Speaking in March at the Argus European Base Oils Conference in Istanbul, Mirjana Kolb, of Serbian oil company Nis-Gazprom Neft, said lube demand in the region is bogged down in a weak economy. In addition, she said, local companies find it difficult to compete against international brands. Kolb also discussed Nis-Gazprom Nefts plan to build an API Group II and naphthenic base oil plant.

The boundaries of the Balkans are subject to interpretation. For the purpose of her presentation, Kolb defined them as Romania, Bulgaria and Albania, plus the seven nations that formerly made up Yugoslavia – Slovenia, Croatia, Bosnia and Herzegovina, Serbia, Macedonia, Montenegro and Kosovo. (Serbia still considers Kosovo part of its territory, but more than 95 nations have recognized it as an independent nation.)

Small Share of Europe

Kolb, who is Nis-Gazprom Nefts director of marketing and research and development, said the Balkans is a sliver of Europes lubricant market, accounting for just 3.5 percent of the continents demand. She cited estimates by Kline and Co. consultancy that Europe consumed approximately 7 million metric tons of lubes in 2012, compared to just 245,000 tons for the Balkans.

The Balkans share of the European market should increase, since lubricant demand in the Balkans is increasing while in Europe it is falling, but Kolb said the trend for the Balkans still is nothing to stir excitement.

After a weak recovery in 2011, the market slowed down last year, due to the Euro-zone crisis. But we are optimists. This market will rise and develop.

Three countries account for nearly three quarters of overall lube demand in the Balkans. By volume, Romania and Bulgaria are the regions biggest lubricant consumers, with annual consumption of 87,700 tons and 50,000 tons, respectively, followed by Serbia, with 37,500 tons. Next come Croatia (24,500 tons), Bosnia and Herzegovina (18,400 tons) and Slovenia (11,200 tons), then Albania (9,300 tons), Macedonia 5,100 tons), Kosovo (4,200 tons) and Montenegro (2,200 tons).

Kolb described the sub-regional market as crowded. It is a highly competitive market with nearly 70 lubricant producers, ranging from multinational oil companies to small independent lube manufacturers.

The Balkans lubricant market is segmented into two categories: premium and regular. Leaders in the premium segment are the traditional brands of BP Castrol, Mobil, Total, Shell, Selenia and Valvoline. In the regular segment are the brands of two Russian oil majors, Lukoil and Zarubezhneft [which owns Oil Refinery Modrica in Bosnia and Herzegovina and operates in the region under the trademark Nestro], Hungarys MOL, Bulgarian producer Prista Oil, Polands PKN Orlen and the Croatian company Optima Group, Kolb said.

Tough Competition

Kolb acknowledged that companies in the latter group would like to gain footholds in the premium segment, but to date they have generally not succeeded. The companies that control that part of the market are all from Western Europe or are large international companies, she said, noting that their brands are well-known around the world. Large companies from Eastern Europe or the Middle East will be [viewed] with great caution and suspicion and are not very popular.

Companies in the standard segment, she continued, are trying to push low-grade, cheap lubes… many of them not even branded. Numerous small companies try to enter the segment, but find it difficult to compete even there.

People in this region are oriented toward premium brands or popular domestic companies, Kolb said. End users are afraid of buying fake oils, which were common in past years. As a result, small, unknown companies are hardly acceptable.

Kolb confirmed that Nis-Gazprom Neft is not among the sub-regions leading suppliers, but she claimed that the companys lubricant business is expanding, primarily in Serbia. The company markets lubes under the Nisotek brand. Nis is experiencing very steep growth on the local market and is becoming a key lubricant brand, she said. The company has already established distribution channels in the region. Besides its network of gas and service stations in Serbia, Gazprom Neft has its own branches already up and running in Romania, Bulgaria and Bosnia, we are also eyeing the Greek market. The biggest volume of our finished products will be offered through these distribution channels and a smaller volume will be offered through open international tenders.

Nis-Gazprom Nefts competitor in Serbia is Fam, an independent lubricants manufacturer from Krushevac, a town in central Serbia. In this past decade, Fam has estab-lished a firm foothold in the sub-regional lubricant market.

According to Kolb, most lubricant companies in the Balkans have done little to explore export markets outside the sub-region. Nis-Gazprom Neft is making plans to do so, however. In the future we expect more exports to Turkey and Africa, as well as Central, Eastern and Southern Europe, she said.

Like most places, lubricant demand in the Balkans depends mostly on economic activity and demographics. That being the case, it does not look like the market should expect much help in the next few years. The population in the sub-region, currently 52 million, is growing at an average annual rate of just 0.28 percent. After a series of armed conflicts, including the civil wars that accompanied the break-up of Yugoslavia and the Kosovo War, the economy in the Balkans is less developed than anywhere in the European Union.

Like much of Europe, the sub-region has been slow to recover from the recession and its subsequent economic crises. Largely because of this, lubricant demand is not expected to return to pre-recession levels until 2016.

Base Oils from Serbia

Base oil capacity in the Balkans and the rest of Central Europe, has received few upgrades, but Nis-Gazprom Neft says it is pushing through with one despite the uninspiring lubes outlook. Gazprom has said it will invest 75 million to build a base oil plant at the Novi Sad refinery. Officials say the new plant will have capacity to make 180,000 to 200,000 tons per year and will open by the second quarter of 2015.

Around 100,000 to 120,000 t/y of that capacity will be for paraffinic Group II stocks, while 80,000 t/y will be naphthenic base oil. When the project comes online, Novi Sad will be one of just two virgin Group II or III producers in the Balkans and Central Europe, the other being Oil Refinery Modricas 52,000 t/y Group III plant in Modrica.

The trend in Europe right now is that Group I will be replaced with Group II plants because of the lower production cost for Group II base oils, Kolb said. Some Group I plants will survive, she said, but it will be those that are efficient, as well as larger plants with bright stock and wax production.

Nis-Gazprom Neft says demand for naphthenics is also rising as plant closings drive Group I users to turn to pale oils for replacements. To make naphthenic base oil, the Nis plant will use Velebit crude, a highly naphthenic oil pumped from Serbia.

Due to its unique physical and chemical properties, it is optimal for the production of naphthenic base oils, Kolb said. She contended that the European naphtenic base oil market needs an additional player because the continents only producer of this kind is the Swedish company Nynas.

The Group II portion of Nis-Gazprom Nefts base oil plant will use wax isomerization and hydrofinishing technology licensed from Chevron Lummus Global. For feedstock, the plant will use heavy hydrocracker residues from the companys second fuel refinery, in Pancevo, Serbia.

[T]he synergy between the refineries… allows us to offer competitive prices on the European base oil market. Also, the project will fill a gap of base oil supply that we have right now in the Balkan region, Kolb said.

Nis-Gazprom Neft hopes to supply lube blenders in the sub-region that are seeking to meet tougher specifications and that want to optimize formulation of automotive and industrial oils. Nis Group II/II+ and naphtenic base oils will be excellent alternatives for them, she said.

Perhaps the company will find the base oil market less difficult than the one for finished lubes.