We enter the Ukrainian market to test our brand's competitiveness

Alexander KrylovInterview with Gazprom Neft Director for Regional Sales Alexander Krylov

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Gazprom Neft intends to expand its network of filling stations outside Russia in the near future. They have already begun fulfilling this ambition, opening their first station in Ukraine. ALEXANDER KRYLOV, the company’s Director for Regional Sales, told RBK Daily’s own GALINA STARINSKAYA all about the company’s motivation behind this move and the prospects for the petroleum retail market.

— Gazprom Neft’s latest strategy envisions work in 36 regions. How does the company plan to expand its retail network?

— The south of the country is very important to us, places like Krasnodar, Stavropol, Rostov, Volgograd and Astrakhan. We are looking at options for intensive development in these areas, as well as in Voronezh, Tula, Vladimir, Vologda and Kostroma. We’re going to keep building our network in Krasnoyarsk, in and around Moscow, Nizhny Novgorod and the North-West of Russia. The Central Asian markets — Kazakhstan, Tajikistan — are very interesting too, customers already know our filling station network pretty well there, and we’re planning to expand further. We want to have 100 stations in Kazakhstan by 2020, for example. One more important market for us is Belarus.

— Is the company looking at any other foreign markets?

— We’re very interested in the Ukrainian market. Gazprom Neft has a stake in the Mozyr refinery in Belarus, not far from the border with Ukraine. The market in Belarus is small, though, we can’t sell all of the fuel from Mozyr there so we have to export a lot of it. We want to sell it through our own network, which is why we decided to enter the Ukrainian market. To begin with we’ve decided to give franchising a try. Ukraine is the first region where we have tried this.

— Why? Aren’t you worried about entering a new market through franchising?

— I’m sure that over five years we’ve managed to build a good platform for franchising our Gazprom Neft retail network. All of our stations now have a unified corporate identity, so they are recognisable, and the Gazprom Neft brand is known for a high standard of service across all regions of operation.

We have created a “gold standard” of service quality, which we’ve been able to uphold thanks to good training, motivated staff and regular tests of the quality of our service using “mystery shoppers”. The retail motor fuel market in Ukraine is about 8-9 million tons per year and has serious growth potential. Gazprom Neft filling stations offer high quality products and services which will fully meet the Ukrainian standards. Franchising in Ukraine is only the first step in building our retail business in the country. Our main target markets in the country are in the Centre and in the East. In six months’ time we’ll better understand how our brand and standards are perceived there, and if the experience proves positive then we’ll start planning a more significant investment.

— How many filling stations is the company planning to build in Ukraine, and whereabouts?

— At the moment there are four stations along the Kiev-Odessa motorway, which is one of the best roads in the country and has a fairly dense flow of vehicles. If this project is successful, we’re prepared to expand our presence up to 300 locations.

— How profitable is the retail business in Ukraine?

— It’s a difficult market with a lot of players. There are 6,000 petrol stations in Ukraine and over half of them belong to large operators. The biggest player is the Private group of companies, and after them it’s worth looking at two premium networks, WOG and OKKO. Then there are some Russian vertically integrated oil companies, Lukoil and TNK, and an international player, Shell. We see the move into Ukraine as a test of our brand’s competitiveness.

— Going back to the domestic market, in spring the oil companies hardly raised their fuel prices at all. Is that likely to change now?

— There are two main reasons why petrol prices rise. The first is a shortage of product, a deficit, and in our country that isn’t a problem. The second reason is petroleum export, which gives oil companies the option to sell their fuel on other markets at a higher price. In recent years fuel prices have dropped, and the price of export fuel is also falling. Soon it will be equal to the domestic market. We’re seeing tiny increases in fuel prices, but this is just evidence of the domestic market correcting itself. Last year prices rose higher in some regions than others, and if the market didn’t correct itself in these situations then you’d end up with companies moving all their oil from one region to another, flooding the regions where the prices are higher. Something like that has developed in the Kemerovo region. On the whole, though, I don’t see any trend of a significant increase in fuel prices.

— Do you think stock trading is an effective pricing instrument?

— Petroleum products have their place on the stock exchange, but our task is to reach the end user. The exchange is used by traders, no end users go there. However, it is a vital price indicator.

— Last year Russia was facing a very unusual situation: a crisis on the petroleum market. Do you think the market has changed as a result?

— The 2011 fuel deficit wasn’t caused by reduced production, but by independent traders sending fuel to countries with higher prices than the domestic market. Meanwhile, in the first quarter of 2011, Gazprom Neft increased the supply of fuel from its refineries to the domestic market by 10% compared with the same period in 2010. Our filling stations are consistently supplied with petrol and diesel. In the Altai region, for example, fuel supply rose by 24%. One of the measures which helped to overcome the crisis was the government’s decision to postpone the introduction of new technical regulations on fuel, enabling Euro-2 standard fuels to return to the market, which helped to increase supply. After the 2011 fuel crisis it became even clearer that an optimal pricing mechanism needs to be developed for petroleum products.

— The government came up with a lot of ideas on pricing, including the use of floating rates of excise duties. Which mechanism do you think would best suit the interests of both the oil companies and the regulatory bodies, particularly the FAS?

— You’re right, a number of different pricing mechanisms are on the agenda for the domestic fuel market. Both regulators and oil companies are heavily involved in this process, which should protect the interests of both consumers and suppliers. The transition to floating rates of excise duties based on oil prices seems to be the best solution. It would help to keep fuel prices at their current levels in the event of rising prices on the global market, and avoid shortages on the domestic market.

— In your opinion, what are the prospects for the compressed natural gas market to develop alongside traditional fuels?

— There are several kinds of alternative fuels in addition to petrol and diesel. The most common are liquefied petroleum gas (LPG) and compressed natural gas (CNG). We are constantly developing our retail network, and we are planning to develop the sale of CNG, which we consider the most promising alternative fuel, as well as expanding our range of traditional motor fuels.

— Who is the target consumer for CNG?

— The main features of this gas are its environmental friendliness and low cost, two factors which are critical for municipal and commercial vehicles in major cities, particularly Moscow and St Petersburg. The total potential consumption of CNG in Russia’s largest cities is around 3 billion cubic metres per year, which is ten times higher than the current level.