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Like a Well-Oiled Machine

Alexander Trukhan

Interview with Alexander Trukhan, CEO, Gazprom Neft Lubricants

28 June 2011  Oil&Gas Journal Russia.

— Mr Trukhan, what place do overseas markets have in the company’s development strategy?

— Of course our main strategic goal is to fully develop the company in Russia. We provide 14% of production across Russia and hold a 9% share in the domestic market for packaged oils, with the intention of increasing that share to 16%. Moreover, up to 45% (approximately 200 thousand tonnes) of our products are supplied to overseas markets in the form of finished products and base oils for processing, mainly at our facility in Italy.

However, it’s wrong to consider foreign direction as an afterthought. Our company has selected a number of European and Asian markets as targets. This means that we do not only want to have a presence in these markets, we also want to hold a substantial share in each of them. These markets include Kazakhstan, Belarus, Ukraine, Italy and Serbia. In these countries we have opened offices and established subsidiaries, and we see 2011 as a year of active implementation of various marketing programmes out there which have already been tested in Russia. In addition to those targeted markets we plan to begin work in a number of Central and Eastern European states.

— What did the company gain from the acquisition of the Italian facility in Bari?

— This was a major acquisition in terms of our movement in the global market. The purchase of Chevron Italia’s oil business in April 2009, particularly the oil and lubricant factory in Bari, has allowed us to immediately gain control of 5% of the Italian market and to begin shipping oil to other EU countries. After all, we acquired the entire Chevron oil business in Italy, including qualified personnel, modern technology for the production of oils and greases, a state-of-the-art facility, supply contracts with 45 distributors throughout Italy and contracts with large industrial enterprises.

Right now our Italian subsidiary Gazpromneft Lubricants SpA supplies products to neighbouring countries such as Greece, Germany, Spain and Malta, as well as Eastern European countries like Romania, Ukraine, Serbia and Moldova, and even to Kazakhstan.

— How is your Serbian asset NIS developing? Has the ongoing modernisation of the local oil refineries had any effect on oil production?

— Yes, we are just started a programme of modernising oil production at NIS, of which Gazprom Neft holds a 51% share. The purpose of this programme is to reduce harmful components in motor oils, as well as to facilitate the manufacture of new, more advanced products.

The marketing sector has also undergone changes. Lubricants produced by NIS are now being sold through various channels, including the distribution network, whereas previously the Serbian company had sold them only at their own filling stations, and never more than a thousand tonnes per year. Compare that to the sales for 2010, which reached 15 thousand tonnes. Through NIS, and using Serbia as a base, we are implementing a promotion project throughout the Balkans — Croatia, Bosnia and Herzegovina, Bulgaria, Romania and Montenegro. This strengthens the market position of our brand, and the Serbian company is given a good incentive to increase production.

— Has the world lubricant market changed due to the global economic crisis?

— Yes, it has changed very much. There is a tendency amongst oil manufacturers to increase efficiency, for which new technologies are actively used. In order to be more responsive to situation changes in various markets, manufacturers are restructuring supply chains and changing marketing strategies.

Market preferences have also changed. On one hand, industrial users now refuse to build up large stocks of lubricants, instead purchasing smaller amounts as needed. This is particularly true of Europe. On the other hand, they prefer to purchase the more expensive oils which ensure a longer life for their equipment. Accordingly, the market share of premium products has significantly increased.

— How quickly can your company react to such changes?

— The fact is that even in the company’s infancy it had an established R&D centre. We began to actively work to develop the product line, going from the traditional “national standard” of products to high performance oil products with modern formulations, with the goal of significantly increasing the latter’s share of the overall volume of production. The first step in this direction was the acquisition of the facility in Italy, where part of the deal was an agreement to acquire technology.

Thus, as well as the aforementioned market share, Bari also offered modern methods of production with good blending, new reactors, homogenisers with an accurate metering system, and a high degree of automation. This allowed us to start producing a premium line of G-Energy motor oils for most modern cars and commercial vehicles, and in April 2010 we released our own international brand into the Russian and European markets. Our R&D centre, in conjunction with several global leaders in the manufacture of additives, creates up to 70 new products per year and has access to virtually all manufacturers of machinery and equipment in order to put new oils and lubricants into production.

— As far as we know, the raw materials of G-Energy are also of foreign origin. Do you not find this strange, considering the abundance of raw materials in Russia?

— Indeed, our main raw materials — base oils and additives — come from outside Russia. But in Russia there is no means to produce oil of the required quality for the G-Energy line.

However, I must stress that we are working on this, investing in new oil production facilities on Russian soil. Together with TNK-BP we will begin producing Group III oil at the Yaroslavl refinery in 2014-15, and by 2017 we plan to begin production of Group II and II+ base oils at the Omsk lubricant factory. This will greatly enhance our ability to conquer the target markets.

— Is the problem of base oils the only industrial and technological problem faced by the company when trying to expand its operations?

— We also have to deal with packaging and logistics. At this time we are considering options with a view to purchase a mixing and packing company in the European part of Russia. The fact is that we currently don’t produce enough packaged products, and this is a necessary condition for success in markets such as Northern Europe.

— You have found a lot of success in the west. Can you say the same for the east? Does the geographical proximity of the Gazprom Neft oil refinery in Omsk make a difference here?

— Of course, the Omsk refinery in southern Siberia, with its huge volumes and modern methods of production, gives us a good advantage when working in neighbouring markets to the east. Here we are primarily talking about Kazakhstan, China and Mongolia. We are experiencing great interest in our products in these countries with their growing economies. The new oil production complex at Omsk will begin commercial operations next year.

In Kazakhstan our brand is in a very strong position, holding about 45% of the market. We have been working in Mongolia for three years and our SiBiMotor brand is the second most popular in the market, with our sales having increased threefold over the past year. As for China, the authorities are reluctant to allow our pre-packaged products onto the market, preferring to organise production in China itself. However, there is clearly a demand for oil and lubricant in the country, and the market is very interesting and highly promising.