Base oil exports from refiners in the Commonwealth of Independent States (CIS) are gradually recovering after a slump two years ago. An increase in API Group II and III production, lower export duties, a weak ruble and a stable global market spell better foreign sales for Russia and its neighbors Belarus and Turkmenistan in 2017, Denis Varaksin, slack wax and base oil sales manager at DYM Recourses, told the Global Business Clubs CIS Base Oils and Lubricants conference in Moscow in May.

Russia exported 1.063 million metric tons of base oil in 2016, of which 323,000 metric tons went to destinations in Europe and West Africa through the Baltic ports of Riga and Liepaja in Latvia and Svetly in Russias Kaliningrad exclave. Another 237,000 metric tons traveled southwest through the Black Sea to Turkey, the United Arab Emirates and India. Ukraine took a further 117,000 metric tons and 75,000 metric tons went overland to China, the worlds largest base oil market. The remaining 311,000 metric tons went to other destinations.

Bear Market

Russian base oil exports peaked at 1.44 million metric tons in 2010, declining to 940,000 metric tons in 2015, a fall of 26 percent, caused not least economic sanctions imposed on Russia by the West after the invasion of Ukraine in 2014. We have […] observed how Russian refiners lost market presence in such important regions as Southeast Asia, India and the Middle East, Varaksin said.

In addition to pressure from sanctions, 1.1 million metric tons per year of Group I base oil production capacity has been shuttered since 2010, leaving total annual base oil production of 2.6 million metric tons, of which 90 percent is still Group I. Global demand for Group I has been declining steadily and plants have been closing for the past decade, contributing to the export drop.

Notwithstanding fresh sanctions imposed by the United States in August 2017, there are other obstacles to recovery that growing demand for Group II and III in Europe and Middle East may not offset. One negative feature of the Russian base oil refiners is the location of their plants. None of them has direct access to sea ports, hence they are relatively far from export outlets, Varaksin said.

In 2016, for example, Russian refiners reduced shipments via rail to Latvia, according to DYM. The reduction is likely Russias reaction to the NATO military exercises in Latvia. State rail operator RZD decreased to almost zero any rail shipments of energy products to Latvia, without an official announcement or explanation. The effect on exports is diminished since refiners can use the countrys other ports in the Black Sea.

What Goes Down, Should Go Up

Now the trend is being reversed. Group II and Group III base stock production is slated to increase in 2017, in addition to the introduction of lower export duties and low logistics costs due to the depreciation of the ruble, Varaksin said, adding that higher global base oil prices are another positive factor for a steady rebound. Russian base oils had been more expensive because of higher production and shipping costs and so were priced out of the market when crude dropped in 2014-15.

By the end of this year, the commissioning in 2014 of Tanecos 190,000 t/y Group II and III base oil plant in Nizhnekamsk and Rosnefts new 100,000 t/y Group III plant in Yaroslav, which came on stream in 2017, will have increased the share of higher-demand base oil stocks in overall Russian exports by 15 to 20 percent.

Gold Members

Some 500,000 t/y of production capacity is found in Russias fellow CIS member states Belarus, Turkmenistan, Uzbekistan and Azerbaijan, the five CIS base oil producing states.

To Russias west in Belarus, Naftans Novopolotsk refinery has a Group I unit with capacity of 198,000 t/y and a Group III unit of 6,000 t/y that produce high viscosity index SN150, SN500 and SN1,200 products. It primarily export to the Baltic states of Estonia, Latvia and Lithuania, as well as to Ukraine. Volumes have increased since 2016, Varaksin said.

The base oil plant in the Turkmenbashi refinery in Turkmenistan in the south has capacity to produce about 80,000 t/y but sold more than 110,000 metric tons in 2016 due to a backlog of shipments allotted for sale but were not made on time, Varaksin said.

This product is good, with high viscosity index, light color and low sulfur content. Its price rose 50 percent for SN180 and 30 percent for SN350 during 2016, he added.

Last year, the refinery exported 52,500 metric tons of SN180 oil, 57,000 metric tons of SN35 and 3,000 metric tons of SN600.

Turkmenistan also has the potential to take advantage of growing Group II and III demand and increase exports. In 2015, the national refiner Turkmenbashi Oil Processing Complex approved a Group II/III modernization program and announced a tender for the design and construction of a 100,000 t/y upgrade, but as of today the plans are on hold.

The challenging economic situation [in Russia] postponed all modernization plans, and a construction timetable hasnt been scheduled yet, in spite of the fact that high-quality base oils are in demand in the region, Varaksin said.

Underperformers

Long distances to ports have also crippled production at Uzbekneftegazs base oil plant in Fergana, Uzbekistan. The nearest are several thousand kilometers away, which limits the refinerys export options because of high rail transit tariffs. At $250 per metric ton, this is almost half the base oil price and so prohibitively costly. There is also a feedstock shortage caused by sanctions.

Fergana produces small volumes of industrial-grade mineral oils based on Russias GOST standard, such as I-20, I-50 and M-20 products, and exports them primarily to Kazakhstan to the north and other neighboring countries. Although these oils have a high viscosity index, they are dark in color and have high sulfur content.

Meanwhile, Azerbaijan is home to Azerneftyag, the only naphthenic refinery in the CIS. In its Soviet heyday, it was one of the largest naphthenic refineries in the world with capacity of 100,000 t/y. This capacity is now barely used, according to DYM.

The refinery is capable of producing limited volumes of low-quality, cheap naphthenic products, but due to the lack of investors and incentives for a quality upgrade, it is scheduled for closure by 2020, Varaksin said. In the past few years, the refinery exported base oil west to Turkey through the port of Batumi in Georgia.

Customer Base

While Azerbaijan and Uzbekistan are not feeling the uptick in the regions base oil fortunes themselves, they do offer Russia and Turkmenistan new export routes to the south and east, especially to Iran, which has growing base oil demand, although it is base oil producer.

The country has Group I units with combined capacity of 840,00 t/y, of which 54 percent is exported. It imports increasing quantities Group II, III and III+.

Iran is the most attractive destination for base oils produced in Central Asia and Russia, Varaksin said. Iran is a regional powerhouse; it has a population of 82 million, of which 66 percent are below 35 years of age. It is the largest economy and lubricant consumer in the Middle East, with the strongest GDP, Varaksin said.

Southern export routes include the Samur-Astara railway between Azerbaijan and Iran, the Serhetyaka-Gorgon line between Kazakhstan and Turkmenistan and via Astrakhan, and through the Volga-Don shipping canal, which can handle flexi containers.

The global trend against Group I base oil capacity that was expected to be replaced with Group II and Group III bodes well for Russian and CIS refiners to secure new international customers and continue the modernization push.