LukOil Adapts to Tough Times


MOSCOW – Russian oil giant LukOil remains committed to investing in the lubricants market despite a 60 percent drop in lubricants production since December and competition from an influx of imported lubricants, especially in the automotive market, a company official told a base oils and lubricants event here recently.

Despite the recent financial turbulence and falling commodity prices, experts are optimistic that the Russian oils and lubricants industry has huge potential in terms of growth, profits and volumes in all segments, including engine and industrial lubes. Demand is growing mainly for high-spec, value-led lubricants due to the growth of Russias foreign vehicle population, resulting in a drop of demand for non-additized and cost-led products.

However, the global economic downturn has caused the countrys major private oil company to revise its marketing strategies, as its lubricants output plunged at the beginning of the year. LLK International, LukOils lube arm, holds a 45 percent share of Russias lubricants market and 62 percent of the countrys lube exports, with annual output of 1.2 millions tons.

Marina Tsaplina, deputy head of production department for LLK, told the Base Oils and Lubricants Russia Conference in late April that the economic crises have affected the companys production.

Our marketing strategy for the next 10 years includes annual production of 1.2 million tons and certainly we arent drawing back from this plan, said Tsaplina. Unfortunately, since December 2008, we observe a 60 percent drop of production in all our blending facilities.

The crisis has hit Russia hard. The World Bank, the International Monetary Fund as well as other rating agencies are now forecasting gross domestic product growth of only 1 percent in 2009, down from an estimated growth of 6 percent in 2008. But, the Russian lubricant market still has huge potential, especially in terms of growth. Tsaplina said that when it comes to the industrial sector, the main drivers of the demand are current modernization of equipment and development of plant facilities.

Consequently, at the moment there are two parallel industry tendencies: growth of the import of high quality lubes, and promotion of internationally approved products of domestic oil and refining producers, she said, adding that the result is intensified competition among the main market players and a search for new ways to develop the business.

This competition is most vivid in the automobile lubricants market. Driven by soaring demand for foreign cars, many major world brands have invested heavily in the Russian auto industry and opened or are expecting to open factories here. The market is still far from saturation with a car density of 200 per 1,000 people, compared to 500 cars per 1,000 people in Germany, for example. The forecasted number of Russian-made foreign brands by 2015 will reach 3.5 million vehicles annually.

In terms of sales, the market grows 30 to 35 percent annually, resulting in demand for high quality lubricants in cars and trucks segments. This demand has been satisfied by imported products and by enhanced domestic lubricants – currently more than 90 brands are offered on the market, Tsaplina said. She said that the Russian market is divided among foreign brands, holding one third of the market share; LukOil, controlling one third of the market; and the remaining third, which is divided among smaller domestic producers.

In fact, Tsaplina told a conference delegate, LLK produces 100,000 tons annually of high quality engine lubes for the domestic market. It implies that LukOil, like the other Russian producers, has been losing market share of high quality lubricants to imports the last couple of years. The growth of the imported products in 2008 jumped to 380,000 tons, or 20 percent more than in the previous year, according to InfoTek consultancy in Moscow.

LukOil operates three refineries and four blending plants in Russia, Finland, Turkey and Romania, where it recently started production of new design packages for enhanced engine lubes to penetrate the European Union market. By 2017 LukOil plans investments of $270 million to boost its lubricants and base oils production capacities. In 2009 the company said it will spend $2.3 million for research and development, mainly for factory fill and marine oil programs.

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