From simple to complex

Gazprom magazine

Interview with Alexander Trukhan, CEO, Gazpromneft Lubricants LLC

Gazprom magazine Alexander Trukhan

Gazpromneft Lubricants LLC CEO Alexander Trukhan answers questions from Gazprom magazine

Rationality — and in rubles

— Alexander Mikhailovich we’ll start, if you don’t mind, with the year-end results for 2014

— The last financial year proved very successful for our company. If we’re talking about volumes, we produced around 485,000 tonnes of oils and lubricants in 2014. We also brought a 110,000-tonne-capacity high-precision blending complex into production, as well as a 180,000-tonne-capacity packaging facility. After bringing this complex into production, total blending capacity at the Omsk Refinery reached 300,000 tonnes. Which means that all base oils produced here can now be further processed into finished products, packaged, and sent to market.

The Omsk lubricants plant is now the most advanced such production facility in Europe and Central Asia. This complex has become a lodestar not just for Gazprom Neft, but for the Russian lubricants industry as a whole.

In addition to this, our company last year finished modernising a facility for lubricant production at the Omsk plant. We can now produce an additional 5,000 tonnes of goods — including, moreover, not just straightforward lithium grease, but also more complex calcium greases. We plan to start production of bentonite greases, much in demand by mining companies. We were the first in Russia to start production of lubricants with “double zero” viscosity (semi-fluid grease — Ed.). We’re going to transfer production of the most complex products from Italy. I don’t think there is, now, a single kind of lubricant that we can’t produce at the Omsk plant.

Demand for our products grew considerably to end-2014, with consignments in December higher than those in the middle of the year. This is largely explained by import substitution, all the more so since the quality of our products in no way falls short of that of well-known foreign equivalents — and at very reasonable prices. In terms of the number of automotive and plant and machinery manufacturers using our products (more than 250), we are the market leader among Russian companies. Our goods are produced from Russian raw materials, at Russian factories, by Russian professionals. Obviously, we’re impacted by increasing prices, as we use import additives and Group III oils, but the increase isn’t that much. We provide a genuine alternative to foreign products.

The main achievement of the last year has been the victory of the Russian G-Energy Team, thanks to which we’ve been able to test our products in racing cars under extreme conditions, in the FIA Cross Country Rally World Cup. And, in early 2015, they won fifth place in the Dakar marathon rally. By the way, our lubricants were also used by the Belarussian MAZSPORTavto team, in the same rally. Both teams this year achieved their best ever results ever in the Dakar rally. The cars were very different, but the outcome was the same: our oils deliver reliable performance for all mechanisms and systems, and deliver victory for their crews.

Group III+

— Returning to Group III: do you plan to fix that close that loophole?

— We’re already building facilities for production of synthetic oils in that group — in Omsk, and at the YANOS refinery in Yaroslavl. We’ll be able to produce Group II, II+, III and III+ oils under our own steam. At YANOS we expect to bring this into production in 2016.

— Group III+ — what sort of oils are these?

— These are unique products, which are only ExxonMobil and SK (South Korea) are currently producing. So Gazprom Neft will become the third company in the world producing oils in this group.

—And will you also be producing Group III+ oils in Yaroslavl?

—No, we’ll only be producing these oils in Omsk.

— Where does demand for these come from?

— First and foremost, Group III+ oils are complex oils used by all industrial sectors, but particularly in gas pumping stations operating under harsh climatic conditions.

— What will be the economic effects of localising production?

— There will be several, and not just economic. First of all, secure and stable supply, regardless of political environment or market conditions, and secondly, in reducing costs. Group II and Group III oils are very expensive in Russia, because there’s no high-quality production in-country.

Russia currently imports about 100,000 tonnes of Group III oils per year. The Yaroslavl facility will produce up to 100,000 tonnes (of which we will have a 50-percent share), and the Omsk plant 230,000. All of which will be destined for the domestic market, as well as Eastern Europe and Central Asia, where they don’t, really, produce such oils.

A fifth player

— And what about additive production? Can this be localised?

— We produce additives (mineral sulphates) not just for our own needs, but for the broader domestic market. However, when endorsement by foreign manufacturers demands it, we use internationally produced additives. It’s an obligatory requirement. Domestic additive production is seriously lagging behind the needs of lubricant producers.

—Do you have any influence of its development?

— Of course, we let Russian producers know what additives we need, but we are decades behind. If we’re talking globally, then there are only four additives producers that are universally approved — Oronite, Afton, Lubrizol, Infineum.

—In other words, all lubricants producers worldwide depend on just four companies?

— Yes. Size matters — setting up a production facility demands multi-billion investment — and skills, which you can’t, really, just acquire; they demand decades of on-the job experience. It would make sense to now bring together the resources of all Russian companies in establishing an alternative, domestic additives producer. A fifth player.

—Would the size of the Russian market justify the costs of establishing such an entity?

— I’m sure it would, although maybe not entirely. In order to get a return on investment, such a facility would need to trade with half the world: although I think that might be possible.

—And is there any such dialogue between Russian companies?

— Yes, we’re currently working on this issue with LUKoil and, I hope, will shortly be talking with Rosneft.

I should stress that, working with international developers, we’ve set ourselves the task of producing goods on the basis of our joint efforts, in-country.

51 countries

—What, in fact, is the current structure of the lubricants market within Russia?

— The structure hasn’t changed: we produce 2.5 million tonnes of oils, we consume 1.7 million tonnes, and we import 500,000 tonnes. I think these figures are going to show some significant change in 2015, reflecting lower imports. We are ready to take full advantage of this, since we have everything we need to offer an alternative to foreign goods.

— But with the current exchange rate it would probably be more profitable to send goods for export rather than selling them here at lower prices

— I wouldn’t say profits on the domestic market are that much lower. Ultimately, if trading within Russia were not profitable, there wouldn’t be such a steady stream of imported oils. We’re changing our product range — from simple and inexpensive oils to more complex, high-performance, prescribed formulations. Our company — and our international sales — will develop, as will domestic trade in complex oils.

— How are your products making progress abroad?

— Very well. More than 50 percent of our total production is sold abroad: 270,000 tonnes in 2013, and 290,000 tonnes in 2014. We entered a further 10 countries in 2014, bringing the total to 51. These include countries in the Middle East — Iraq, Israel and others — as well as Indonesia, Spain, Costa Rica, the Congo, and China. We’ve also increased supplies to Egypt. We’re currently fighting for a contract with Libya in the order of 21,000 tonnes.

—How secure would such a contract be?

— We’ll be operating on a 100-percent pre-payment basis.

Investment success

—What success has your Bari plant (Italy) had?

— We got back the investment made in acquiring this asset by mid-2013. We’ve refitted the plant’s packaging lines, and modernised the laboratory, and measurement instrumentation. If necessary, we could increase production in Bari two-fold. We’re currently producing 24,000 tonnes of oil per year at that facility. We’ve increased our market share in Italy to the level we needed — four percent.

Whereas previously we brought products into Russia and packed them here, following the commissioning of all planned production facility in Russia, and the localisation of new complex oils, the movement has started to go in the opposite direction. We can now send finished products to Italy. Production costs in our country are far lower, even taking transport costs into account. Production is simply highly cost effective in Omsk. A certain proportion of our production is, already, being sent from Omsk to Italy, to be packed and sold there.

— How has your work been affected by recent tax changes?

— I should like to thank everyone who has helped us persuade the government that export duty on lubricants has to be separate and distinct from export duty on heavy fuel oil (mazut). Export duty on lubricants has been specified as such, and reduced — by $103 in January, and reduced still further in February. Which creates an opportunity for our more basic products to return to European markets.

Industrial customers

— What proportion of your product range is given over to industrial and engine oils?

— Industrial oils 65–70 percent, motor oils 25 percent; the remainder comprises transmission fluids and so on.

— Who are your key industrial customers in Russia?

— The Gazprom group of companies. Apart from this, about 70 percent of the extractive industries in Russia buy our oils and lubricants. In 2014 Siberian Business Union took the decision to switch over to the exclusive use of our products. This group includes companies involved in the mining and processing of coal, as well as machine building, car maintenance and chemical facilities, etc. A major industrial customer.

I have to mention car assembly plants. Our company supplies oils and lubricants to car manufacturers including Avtotor (General Motors) and Derways.

A major breakthrough this year was the commencement of automated first-filling for Mercedes Benz Trucks Vostok at their plant in Naberezhnye Chelny.

This refuelling complex facilitates the first-filling (and automatic accounting of) more than 3,000 litres of lubricants and engine fluids per day, allowing the servicing of roughly 300 car chassis per shift. We have supplied enough fluids to support nine filling posts. We now estimate this not on a “per ton” basis, but in terms of vehicles filled. We are determined to increase this still further, and are in ongoing dialogue with Stuttgart.

In 2014 Gazpromneft Lubricants became the first company in Russia to obtain accreditation for ISO 16949 Quality Assurance in Automotive Management — a standard developed by automotive producers for suppliers of assembly line components.

— Was this a complicated process?

—We had to revise a range of business processes in quality control and client liaison — for example, logistics, and providing information.

Venturing eastwards

— How did you manage to enter the Chinese market?

— Thus far, this concerns the delivery of finished products. We first tried to get a foothold in this market three years ago, although at that time we were just supplying base oils. They understood though that our products are in demand because of their high quality. We have agreements in place with two companies, from Hong Kong and Shanghai. We’ll mainly be despatching industrial oils and pre-packaged G-Energy oil. One company wants to buy 2,000 tonnes per year and the second, 2,500. The Chinese market is moving rapidly towards more complex vehicles and equipment, so high-performance lubricants are in ever greater demand.

— What are your plans for developing this market?

— The Chinese consume about five million tonnes of oils and lubricants, and produce about 3.5 million tonnes. We’ve initiated a major project regarding China — we’ll be monitoring the market, and will take a view on which regions our products might go into. And by 2018–19 we plan to start work on localising the blending process in China. We might start with processing, and then move on to independent production. The experience of global players is interesting — in acquiring, early on, local producers with well-known brands. But, of course, the situation could well change by 2019. Among the Chinese producers we’re currently collaborating with Chery and Lifan. A few automotive producers have invited us to begin conveyor-belt first-filling within China. I think we’ll soon need some form of representation in this country.

— Are you going to be involved in the Power of Siberia project?

— We’re currently working on taking part in the tender as a potential supplier of oils and lubricants.

— What are your plans for 2015?

— Our production capacity totals about 500,000 tonnes. We’re going to develop lubricants production in Omsk, extending the range of synthetic products. As soon as our own independent production starts in 2016 we’ll use these to replace imported components. Production of the GOST-compliant goods will decrease, but we will make sure we meet our obligations to domestic customers in full. We’re going to go into production of marine lubricants more proactively: we currently produce about 3,000 tonnes, but we plan to gain some market share from foreign suppliers.

We’re going to launch a facility for the production of plasticizers, to be used in tyre production. We’re going to extend our collaboration with automotive manufacturers. And we hope to break through the 500,000-tonne barrier vis-à-vis production volumes, with 190,000 of this being premium products.