The Most Profitable Projects are in Russia

Aleksander Trukhan

Interview with General Director of Gazpromneft - Lubricants, Aleksander Trukhan

March 2011. Gazprom Magazine.

Market

– Alexander Mikhaylovich, how has the world lubricants market changed in recent years?

– The economic crisis has led to major changes. It is not just the decrease in consumption in Europe, which is still ongoing, but it is the structure itself that has changed; the share of premium lubricants has increased, while the share of traditional industry lubricants has decreased. Enterprises have begun to be more careful with their money, preferring to buy lubricants that can deliver a longer service life, but these are more expensive.

European industry is gradually abandoning the practice of creating large stocks of lubricants, buying small amounts as needed. As a result, lubricant producers have been forced to change their policy by developing client service divisions and organizing delivery from the plant to the consumer’s warehouse. This, of course, affects the final price of the product, but the consumers are ready to pay more because, in the end, they are spending virtually nothing on logistics, which means that the higher price of lubricants is compensated for by saving on associated costs.

The Asian-Pacific region is increasing in importance, as industry continues to develop there and, consequently, so does the consumption of lubricants.

– And what is the situation on the domestic market like?

– In Russia, just like in the West, demand decreased during the crisis, by 25 %. This particularly affected the market for industrial lubricants. But the segment of customer-size packaging turned out to be more stable, and sales there increased by 30 % last year. Our consumers, as well as those in the EU, want more expensive but higher-quality products which will allow them to save money in the medium term.

Unlike Europe, our lubricant market is in the process of recovering. In reality, however, I expect full recovery no earlier than 2013. The most profitable projects, in terms of return and payback on investment, are in Russia. Many global companies are seeking to localize their production here, although consumption levels are still below those before the crisis.

Today competition in the field of technology and service is increasing, and painstaking work is under way to reduce product cost. As for the structure, the volume of compound technological products is increasing. The companies that invested in new product development are obtaining an additional share of the market as it recovers.

Share growth

– We are one of those companies. In 2010, the premium share in our product line increased by 30 %, and all these products are classified as marketable goods.

– What is your share of the Russian market?

– Our enterprise accounts for 14 % of total production and 9 % of the market of packaged lubricants. And although the crisis made us review our strategy a little, our general aims remain the same – 16 % of the domestic market, including the segment of packaged lubricants.

– What changes have taken place in your company?

– During the last three years, the number of our customers has increased from 20 to several hundred. It is not surprising that customer service is one of our largest departments. Since the autumn of 2009, we have shifted to delivering products from our plant to the doors of the customer’s warehouse. We organize shipping from our Yaroslavl and Omsk sites by ourselves. And the consumers are ready to pay in order to save in the future. In 2011 we are planning to automate customer support as much as possible.

Strategic areas

–What markets do you see as strategically important for you?

– We plan to expand in the promising Asian market, which consumes the whole range of lubricants, including low-cost industrial products. We are also planning our development in Europe; there is a peculiar situation there related to the closure of a number of enterprises in this industry.

– Why have they closed?

– The owners are losing money and they need to modernize, but for a number of reasons modernization would cost too much, and so it is easier to stop the enterprise. In 2008 we purchased a plant in the town of Bari in Italy, and now we have about 5 % of the Italian lubricant market. The products from this plant are also delivered to other EU countries. In addition, this purchase quickly allowed us to launch production of the premium G-Energy lubricants.

Of course, we are interested in the Balkans. As you know, Gazprom Neft purchased the Serbian company NIS early in 2009. Until we arrived in the region, the Serbs sold their products only through their own filling stations and sold no more than 1,000 tons a year. Now we are modernizing production, expanding our facilities, trying to find new technological solutions and manufacturing new modern products for which the market has a demand. Besides, sales have changed: now NIS lubricants are sold through various filling station networks and also through distributors. It should be noted that we are operating in the medium and premium cost segments. In the near future, we plan to expand into the nearest Balkan countries.

– And what about the Asian markets?

– The Chinese and Mongolian markets are the strategic ones for us here. In Mongolia, our SiBiMotor brand is No 2 (after Mobil). Our enterprise has been operating for three years in this country, and thanks to our efforts in brand promotion, sales figures trebled in 2010.

In China there is a shortage of lubricants at the moment, but nevertheless the government is reluctant to allow the sale of packaged lubricants on its market. They are doing their best to localize production. This market is especially interesting to us, because virtually 90 % of our products meet China’s needs. Besides, the Omsk oil refinery is situated rather conveniently from the logistical point of view, as the haulage distance is quite short.

The Omsk oil refinery’s products are also purchased in the countries of Central Asia and in North Korea. Since November, Koreans have been purchasing lubricants produced under GOST standards, and have recently started to purchase packaged lubricants. In the near future, in order to respond quickly to the region’s needs, we are going to open a representative office in Almaty.

Products

– How is your product line developing?

– In 2010, over 70 new lubricants were put into production. The average is three. In addition, in April it will be a year since the start of G-Energy lubricant production. We are now manufacturing over 40 products under this brand. Unfortunately, this product is 100 % foreign at the moment; I mean not just where it is produced, but also its components – base oils and additives. This is due to the fact that there is no production of the second and third oil groups in our country. Therefore, for the moment we are relying on the capacity of our plant in Bari.

It is particularly important for us that the number of applications exceeded the production capacity last year. It made us revise our growth potential and investment opportunities. We are already investing in the construction of new oil installations. A new plant complex in Omsk will begin commercial production as early as next year. But this only relates to the first group of oils. The third group of oils will be produced at the Yaroslavl oil refinery in conjunction with TNK-BP from 2014-2015. We plan to be manufacturing all three oil groups by 2017.

– How much money was invested in the construction of the Omsk plant?

– About 2 bn rubles. By the way, we became the first vertically integrated oil company after we gained control of the oil installations at the oil refinery.

– Have your oils been authorized by motor manufactures?

– Of course. Our products have been approved by many European manufactures, such as Volvo, Volkswagen and Mercedes-Benz. Before that, we had purchased the necessary equipment to carry out trial runs, and signed a contract with an independent laboratory. Additionally, we trained distributors in order to promote the products, actually making engineers out of them, so that they can clearly communicate with professionals and explain the advantages of our products to them.

Now we want to bring the new G-Energy products to the market for service stations and Asian cars.

– What else is there in your future plans?

– We are planning to complete the first oil production line at the Omsk plant. We are considering purchasing a mixing and packing enterprise in the European part of Russia. We need this in order to operate more successfully on the domestic and European markets.

Interviewer: Alexander Frolov