Several Western oil companies announced the past few days that they will exit joint ventures in Russia to protest that country’s invasion of Ukraine, but foreign-owned lubricant operations in Russia are so far not caught up in acts of protest.
An industry observer suggested that Russian base oil refiners are working quickly to try to make contingency plans in case the conflict disrupts their export activities.
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“They are studying alternative financial channels for making payments and making possible alternation of the logistics for product export,” Denis Varaksin, a base oil trader at Berlin-based DYM Resources told Lube Report on Monday.
London-based energy giant BP announced last weekend that will sell its 20% stake in Rosneft as a corporate rebuke of Moscow’s military attack. Shell and Norwegian oil company Equinor took similar steps on Monday, and ExxonMobil and TotalEnergies were said to be mulling their own steps.
BP, Shell and Equinor all said they expect to impairments due to their withdrawals, but stated that they felt compelled to take acts in support of Ukraine.
Shell is one of several Western companies with lubricant blending plants in Russia. It operates a plant in Torzhok with capacity to make 180,000 metric tons of lube per year. TotalEnergies has a 70,000 t/y plant in Kaluga, and Germany-based Fuchs Petrolub SE has a 40,000 t/y plant in the same city.
Shell confirmed that the joint venture withdrawals announced Monday did not affect its lubricant operation in Russia. TotalEnergies issued a statement supporting sanctions taken against Russia and added that it was weighing actions to take itself.
The EU, the United States, Canada, Australia and other allies and partners announced harsh punitive measures for Russia, aimed to effectively cut off the country’s banking sector and its central bank from the international markets. This threatens the companies’ ability to execute foreign currency cash flow or pay the local workers, albeit the export and import of energy products such as fuels, base oils and lubricants are still not affected.
Market observers say that Russian refineries and base oil producers are also grappling with the situation in which they found themselves unprepared, and sketching out contingency plans. Lukoil and Gazprom Neft did not replied back to Lube Report inquiry in press time.
Varaksin said that as of now, the lubricant companies do not have problems with base oil supply, while refineries have sufficient raw materials such as crude and vacuum gasoil to produce base oils.
“The import of finished products stagnates, as it has been, on the heels of the import substation drive in Russia after 2014,” he said. DYM is dealing with movement of materials such as base oils and slack wax from Russia and some Central Asia countries and have insights in the region’s base oil and lubricant market.
As reported by Lube Report, export of the finished lubricants from Russia improved in 2021. Companies such as Gazprom Neft, Lukoil and Rosneft, posted good export results in a number of countries in Europe, the Middle East, Africa, Southeast Asia and South America. But this might be halted if the West imposes total ban on Russian energy imports, with the uncertainty of what direction the war in Ukraine could take, as more Russian troops are pouring in the country.
“In my opinion, if the war drags on the situation with import of finished products such as lubricants and additives and export of base oils and lubricants would get worse,” Varaksin said. “In 2022, the export might decrease by 20%, if additional sanctions are imposed. The foreign clients would stop buying Russian lubricants and this will be additional negative factor besides the closure of borders and restricted cash flow.”
He estimates that the demand for lubricants in Russia could slump from 5% to 10% in 2022, as result of the slowed economy and supply problems.