Gazproms primary distinction is that it is the worlds largest supplier of natural gas, but the Mos-cow-based company is also a significant petroleum refiner. The refining segment, including its lubricant business, is centered in this southwestern Siberian city, 2,700 kilometers east of Moscow. Omsk Refinery sprawls across several square kilometers, with barren plots interspersed between refining units and pipelines. Built in 1955, it is one of the largest refineries in Russia with capacity to process 19.5 million metric tons of crude oil per year and includes a 240,000 t/y base oil plant and finished lubricant blending plant. The overall refinery has 3,600 employees, 640 of whom are devoted to its base oil and lubricants blending facilities.

STRIVING TO MODERNIZE

Gazprom Neft-SM, which is headquartered in Moscow, also has several other assets. It has a share in the oil major Slavneft, a 50-50 joint venture with TNK-BP that owns the 250,000 t/y Yaro-slavneftorgsintez base oil plant in Yaroslavl. It also manages Gazprom Neft Lubricants Italia and its 30,000 t/y Bari, Italy, blending plant, purchased from Chevron in 2009.

Additionally, Gazprom Neft-SM manages an-other share in Slavneft: the lubricants production of Rusoil, operator of the Mendeleev refinery in Konstantinovsky, Yaroslavskaya oblast. This mini refinery, the countrys oldest lubricant plant, has operated under big losses since 2006, according to Russian accounting standards. In 2009 the plant produced only 3,000 tons of lubes.

Slavnefts shareholders have tried to sell Rusoil twice, in 2007 and in 2010, but without success. One of the biggest reasons is its obsolete technical condition. The plant yearns for investments to modernize its entire refining processes. Russian newspaper Kommersant reported last year that any purchaser would have to double its initial investment – Gazprom and Slavneft were reportedly seeking around U.S. $15 million – to keep up with Euro 4 fuel standards recently adopted by Russian authorities.

The Mendeleev refinery is in some ways symbolic of Gazprom and its lubricants business. From its crude oil extraction and the refining operations to its base oil and lubricants production facilities, Gaz-prom has much need for immediate modernization if it wants to keep up with the dramatic evolution of global energy markets.

Here lies the major question facing Gazproms lubricant business: How quickly and adeptly can a company that has focused on natural gas, crude oil, petroleum and diesel products reform managerial and facilities aspects of lubricant operations? The is-sue is how to command and coordinate such diverse operations (including nonessential activities such as a bank, hospitals, football clubs, its own media group) – a challenge that seems especially tall for a state-controlled company. The Russian government owns a 50.02 percent stake in Gazprom.

A market orientated company which is privately owned could succeed better, Boris Bunakov, general director at Nami-Chim, Russian Association of Automotive Engineers, told LubesnGreases during an interview. I cannot imagine how Gazprom could be able to manage even its lubricants business. The company might succeed if its lubricants business is controlled by a commercial and private entity, and if it pays more attention and money for the development of science. To bolster his argument he pointed to the success of Lukoils lubes subsidiary LLK-International.

For its part, LLK claims to be pleased by the lubricant-related undertakings of its competitor. Such a vital competition always helps markets to develop, said Alexei Fillipov, LLK-Internationals deputy general director for production, science and technology. Let it be Gazprom Neft, TNK-BP or Rosneft – we hail such a competition. Such strong players and competitors could only result in a more developed market. It is good both for us and for them. He added that being state controlled is not necessarily a hurdle, as it could have positive and negative effects.

EXPANDING ABROAD AND AT HOME

Gazprom Neft-SM is one of the 20 biggest lubricant producers in the world, according to the companys strategic marketing department. With annual sales of less than 250,000 tons in 2008, it is still far behind global leaders such as Shell and ExxonMo-bil, which reportedly sold 4.5 million tons and 4.4 million tons, respectively, in 2008. Lukoil ranked seventh that year with 1.2 million tons.

Gazprom Neft-SM sold 43,000 tons of automotive lubricants in Russia in 2009, accounting for 8 percent of the market, according to its own estimates. As one of the key players in the countrys lubricants market, we are strongly committed to in-crease our sales in Russia, Anton Kiselev, a senior strategic market specialist, said during an interview in Moscow. He added that the company expected to raise its total lubricants sales from 155,000 tons in 2009 to 213,000 tons in 2010. Over the last couple of years the company has tried to increase its sales in the country as well as in Belarus, Ukraine and in the EU.

To establish a firm foothold in neighboring lube markets, Gazprom Neft-SM has outsourced production in Belarus, Ukraine and in Moscow, using contract blenders. In the capital it uses the facilities of independent blender Vial Oil. Parent company Gazprom Neft has dozens of fuel stations in Kazakhstan, which helped establish a strong lube distribution network there.

As a result, the share of finished lubes sales in these countries has been significantly increased, Kiselev noted. The Strategic Marketing Department forecast that the company in 2010 would capture approximately 1 percent of Belarus 213,000 ton finished lubes market and an equal share of the 345,000 ton Ukrainian market. The proximity of the Omsk plant to Kazakhstan and Gazproms network there may have given it a 39 percent share of the countrys 137,000 ton market in 2010. Gaz-prom Nefts brands had sales of roughly 7,000 tons in Italy in 2009, Kiselev remarked, adding that in 2010 those sales were expected to rise to 18,000 tons, or 3 percent of the 613,000 ton Italian market. 2010 marked the start of a three-year plan for Gazprom Neft to invest 133 million in its lubricants business. According to Kiselev, management plowed 34 million into manufacturing facilities last year, almost 10 million in marketing and an additional 1.5 million in product development. Similar expenditures are scheduled for 2011 and 2012.

To expand production capabilities, the company recently began construction of a blending plant near the Omsk base oil plant. The new blending plant will have capacity of 70,000 t/y and will be completed by the end of 2012.

It will boost the annual capacity of our plant to 120,000 tons of finished automotive and industrial lubricants, Alexandr Chembulaev, head of the Omsk base oil and lubricants plant, said during an interview in his office. He asserted that new storage capacity for both raw materials and finished products are due to be ready this year, along with a new packaging line. The plant will increase production of SibiMotor brand standard engine oils for domestic automobiles and Gazprom Neft brand industrial lubes.

Production of premium-class G-Energy motor oil, now made in the companys blending plant in Italy, will be partially carried out there as well, Chembulaev confirmed. In addition, the company last year introduced a new blending unit for production of hydraulic, compressor and electrical transformer oils.

As part of the strategy to introduce the G-Energy brand in Russia, and to increase the lubes outputs, the company also set up a new 12,000 t/y filling line at Rusoils facility in Konstantinovsky. Our company operates a plastic bottle plant there and a big logistic center for finished lubes distribution in the European part of Russia, Kiselev revealed. This facility was included in the acquisition of Rusoil in 2007, according to Kommersant. After the filling line was installed in Konstantinovsky, management decided it would be more helpful to use this logistic center as a hub to market its lubricants in the European part of Russia.

BOLSTERING BASE OILS

Omsk Plant Manager Chembulaev said the company has already begun a project to upgrade its base oil plant. The past couple years the plant hit production targets, keeping pace with the increased demand in the country. Base oil plant output volume in 2009 was 230,000 tons, he confirmed. The plant was on target for the same result in 2010.

A technical working committee is busy working on several installations, according to the plants technical director. We are installing an improved deasphaltization unit, a couple units for selective refinement and three units for dewaxing, Vasily Pozygun said, adding that this is to boost the volume and quality of API Group I base oil currently produced at the plant.

We have also completely replaced and computerized the control system of both the base oil and existing blending plant resulting in better compounding and management of the finished lubricants, he said. Of course, with the increase of our base oil production, we are considering introducing hydro-cracking too. Our long-term plans call for breaking ground for this installation in 2014, with Group II and III coming onstream in 2016.

Gazprom Neft-SM has been developing a base oil and lubricants production strategy since 2006. The operations of the companys entire lube business were given to the subsidiary Gazprom Neft-SM in late 2007. Upper management developed this strategy four years ago, and we hope they wont abandon plans that were committed to, Pozygun said. Sibneft, the Omsk refinerys previous owner, gave priority to fuels production.

Meanwhile the countrys industrial and auto-motive lubricant market trends have seen drastic changes, and during the last decade every major oil company in Russia has been investing in development of its own lubricants business. Gazprom completely overturned the Omsk plants previous owners approach.

In 2005 Gazprom acquired Sibnefts assets, including the Omsk refinery, for $13.1 billion, one of the largest corporate takeovers in Russian history. For the past decade, Gazproms strategy was aimed at consolidating its numerous assets that range from oil fields and refineries to gas and oil distribution, to base oil and lubes making. Besides the vast Siberian region, its assets are now present in countries like Great Britain, Germany, Serbia and Nigeria, serviced roughly by 450,000 employees in Russia and all over the world. Gazproms sales in 2009 totaled 70 billion, according to European media reports.

The 1990s were a time of chaotic wheeling and dealing in Russia, and were followed by a decade of consolidation and stagnation, when calculating the losses and gains was the main game of the policy makers in Kremlin. Gazprom exemplified both of these periods. Now it finally has put development of its base oil and lubricants operations on the companys priority list. It is not without a reason that Kiselev told a reporter during a flight from Moscow to Omsk, We aspire to become a number one lubricants company.

Many observers are watching to see if a giant state-controlled company can pull it off.