizon of five to ten years, and the investments should be made now," stated Vyacheslav Bunkov of Aton by phone, referring to wariness of companies to make upgrades.

Source: Voice of Russia