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10 Questions

with Ivan Ottis
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June 11th, 2008 issue

COURTESY PHOTO
Higher oil prices are "suicide" for producers, Ottis says, "with some exaggeration."
THE OTTIS FILE



Job title: Chairman and CEO, Paramo
Age: 60
Nationality: Czech
Previous position: Director of strategic projects, Unipetrol Rafinerie
Education: Degree in chemical engineering, University of Pardubice
In the past few weeks, the price of crude oil has risen to more than $135 (2,149 Kč) a barrel, alarming businesses and consumers alike. Questions linger as to whether the increase stems from market demand or speculation by commodity traders. To shed some light on the black gold, Ivan Ottis, CEO of the Unipetrol-owned oil refinery Paramo, talks to The Prague Post about the reasons behind the price rise, where Czech oil originates and his beef with biofuels.
? Worldwide crude oil prices have been spiraling upward this year. Why?
There are two hypotheses. The first is that investors, due to the shaky performance of stock exchanges worldwide during the credit crisis, have rerouted their money into commodities and into crude oil especially.
The second widely used explanation is that crude prices have been driven by high market demand, coming from increased consumption of oil products in developing countries, particularly in Asia.
In my view, both are true, but it’s difficult to decide what the prevailing factor is. I personally believe that the former is a major contributor. On the other hand, I have to admit that the fact that refiners have been capable of maintaining relatively high refining margins indicates that the balance of supply and demand has also been playing an important role.
? Is there a chance prices could go back down?
The answer to this question lies in the answer to the previous question. If this is due to speculation, the only hope is that investors will find better investing targets and sell their crude positions. If the crude price is being driven by the physical market, we may see a more complex development.
Except for automotive fuels, which have the most direct route from crude processing to end customers and thus quickly reflect increasing costs, other derivates of oil, such as petrochemical feedstocks, plastics and fertilizers, respond more slowly to price rises.
The market’s response to the price rise in these derivatives will have a lot to say about future crude costs. Traditionally, end customers oppose higher prices, lowering the margins of businesses in the production chain. This is, by the way, the situation we are in now.
All manufacturers try to transfer higher costs to their customers. If they fail to do so, they will reduce throughput, changing the supply-demand balance all the way to refineries. The response of the transportation industry will be decisive, because fuel production is an overwhelming part of most refineries’ income. Deteriorating margins may force refineries to reduce throughput or even temporarily shut down their least-efficient refineries. A reduction in demand will then bring a reduction in prices.
? How important has the crown’s appreciation been to muffling the impact of rising oil prices?
That refineries buy crude oil in U.S. dollars is generally known. Less people know that most refining products, such as lubricants and asphalt, are also sold in dollars. So the strengthening Czech crown has slowed down the rise in end-consumers’ prices. In the past year, it can be said that approximately 50 percent of the crude price increase has been absorbed by the crown’s rise against the dollar.
? Could the rising price level of oil make alternative energy sources more competitive or will it spur oil companies to seek oil in more difficult places, like Canada’s tar sands?
To the first part, undoubtedly. With some exaggeration I’d say that, with the increase in prices, oil producers have been committing suicide. There will be a speeding up of research and application of alternative energy sources as a response, developed in parallel with strengthening energy conservation efforts.
And certainly, current crude prices have allowed oil producers to change strategies, using more expensive techniques to increase yields at old fields or looking for crude sources that were uneconomical at $30 a barrel.
? We’ve seen the recent introduction of mandatory blends of bioethanol and biodiesel. How easy or difficult was that to implement?
It was not too difficult, but expensive. First, refiners and Čepro [the state-owned oil distributor] had to invest hundreds of millions of crowns into storage and blending facilities. Second, we had to develop new blending recipes for gasoline and diesel. Third, and mainly, we had to look for cheap biocomponent sources because the Czech Republic, unlike many other countries, does not subsidize biofuel production. So we’ve had to transfer these higher costs to customers or take them from our profit.
On the other hand, the crude price has pushed diesel prices to the level of $1,400 a ton on the international market. This has partially relieved the tension on refiners due to the biofuel obligation.
? Do you consider biofuels to offer a plausible energy alternative in the future?
You know, I have been a long and loud opponent of biofuels. They bring technical, commercial and financial troubles to refiners. Therefore I may not be objective in answering this question. Nevertheless, my view is that first-generation biofuels [made from rapeseed or corn] are certainly not a solution for many reasons, including the rising complaints about their effect on food prices. Regarding second-generation biofuels, there is a lack of commercially proven technologies. The basic question here is: Are there sufficient resources in the world for biofuel production to make a material impact on the energy balance?
Most importantly, if they turn out to be an unneeded diversion, excessive dependence on biofuels may mean losing time we could have used looking for alternatives we may not know about yet.
? Where does most of the Czech Republic’s oil come from?
Most of our crude oil comes from Russia. Fortunately, owing to two crude pipelines, the Czech Republic has access to practically all the world’s crude oil. So whether the source of our supplies will remain the same in the future will depend on specific crude availability and pricing.
? Politicians often flog the concept of “energy security.” Do you think it’s truly possible for a small country like the Czech Republic to ever have real energy security?
I don’t think there is a difference between small and big countries in this respect. Regarding energy as a whole, depending on how the coal limits and new production of nuclear power are reevaluated, the country may be well off. It could be different with automotive fuels. Yet, I feel that in case of any trouble, all countries, not just us, would be in similar situations.
? Is the Czech Republic’s oil infrastructure antiquated at all?
As an industry representative I should certainly say that our infrastructure is in good shape and comparable to advanced countries. But, seriously, I am convinced of this.
Czech refineries are able to saturate the country’s need for gasoline and are short in providing diesel. In reality, almost 40 percent of both commodities are imported because we’re a very open economy.
Like in other countries, domestic refineries here serve as a price stabilizer on the local market. The fact is that in 2007 there was the longest-ever shutdown of our refinery due to a combination of repair and investment activities. All the oil importers tried to capitalize on the situation and pushed up prices as much as possible. But this was a temporary situation and it happens in other countries when a major local refinery stops for some reason.
? What role do you see for companies like Unipetrol in the future as countries try and move past the carbon economy?
Unipetrol is capable of routing 50 percent of its refinery production to petrochemicals and agrochemicals. I don’t know about any ideas of replacing oil as a source for plastics and fertilizers in the near future. I am confident that we will find a new position in a changed fuel world, too.
Want your manager to answer our 10 Questions? Contact Paul Voosen at pvoosen@praguepost.com


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