Russia has surplus base oil capacities, and our two only business alternatives are to make base oils for production of finished products and sell them on the market, or to export base oils, Donde, the companys general director, told RPIs Lubricants Russia conference in Moscow last week. However, the latter is not promising – as a result of the new export tax scheme, the prime cost for our base oils could rise by at least 20 percent in each of the next three years, compared to now.

This would affect the prices of finished lubricants in Russia and at the end of the day, end users have to pay more, he said, adding that it does not mean that as a producer, LLK wants to gain more. We are just trying to keep the profitability at the current level.

Russia produced 2.3 million tons of base oil and lubricants combined in 2013. The production, import, export and domestic consumption balance sheet has been stable and unchanged from 2008 to 2011, except for 2009, impacted by the global recession, Donde said, quoting InfoTek Moscow consultancy data. The export and consumption slowed down in the last few years as introduction of higher specification oils lengthened oil drain intervals, lowering the general volume of the market.

Russian lubricant consumption is expected to decline during the next few years, according to LLK. In 2013, total consumption reached 1.7 million tons, and the company expects it to slump to 1.5 million tons in 2014. It will stay at this level until 2017, when we expect a modest market revival, reaching the 2013 volume in 2019, Donde said.

In this years third quarter, it became clear that the economy went into muddy waters – the crude oil prices drop, introduction of higher interest rates, limited lending and abrupt deterioration of the external borrowing, Tamara Kandelaki, general director of InfoTek, told the conference. As result of the sanctions, Russian oil majors Rosneft, Gazprom Neft and Lukoil were shunned by the European Unions lending institutions. These companies are facing lack of long money – their own or from the Russian banks, she said, adding that it can result in postponement of their current investment programs.

Russias base oil and lubricant export volumes dropped by 20 percent in the last couple of years, InfoTek found. It is highly unlikely that our products will be banned from use in the EU countries that are also facing economic problems, Kandelaki said. The consultancy expects up to 60 percent of the total exported base oils and finished lubes from Russia to go to the EU and Ukraine this year. As the demand for lubricants is dropping elsewhere, importers would make efforts to increase their sales in Russia, which could trigger price competition.

She contended in the last few years we lost the distinctive perspectives for short- and long-term economic development. Yesterday we had a technical framework agreement with the government for modernization of the oil industry. Today we have an oil tax maneuver that pushes us back to the resource economy.

Rosneft, Gazprom Neft, and Tatneft have each announced developments in base oil production, LLK said. For example, Rosnefts Novokuibyshevsk refinery expects 160,000 tons per year of new API Group II and 183,000 t/y of new Group III base oil production by June 2016. Rosnefts Angarsk and Gazprom Nefts Omsk plants both expect high quality base oils by 2018 – 215,000 t/y of Group II/III from Angarsk, and 200,000 t/y Group II/III from Omsk. Slavnefts 100,000 t/y Group III base oil production in Yaroslavl, a joint venture between the both companies, is on hold, while Tatnefts 190,000 t/y Group III in Nizhnekamsk expects commercial start-up by mid-2015.

Lukoil also announced new base oil production at its Volgograd and Perm refineries by the end of this decade, but it recently modified its strategy. Given the current oversupply condition on the global base oil markets, many plants closures in Europe and in Russia, and seeing our colleagues efforts to increase the high quality base oil production in Russia, we decided not to proceed with our modernization plans and to observe the situation cautiously, Donde declared. The company plans to purchase needed base stocks on the open market. From the economic point of view, it is more profitable for LLK at the moment.

As of now, Lukoils total base oil capacities amount to 1.2 million t/y, the largest in Russia, which makes it the countrys biggest lubricant marketer and its largest base oil net exporter. In Volgograd, the company operates a 495,000 t/y Group I base oil plant, which includes a small amount of Group II production and additional 25,000 Group III/III+ capacity. The company operates Group I plants of 440,000 t/y capacity in Perm and 250,000 t/y in Nizhny Novgorod, according to Donde.

LLK found that the Russian lubricants market is characterized by strong competition in the automotive lube segments, while slow modernization processes at the refineries result in producing large volumes of low quality, additives-free industrial oils meeting GOST-I 20, 40 and 50 specifications. We observe a variety of methods Russian companies employ to calculate the lubricant production costs. Also, there is a persistent negative image by the Russian customers of the finished products made in Russia, Donde said.

The company expects that increased costs for doing lubricants manufacturing business in Russia will result in lower profitability and closure of many companies, while those that stay could face a lack of skilled professionals.