Market premium

Леван КадагидзеInterview with Levan Kadagidze, head of Commercial Directorate at Gazprom Neft

Sibirskaya Neft Magazine

Gazprom Neft’s 2011 sales have soared more than 40% in premium sales channels. Building high-margin oil-product businesses is still one of the company’s priorities in 2012. In an interview with Sibirskaya Neft, Levan Kadagidze, head of Commercial Directorate at Gazprom Neft, told us about plans to develop business in aviation fuel, bunker fuel, bitumens, and more.

— What kind of year was 2011 for Gazprom Neft’s Commercial Directorate?

— It was successful, in spite of a number of difficulties that affected our work. We’ve managed to be more profitable in every premium business, while refining smaller volumes than other oil companies (SN: Gazprom Neft is third in Russia by volume). Gazprom Neft has become a leading Russian company in sales of aviation fuel. It has firmly retained its first place position in ship-fuel sales. And, for the first time, it has become number one in sales of bitumen materials.

As for the motor oil business, Gazprom Neft has taken the lead over competitors in terms of the number of new, high-tech motor- and industrial oils introduced to the market that meet the standards of the leading global machinery manufacturers: 13 new items were added to the G-Family product line. But the figures say it best: the growth of retail sales of aviation fuel was 54% over 2010, for ship fuel — 48%; packaged oil sales increased 30%, and sales of oils in the G-Family line doubled compared to 2010.
I want to stress that these achievements at separate market segments in which the company’s product business units occupy leading positions, contribute to Gazprom Neft Group’s global product business. Our leadership in the Russian market in each of these areas says, first of all, that the business is organized properly and has an effective team to build it.

— How was this particular premium sales structure formed?

— In 2008 the company worked out a long-term development strategy which called for subdivisions of the Commercial Directorate, which would handle the sales of separate types of oil products, in independent business units. Gazpromneft Aero, Gazpromneft Marine Bunker, and Gazpromneft Lubricants were created following that philosophy.
All the premium areas — aviation fuel, bunker fuel, bitumens, oil production, petrochemicals — can be grouped by general features, identifying two basic types among them: industrial-commercial and distributor. For example, the aviation fuel and bunker fuel business units acquire an end product from the Gazprom Neft’s refineries and sell it at retail where it is consumed — at airports (represented in 48 locations around the world), sea and river ports (represented in 35 locations around the world) — thereby adding value to the product. The heart of Gazpromneft Lubricants and the bitumen business, despite the difference in their organizational structure, is similar. Gazpromneft Lubricants acquires raw materials from the parent company and then uses its own production, blending, packaging facilities to create a new end product with high value added.

The facilities may be subcidiaries of the parent company (like the Omsk Lubricant Plant), constructed (like the recently opened oil blending and packaging complex, again in Omsk), or purchased on the market (like the Moscow Lubricant Plant or the oil production plant in Bari, Italy). The same principle of operation applies in the bitumen business. The only difference is that the bitumen business is a part of the Commercial Directorate but not yet a separate company itself. Looking at the figures shows that our investments in these business segments have been highly effective and have more than paid for themselves.

— The bitumen business hasn’t yet been spun off as an independent business unit, but last year the bitumen group was turned into a department. What made it necessary to restructure?

— Last year we took a look at the business’s potential for growth and came to the conclusion that the existing organizational structure would limit the bitumen business’s profitability and its opportunity to fully realize its progress. The department picked up new responsibilities as a result of the organizational changes. Some of the areas are to actively coordinate with road agencies (including the Ministry of Transport of the Russian Federation and the Federal Highway Agency Rosavtodor) and specialized research institutes, to develop joint proposals on government regulation of petroleum bitumen (GOST) that secure the company’s interests, and to promote modern polymer-bitumen binders and emulsified bitumens. Other areas that have come to require a more in-depth approach are niche marketing, the product mix, developing new logistic plans and services, and managing development projects.

We have big plans for 2012 in terms of projects. The matter of acquiring bitumen factories in the Republic of Kazakhstan is nearly over. We’re currently refining tar at a third-party site in the Southern Federal District under a tolling scheme. A presence in areas with intense road construction, which right now is the south of Russia, is part of the development strategy for the bitumen business through 2020. Now we’re looking into the suitability of further integration of the enterprise.

This year the volume of premium sales of polymer-bitumen binders and emulsified bitumens should increase 7 times — to 10,000 tons — from 1,500 tons in 2011 when manufacture of these products began. Right now we are in conjunction with SIBUR, the only one in Russia specializing in the polymers necessary to produce polymer-bitumen binders, monitoring sections of road constructed using materials produced by the Omsk Oil Refinery.

— The Omsk Oil Refinery is the only refinery in Siberia that outputs this product. Are there any plans to produce polymer-bitumen binders at the Moscow Refinery?

— Yes, in concert with the Refining Directorate and the Moscow Refinery, the Project to Organize the Production of Polymer-Bitumen Binders at the Moscow Refinery got approved. Output of the first batch of modern, modified bitumen materials is slated for the second quarter of 2013. There are large-scale plans here at Gazprom Neft as well: talks are underway with the French group Total to create premium bitumen products at our Moscow refinery. Total is the global supplier of the product for the Vinci construction group — one of the contractors for construction of the first stretch of the M-11 highway (Moscow — Saint Petersburg).

Obviously, the Total group is interested in launching a production in Russia of its own business product, Styrelf, which is used in road construction. At the same time, Gazprom Neft, in turn, would like to play a role in new projects that are state priorities.

— Last year the company signed a network agreement with Air Total International to share airport facilities. Is the scheduled project with Total an extension of the cooperation that began with a partnership in the aviation fuel segment?

— We collaborate with Total in many areas and are looking at various ways to grow that partnership. We’re discussing, for example, the production of specialty fluids — a narrow fraction is used to do this, resulting in very expensive products. Total exports these products to Russia from its factories, but the logistics of it turn out to be very complex. Together with our colleagues from the Refining Directorate, we’re now studying the technical feasibility of production. After that, we’ll evaluate the economics of the project.

— Overall, how has Gazprom Neft’s petrochemicals business been growing?

— The development of this business is inseparably connected to the development of petrochemical production at Gazprom Neft’s refineries. In terms of its business model the petrochemicals business is closer to the industrial-commercial areas. But it differs from the bitumen and lubricant areas by its considerable capital intensity — all of its projects are huge and investment- and technology intensive. That’s why the petrochemicals business’s development strategy, which was adopted by Gazprom Neft in 2008, includes this important condition: development of this business should follow the path of cooperation with the leaders of the petrochemicals market.

This is related to the fact that the petrochemical products that Gazprom produces — xylene, benzene, and propane-propylene fraction — are feedstock for subsequent output, which in turn serves as the feedstock for other products. Refining one feedstock into another adds great value. But it’s risky to do that when all you have is feedstock. So we’ve formed an alliance with the largest players in the petrochemicals market.

— Are you talking primarily about SIBUR?

— Yes, a pilot project, which we used to fine-tune this model — production of polypropylene at the Moscow Oil Refinery — was executed in cooperation with SIBUR at the Neftekhimiya Research and Production Enterprise. The partnership was a success — and right now we’re working on the next project together with SIBUR and the Titan group to produce polypropylene in Omsk at the Poliom Plant, which is under construction. But the biggest joint project planned with SIBUR in the coming years is to develop production of terephthalic acid (TPA) and polyethylene terephthalate (PET).

Gazprom Neft is also currently actively negotiating with one of the world’s leading film manufacturers — we’re discussing the possibility of jointly producing popular films using the capabilities of the Moscow Refinery.

Investments in the petrochemicals business totaling three billion rubles are planned for the year 2012. In other words, the business’s active growth demands that it be reorganized. We are considering two options: reinforce structures within Commercial Directorate or create a legal entity that will manage the combined petrochemical assets on behalf of Gazprom Neft.

— Petrochemicals — a relatively new area for the company — is growing fast. How well are the company’s traditional areas of business growing?

— I’ve already mentioned the growth in sales for all three product subsidiaries, or more precisely, the company groups. The international phase of developing the premium business units has begun. For our enterprises to be of interest to foreign customers, they need to extend their presence to key locations. For example, Gazpromneft Lubricants sells its products in 35 countries around the world today. In 2011 the company increased its presence in one of its key European markets — in Italy, where our oil production plant is located. Today we already hold 3% of the Italian market for lubricants; and this is a great result, because the European markets tend to be very closed to new brands.
Business is also actively growing in Central Asia: Gazpromneft Lubricants currently has more than 45% of the market for lubricants in Kazakhstan; and it is expanding its presence in the region thanks to product sales in Kyrgyzstan, Tajikistan, Uzbekistan, Turkmenistan, and Mongolia.

Gazpromneft Aero and Gazpromneft Marine Bunker are also running their foreign operations effectively, gradually transitioning from regional to international refueling companies. But a global presence presumes a global partnership in order to have our product at any location in the world where the customer may go, whether it be an airline or a ship owner. This is the philosophy behind developing the partnership between Gazpromneft Aero and Air Total International, for example. We will soon complete preparation of materials needed to open subdivisions of these business units in the far abroad.

— Has transferring the Gazprom Neft headquarters to Saint Petersburg impacted the work of the Commercial Directorate?

— Undeniably, there have been serious changes: there was 50% turnover among our staff, so it was extremely important for us to preserve all that we had accomplished. And I believe we didn’t lose, rather we only gained during the process of the transfer — new ideas, new approaches, and a fresh team. It has affected both the office for processing and oil product accounts, which has been on the leading edge of interaction with the factory companies, and the export office, which operates in the international oil products market in concert with Gazpromneft Trading. Our team is now already completely formed — and I can proudly say that this team shares the same vision. Of course, in some sense this was a challenge, but we’ve responded to the call. And we’ll continue moving forward with the same pace.