MOSCOW – LLK-Naftan has bucked the trend for lubricant additive companies in the former Soviet Union, growing its business during its first three years of existence. But a top official told an industry conference here that the joint venture faces challenges as it aims to offer products of higher quality levels.
Deputy General Director Mikhail Babushkin discussed LLK-Naftans experience during an April 23 presentation at the World Refining Associations Base Oils and Lubricants in Russia and the CIS conference. He recounted the joint ventures formation in 2006, when Russian oil giant LukOil contributed U.S. $11.4 million and Belorussian refiner JSC Naftan carved out its additive business.
The primary purpose of the venture was to supply additives for LukOil engine oils. LLK-Naftan produced 10,000 metric tons of additives during its first year and grew to double that volume by 2008, Babushkin said.
LLK-Naftan was created during a time of crisis for additive companies in Russia and the former Soviet republics. During the past decade, as Russias lubricant market opened to outside competition, most of the additive producers that had traditionally supplied the market watched sales plummet – some to the point of exiting the market.
Babushkin said LLK-Naftan recognized the difficulties that it faced and adopted a phased strategy. The first stage depended on LukOil buying large volumes of existing technology so that the additive business could grow. That goal has been successfully incorporated, and LLK-Naftan now supplies additives for approximately 50 percent of LukOils engine oils, Babushkin said.
Now the company is trying to expand into other types of products, including higher performance additives that should allow more profitable margins. Making that transition is especially important considering that Russias engine oil market is transitioning to higher quality products.
We are trying to broaden our product mix, he said.
But the company faces several challenges as it tries to move to the second stage of its strategy. One is that it will have to increase its reliance on imported components, which are already stretching the expense side of its ledger. The company already buys more than half of its components from foreign suppliers.
We have allocated $2 million this year, and hopefully this will be adequate for these materials, he said. Unfortunately, for now local chemical manufacturers are not capable of providing the quality level needed.
LLK-Naftan also faces challenges proving that its products meet the performance levels that it claims. Babushkin said much of the additives sold to LukOil are used to make engine oils that are marketed as meeting API SG standard. However, in response to a question from the audience, he acknowledged that LLK-Naftans formulas have not actually been tested by an independent laboratory, which would be required for certification.
We do realize those are the questions we are going to face – how to prove that our oils comply with specifications, Babushkin said.