In response to industry complaints, a senior Russian official agreed that base oils and lubricants should be exempt from the new export tax slated for 2015, and said he would look at possible relief in the face of countrys slow-growing lubricants market.
Lukoil, the biggest Russian lubricants marketer, was the countrys first oil major to voice industry concerns over export duties in a high-level note to the government that Lube Report obtained last week.
Lubricants are special petrochemicals supplied in almost every branch of the Russian economy, Vagit Alekperov, the companys general director wrote in a September letter to Energy Minister Alexandr Novak. The lube production process is very complex, unlike other products such as tar oil. And if export duties for these special petrochemical products become equal to crude oil export duty rates, it could hamper the countrys economic development.
High production cost and low market value could harm lube production in Russia, which in turn could stimulate competitors abroad, Alekperov continued. On the other hand, the federal budget couldnt benefit substantially by the higher export tax on these products because their export volumes are insignificant [compared to the other products such as crude oil or gasoline]. Hurting their production could lead to their shortage in many domestic industry branches and on the regional level, he contended.
Changing the lubricants export tax code would change the companys investment plans, a spokesman for LLK International, the companys lube arm, told Lube Report.
Currently there are at least 100 lube players in Russia. The oils themselves are the most competitive niche of the entire petrochemicals market, said Maxim Donde, LLKs general director. As a result [of the competition], in the last few years small regional market players were eaten by the big lubricants producers.
Lukoils letter was reportedly well received by the Energy Ministry, which supported the companys idea of calculating export duties under the current formula, which states that tax should be equal to 66 percent of the crude oil export duty.
The decision to slate lubricants for export duty increases is groundless, Pavel Fedorov, deputy energy minister, told a working meeting at last months opening of Shells new blending complex in Torzhok, Russia. During the meeting Fedorov called for finished oils and other petroleum products such as bitumen and coke not to be included the new export tax code.
At the meeting, attended by Shell Neft’s general director William Kozik and officials from Lukoil, Gazprom Neft, Rosneft and other oil majors, the ministry instructed the oil majors to file reports on their investment plans by mid October,so the ministry can later decide on possible export duty privileges. The ministry did not respond to Lube Reports inquiries about the reports.
Moscow legislators last year introduced a flat export duty for petroleum products such as bitumen, fuel oil, tar oil and vacuum gas oil, as well as base oils and lubricants. The government increased the export duty from the current 66 to 100 percent of the crude oil export duty, effective by 2015. The export duty for many petrochemical products, including lubes and base oils (but excluding gasoline, which stays at the current 90 percent of crude oils export duty) will be equal to the crude oil export duty.
Attracting investment in petrochemical production is Russias main priority to help develop the oil refining sector. Investment can solve problems related to import dependency, and will create such conditions that our oil refining industry could supply high-value added products not only to Russia but to international markets as well, Fedorov said at last months meeting,
Russias engine oil market will grow 2 to 3 percent annually supported mainly by the growth of good and premium quality products, according to Shell Neft, which manages operations for the Anglo-Dutch oil major.
Development of Russias lubricants market is defined by three interrelated trends, Kozik told Lube Report. First, is increasing sales of synthetic lubricants compared to the minerals. In 2011 the share of synthetics and semi-synthetics grew by 30 and 8 percent, respectively, compared to the year before. While last year mineral oils sales slumped by 25 percent, compared to 2010.
Motor oils sales in Russia are triggered by increases of vehicle population and increased imports of finished products. In fact, this car replenishment is basically driven by new automobiles, which all use high quality lubricants, Kozik said.
The third trend is related to a steady growth in the share of imported oils on the Russian market. According to our estimates, the share of imported motor oils in 2011 grew by 70 percent of total imported oils into Russia.