It seems that this could set up perfectly for Russia – a large base oil producer with substantial surplus capacity immediately on Chinas doorstep. Russian supply is also a good quality match for its neighbor to the south. Indeed, at least one consultant says China presents Russian refiners with a great opportunity for years to come.

Those base oil producers, however, remain skeptical. Although China has their attention, some of the largest refiners say their supply to China is low and declining. Furthermore, some producers say they lack good access to the Chinese market.

Russian base oil producers have been involved for many years exporting base oil to China. This is not new business for them, Ray Masson, trader and director of Pumacrown Ltd., told LubesnGreases. They have been supplying API Group I base oils to China in the past, and they will be doing it in the future in varying quantities depending on the market opportunities, both domestically and in China.

Thirst for Imports

Speaking to the World Refining Associations Base Oil and Lubricants in Russia and the CIS conference in Moscow in early April, John Leavens of Purvin & Gertz consultancy said that China is a net importer of around 2.5 million metric tons of base oil per year. At the same time, Russia exports around 1.5 million tons of base oil annually, according to the Moscow consultancy InfoTek.

At the moment the country utilizes about 69 percent of its total base oil capacity, InfoTek General Director Tamara Kandelaki said at the WRA conference. Base oil producers in Russia are export oriented, and their success is intertwined with demand fluctuations.

Asian base oil demand will be driven by the strong economic growth in China, Leavens said. The countrys annual gross domestic product growth rate from 2005 to 2010 was 11 percent. From 2010 to 2030 we projected an annual [GDP] growth rate of 8 percent.

Transportation engine oils account for approximately 40 percent of global base oil demand, according to Leavens. Vehicle fleet growth in China is steady and shows no signs of slowing down. There were approximately 67 million passenger cars and light commercial vehicles in China in 2010, or about 50 vehicles per

1,000 people. We projected that by 2030 Chinas passenger car and light commercial vehicle fleet would grow to around 320 million units, or about 220 vehicles per 1,000 people, he said. That is a lot of cars and a lot of trucks, a huge potential. And this number is less than the number of vehicles per 1,000 people in Europe or North America.

Russia makes mostly Group I base oils, as these account for 98 percent of its capacity. According to Leavens, Group I oils will find strong demand in Chinas growing automobile population, as well as its manufacturing base.

Purvin & Gertz, which is headquartered in the United States, says that most of the worlds growth in base stock demand for the next couple decades will occur East of Suez – in the regions bracketed by the Middle East and the Pacific Rim – and that China will be the core of that growth. Most analysts agree that Chinese base stock demand will eventually shift toward Group II and Group III, as has happened in Europe and North America. But Purvin & Gertz defines China as a developing market and predicts that it will continue consuming large volumes of Group I for the foreseeable future.

The market for Group I base oil in China is expected to grow until 2020 and actually to rise slightly even after 2020, Leavens said, unlike global and some Commonwealth of Independent States markets where Group I base oil demand is declining. Given their proximity, Russia and other CIS nations could become key suppliers of this demand. This is all about timing, he added, and Russians should use the moment.

Strategically Located

Besides its surplus capacity, Russia also has transportation resources for the job. The country has the finest railway system in the world for transporting large quantities of material. The system has thousands of kilometers of well-functioning track and can transport to Chinas borders without complication.

The railway to the East is becoming available simply because of the opening of the East Siberia-Pacific Ocean Oil Pipeline, Leavens said. It moves a lot of crude oil previously moved by rail. Before the pipelines opening, the railway system transported huge volumes of crude oil, but unutilized, now it can be a solution for transporting base oils from Russia and CIS to China.

The alternative transport by sea is much more remote, since it could involve double handling and extra storage in ports such as the Pacific port of Vladivo-stock, Masson said. Russian base stocks will primarily be supplied by rail. The only advantage with sea-borne cargoes is that they can be sold into the southern parts of China with more control and security.

Lukoil, Russias largest base stock producer, said it supplies approximately 40,000 t/y of Group I to the Chinese market, and it uses both rail and sea channels. Spokesman Vladimir Semakov said the company will soon begin delivering in flexitank containers.

Russian base oil producers and marketers are facing quite a few competitors in the region, Semakov told LubesnGreases during an interview. Lukoils competitors include Iran, traders from India and Singapore, as well as the producers in Malaysia and South Korea. China represents a huge and growing market for all base oils, and consumers there are using quite diversified channels to meet this demand. Considering that Lukoil is the biggest base oil producer in Russia and responsible for more than half the countrys base oil exports, shipments to China are not very significant for the company.

Competing Opportunities

Gazprom halted supplies to China in April 2010 because it saw better opportunities in Europe. We know that the base oil demand in China plays a very important role in the global market, said Ivan Yakovlev, spokesman for the companys lubricant arm, Gazprom Neft-SM. During 2009 and at the beginning of 2010, base oil prices offered on the Chinese market were approximately U.S. $100 to $150 per ton higher than in Europe. Back then it was profitable for us, and we used to supply up to 75 percent of the companys base oil exports to China.

In 2010, depending on the base oil types, market prices in China declined by $200 to 250 per ton from the previous years peak, according to Yakovlev. This is the reason the company at this moment doesnt sell any base oils to China and redirected its exports to Europe, where the base oil prices are higher, he revealed, adding that it is not profitable for the company at the moment to supply the Chinese market. If price-demand conditions become favorable for us, we could quickly resume the supply. Yakovlev noted that the location of Gazproms Omsk base oil plant, in Siberia, is advantageous for transporting to China. He also confirmed that the company is currently preparing to start exporting finished lubricants to the Chinese market.

The Russo-British joint venture TNK-BP calls the Chinese market very promising, but currently it doesnt export base oils there. At the moment we are analyzing transportation issues and the situation in this fast-growing market, and we expect very soon to ship both base oil and finished products there, said Maxim Horoshenkov, general director of TNK Lubricants.

Most industry insiders agree that there is a limit to base oil availability coming out of Russia. With local markets gaining impetus, there will be a falling availability of Russian Group I base oil for all export markets, said Pumacrowns Masson, who is based in East Grinstead, U.K.

Along with Asian competitors, Russian base oil suppliers should also expect competition from Europe. There is some Group I base oil surplus capacity in Europe, Leavens noted. In order to balance global demand, these producers exports could flow over to Asia via the Middle East. Russian producers should have inside tracking to detect their competitors on the Chinese market.

Purvin & Gertz predicts China will also see strong demand growth in Group II and Group III base stocks. It will be driven by rapid rise in vehicle ownership, with increasing quality requirements for both imported and domestically produced cars, he said. The proportion of Group II and III demand in the country is forecast to increase to around 37 percent by 2030.

There are several Group II and III projects planned in Russia and Kazakhstan. Rising demand for higher-quality lubricants in Europe and China prompted Russian and CIS base oil producers to undertake projects that would add a total of 1.3 million t/y Group II and III capacities by the end of this decade.

Globally, the demand for higher quality base oils is very high, particularly in China,, said Rahimzhan Nupbayev, an executive of Hill Corp., which opened a lube blending plant in Kazakhstan last year. Hill has a partnership with state energy giant KazMunayGas to build a 200,000 t/y Group II and III plant in southern Kazakhstan by 2014. Petro-Kazakhstan, a joint venture between

KazMunayGas and Chinese oil major PetroChina, is also a partner in the project. Nupbayev confirmed that Hill is exporting finished products to China, and he sees great opportunity for the base oil plant to do so as well. In due time when the plant will go online, we expect China to be our main export destination, he said.

There seems to be a general consensus that the Chinese market represents a potential opportunity for base oil producers in Russia and other parts of the CIS. Whether refiners take advantage of it – and to what extent – remains to be seen. Ultimately the answer may be a level of exports that fluctuates continually.