This would affect the price of finished lubricants in Russia and at the end of the day, end users have to pay more, he said, adding that it does not mean that as a producer, LLK wants to gain more profits. We are just trying to keep profitability at the current level.

Russia produced a combined 2.3 million tons of base oils and lubricants in 2013. The production, import, export and domestic consumption balance sheet has been stable and unchanged between 2008 and 2011, except for 2009, which was impacted by the global recession, Donde said, quoting data from InfoTek Moscow consultancy. Exports and consumption slowed in the last few years as the introduction of higher specification oils lengthened oil drain intervals, lowering the general volume of the market.

Russian lubricant consumption is expected to decline during the next few years, according to LLK. In 2013, total consumption reached 1.7 million tons, and the company expects it to slump to 1.5 million tons in 2014. It will stay at this level until 2017, when we expect a modest market revival, reaching the 2013 volume in 2019, Donde said.

In [2014s] third quarter, it became clear that the economy went into muddy waters – the crude oil price drop, introduction of higher interest rates, limited lending and abrupt deterioration of external borrowing, Tamara Kandelaki, general director of InfoTek, told the conference. Because of the sanctions, Russian oil majors Rosneft, Gazprom Neft and Lukoil were shunned by the European Unions lending institutions. These companies are facing lack of long money – their own or from the Russian banks, she said, adding that it can result in postponement of their current investment programs.

Russias base oil and lubricant export volumes dropped by about 15 percent in the last couple of years, InfoTek found. Despite this drop, the consultancy expects up to 60 percent of the total exported base oils and finished lubes from Russia to go to the EU and Ukraine this year. It is highly unlikely that our products will be banned from use in EU countries that are also facing economic problems, Kandelaki said. However, as the demand for lubricants is dropping elsewhere, importers would make efforts to increase their sales in Russia, which could trigger price competition.

She contended that in the last few years, we lost the distinctive prospects for short- and long-term economic development. Yesterday, we had a technical framework agreement with the government for modernization of the oil industry. Today, we have an oil tax maneuver that pushes us back to the resource economy.

Rosneft, Gazprom Neft, and Tatneft have each announced developments in base oil production, LLK said. For example, Rosnefts Novokuibyshevsk refinery expects 160,000 tons per year of new API Group II and 183,000 t/y of new Group III base oil production by June 2016. Rosnefts Angarsk and Gazprom Nefts Omsk plants both expect to produce high-quality base oils by 2018 – 215,000 t/y of Group II/III from Angarsk and 200,000 t/y Group II/III from Omsk. Slavnefts joint venture 100,000-t/y Group III base oil production is on hold while Tatneft expects to start-up a 190,000-t/y Group III plant in Nizhnekamsk by mid-2015.

Lukoil also announced new base oil production at its Volgograd and Perm refineries by the end of this decade, but it recently modified its strategy. Given the current oversupply condition in global base oil markets, many plant closures in Europe and Russia, and seeing our colleagues efforts to increase high-quality base oil production in Russia, we decided not to proceed with our modernization plans and to observe the situation cautiously, Donde declared. The company plans to purchase needed base stocks on the open market. From an economic point of view, it is more profitable for LLK at the moment.

At present, Lukoils total base oil capacity amounts to 1.2 million t/y, the largest in Russia, which makes it the countrys biggest lubricant marketer and its largest net exporter of base oil. In Volgograd, the company operates a 495,000-t/y Group I base oil plant, which includes a small amount of Group II production and additional 25,000-t/y Group III/III+ capacity. The company operates Group I plants of 440,000 t/y capacity in Perm and 250,000 t/y in Nizhny Novgorod, according to Donde.

LLK found that the Russian lubricants market is characterized by strong competition in the automotive segments, while slow modernization at the refineries results in the production of large volumes of low-quality, additive-free industrial oils meeting GOST-I 20, 40 and 50 specifications. We see Russian companies employing a variety of methods to calculate lubricant production costs. Also, there is a persistent negative image of the finished products made in Russia by Russian customers, Donde said. The company expects that increased costs for lubricants manufacturing in Russia will result in lower profitability and closure of many companies, while those that stay open could face a lack of skilled professionals.