It appears, however, that the Great Bear is ready to jump on the bandwagon. Upgrades of several plants are now underway and scheduled to be completed by 2014, and a greenfield facility now under construction is due to open in the same time frame. Together these projects will give Russia capacity to make nearly 900,000 t/y of highly refined stocks, and refiners say that more will be following.

Observers call these important steps for Russian base oil suppliers and maintain that they should boost the competitiveness of domestic finished lubricants, too.

Projects in the Pipeline

The U.S. and China are the only countries with more base oil capacity than Russia, sitting at 11.7 million and 5.2 million t/y, respectively. Russia has nine mineral base oil plants, but only one of them makes anything other than Group I. Lukoils 560,000-ton plant in Volgo-grad has capacity to make 30,000 t/y of Group III.

Industry observers say the dearth of domestic Group II and III has not helped the plight of automotive engine oil suppliers that in recent years have steadily lost market share to foreign brands. Imported engine oils are mostly high-margin, upper-tier products purchased for foreign-made cars and trucks. Many agree that the biggest obstacle for Russian companies is that their formulating technology lags behind international standards, but a lack of domestic high-grade base stocks is also cited as a factor.

The Russian base oil industry is characterized by obsolete, low-efficiency technologies and a low percentage of high-viscosity base oils, according to Vladimir Kapustin, general director of Moscow-based VNIPINeft, the Research and Design Institute for Oil Refining and the Petrochemical Industry. Russian base oil production capacities were built in 1950s, 1960s and 1970s, still using obsolete technologies, he told WRAs Base Oil and Lubricants in Russia and the CIS conference. VNIPINeft is one of the few Russian institutes that provide technical expertise for development of base oil production.

Several domestic refiners say they are close to making highly refined stocks. Four projects are currently under development. The first is Tanecos 100,000-t/y Group II and III base oil plant in Nizhnekamsk, which will use technology licensed from Chevron Lummus Global. Taneco, a subsidiary of oil giant Tatneft, is building the base oil plant at the site of an existing refinery.

Rosneft has upgrades underway at its plants in Novokuibyshevsk and Angarsk. A first phase at Novokuibyshev involves installation of vacuum distillation and raffinnate hydro-conversion units that will enable production of Group II later this year. A second phase will install hydrocracking and wax isomerization units and give the plant 400,000 t/y of Group II and III capacity by 2014.

Like Novokuibyshev, the Angarsk plant will use technology licensed from ExxonMobil Research and Engineering. Its upgrade is designed to give the facility 200,000 t/y of Group II and III capacity, streaming by 2015. The fourth project is an upgrade that will give Slavnefts plant in Yaroslavl capacity to make 100,000 t/y of Group III. The company says it, too, should be completed by 2014.

Plans for a few other projects have been disclosed, although their timeline is further out. (It should be noted that plans without final approval sometimes linger for years without moving forward.) Lukoil says it will expand Group III capacity at Volgograd and upgrade another plant in Perm. Gazpromneft has discussed a project at its Omsk.

By 2015 we expect our Volgograd plant to produce up to 265,000 tons of Group III base oil, LLK-International General Director Maxim Donde said in November. LLK is Lukoils lubricant arm. Our new 350,000 t/y per year of Group II and II+ base oil plant in Perm will come on stream by 2021.

Russia produced 2.35 million tons of base oils in 2011, Moscow consultancy InfoTek said at the WRA conference, almost 6 percent less than the year before. Lukoil continues to be the largest producer. In 2011 it produced 1.14 million tons – nearly half of the countrys total. Rosneft is second with production of 468,000 tons and a 20 percent share, followed by Gazpromneft (253,000 tons), Slavneft (248,000 tons) and Bashneft (185,000 tons). The rest is controlled by Cyprus-based FortInvest. In 2011 FortInvest acquired Russnefts Orsk refinery, along with its Group I base oil capacity.

Exports and Duties

Russia exports large volumes of base stocks – typically upwards of half of its total output. Exports in 2011 declined 5.5 percent from 2010, reflecting lower base oil production.

Last year Russia exported around 921,000 tons of base oils, of which 99.5 percent was Group I and 0.5 percent was Group III, Tamara Kandelaki, general director at InfoTek, said at WRAs Base Oils and Lubricants in Russia and the CIS conference in March. Greece was the biggest destination for Russian base oils, accounting for 19 percent of exports, followed by Belgium (16 percent) and China (14 percent). Its possible that Greece and Belgium are not direct consumers of the Russian base oils, and that their ports are used for re-exporting to other destinations. This is not the case for China.

In 2011 Chinas churning economy imported a record 2.7 million tons of base oils, which was partially covered by the Russian Group I products, according to Beijing-based Chem1 consultancy. In 2010 Russia held a 9 percent share of Chinas 2.1 million tons of total base oil imports, Chem1 analyst Frank Ye told the Moscow WRA conference. Last year the Russian base oil import share to China was 7 percent.

Russia, along with Saudi Arabia, is one of the worlds two largest crude oil producers and exporters. It is obvious that most of this oil is sold on the international markets and less is processed in the countrys refineries. The base oils segment is not a part of the governments strategy for the development of countrys oil sector until 2020. It is why many fear … how the industry is going to develop in the following years, Kapustin, of VNIPINeft observed.

Some of the conference participants, including Kapustin, expressed admiration for the Pearl gas-to-liquids Group III base oil plant opened last year in Qatar by Shell and Qatar Petroleum. They mused that such a project could be developed in Russia but concluded that it is probably a very distant prospect. After the United States, Russia is the worlds second biggest natural gas producer. The production of crude oil is the governments top priority right now, and in the foreseeable future it will remain the only feedstock for the base oils made in Russia, Kapustin said.

Another speaker at the WRA conference, Alexandr Bylkin, an analyst with consulting firm Petromarket, said Russias base oil industry also faces a threat from government taxing policy. In order to stabilize domestic energy prices, Moscow is imposing export duties on such products as bitumen, tar oil, vacuum gas oil and fuel oil. Some industry experts fear that if the duty applies to base oils, it will negatively impact upgrading projects because refiners could focus on production of gasoline or diesel fuel, products that have higher profit margins.

The government has already passed a decree to increase export duties for almost all petrochemical products, including base oils, to 100 percent of the marginal crude oil duty by 2015, Bylkin said.

Under the current duties, when crude oil sells for U.S. $120 (92) per barrel, the base oil sales margin in Russia is $10 per barrel, according to Petromarket. The consultancy estimated that if the approved export duties take effect in 2015, base oil sales margins would be much lower – around $4 per barrel if crude prices reach $140, which Bylkin called unlikely. If we deduct the operational production costs which in some older plants are up to $4 per barrel of base oil produced, then three years from now the Russian base oil industry will begin a slow and painful death, he contended.

It remains to be seen whether the government follows through on this tax policy, which aims to stimulate refiners to offer more and higher quality products at prices that are acceptable to domestic end users. But it is clear that many Russian base oil producers are faced with an uncertain future. If not modernized in the shortest period of time, Bylkin said, many base oil plants are bound to meet the same fate as a TNK-BP plant in Ryazan, which was closed in 2010. Bylkin concluded, Maybe it sounds sad, but it is realistic to say that only needed base oil plants will persist in Russia.