But the countrys primary export product, Solvent Neutral 150, has been squeezed out of the European market by Group II and III supplies in the last couple of years. The consultancy also found that around 60 percent of Russian base oil exports are shipped to Europe and Ukraine, while the countrys export volumes dropped up to 20 percent in 2014.
This volume represents the lowest output in the last five years, Denis Varaksin, a base oil trader at Berlin-based Integral Petroleum, told the Global Business Clubs Base Oils, Lubricants and Fuels conference in Moscow in May. We observed the highest volumes exported from Russia in 2010 when the country realized 1.44 million tons of Group I base oil exports, he said. The subsequent two years marked a steady decrease in export volumes, which fell to 1.15 million tons in 2012, rebounded to 1.23 million tons in 2013 and slumped back to 1.08 million tons in 2014, a five-year low.
Why the Drop?
The main reason for the drop is that many Russian, European, Middle Eastern and Asian, as well as some American and Australian base oil marketers, launched new or upgraded production and announced new capacities that have either come on stream or are about to. About 7.5 million tons of Group II and III capacities are coming between 2014 and 2016 globally. If global lubricant demand was about 42 million tons in 2014, it equals an 18 percent supply increase, Varaksin contended, citing Argus consultancy and Integral Petroleum estimates.
Other reasons are growing production costs and falling demand in Europe, China and India. All these regions experienced various economic woes, such as Chinas economic slowdown and Greeces sovereign debt crisis, which weakened the European currency and caused shockwaves in the Eurozones fiscal policy.
Integral Petroleum found one more important reason; namely, the increased cost of Russian rail transportation, which surged an average of 10 percent per year. Moreover, the Russian base oil market is oversupplied, leading to price pressures, according to Oleg Tsvetkov, head of the lubricants department at VNIINP, the All Russia Research Institute for Oil Refining. On the other hand, in the last few years, we have seen a steady growth in domestic gasoline prices despite the 2014 crude oil price crash, he said.
The institute found that if a Russian refinery has available or extra volumes of vacuum gasoil it is likely to use it to process fuels. It is [one of the reasons] why three base oil plants closed in Russia, Tsvetkov said, referring to Lukoils 230,000-t/y Group I plant at its Nizhny Novgorod refinery in Kstovo that closed in April, as well as the 190,000-t/y Group I Russneft facility in Orsk that closed in 2013 and TNK-BPs 275,000-t/y Group I plant in Ryazan that closed in 2010.
Globally, dozens of refiners either expanded or developed new Group II and III base oil production to be ready in the near future. Some have already expanded or launched new operations in 2014 and 2015, and many of these new or upgraded plants have nameplate capacities much higher than those of any other existing or announced Russian Group II/III base oil plant projects. Some of these major capacities include Adnocs 620,000-t/y Group II and III plant in Abu Dhabi, scheduled to commence by the end of 2015, and Luberefs Yanbu 710,000-t/y Group II plant in Saudi Arabia, scheduled to go on stream at the beginning of 2016, Varaksin said.
In August 2014, the Shell and Hyundai Oilbank joint venture launched a 620,000-t/y Group II capacity plant in Daesan, South Korea, Another Euro-Korean joint venture, the Repsol-SK Lubricants alliance, launched a 630,000-t/y Group III base oil plant in Cartagena, Spain, last September.
Taneco, a Russian oil major from Tatarstan, started commercial production at its 190,000-t/y Group II and III base oil plat in Nizhnekamsk in December 2014. These 2.5 to 3-centiStoke Group II and 4-cSt Group III products are ready for export and hav been shipped to Black Sea ports since since March, Varaksin revealed.
The Baltic and Black Seas are home to the main Russian base oil transportation hubs. Changing market conditions led to a higher discount for Russian Solvent Neutral 150 exported through the Baltics, compared to similar products in Europe. For example, Russian Solvent Neutral 150 was sold at a U.S. $182 per ton discount in 2014, much higher than the $134 per ton discount in 2013, said Varaksin.
He added that Lukoils Nizhny Novgorod base oil plant closed because the refinerys primary Solvent Neutral 150 product exported via Baltic ports had been in low demand in Europe in the last couple of years. Varaksin also confirmed that Russian Solvent Neutral 150 has been losing market share in Europe and in the neighboring markets for another reason: high-quality base oil product competition from European rerefineries, along with competition from the virgin base oil producers.
Looking for Markets
Turkey has been one of the largest export destinations for Russian base oils, but the countrys imports from Russia fell 44 percent in 2014, compared to the year before, according to Integral Petroleum. It was caused by multiple factors such as the state-imposed 3.7 percent import duty for Russian base oils introduced in 2014, 36 percent growth in base oil imports from Greece compared to 2013 – making this country the top importer to Turkey for the first time – low demand in the European Union and a 10 percent slump in Turkish car sales in 2014, Varaksin said.
He added that access to base oil produced in the Turkmenbashi refinery is secured in Turkey because it is exempted from the 3.7 percent import duty. Additionally, Turkmenbashis 60,000 to 80,000-t/y base oil capacity has Solvent Neutral 180 and 380 quality, characterized by bright color, low sulfur and high viscosity index.
At the moment, 13 refineries from the former Soviet Union offer base oil for export. Besides nine Russian plants, Belarus, Azerbaijan, Uzbekistan and Turkmenistan are home to one plant each.
A blip in Russian base oil exports occurred in India, and the country has become a promising destination for Russian exports in the last couple of years. In the second quarter of 2014, Russian exports to India peaked at 41,000 tons, but in this years first quarter, we lost India after it switched to Korean, American and United Arab Emirate supplies because of their higher quality and competitive prices, Varaksin said. Russian base oil supplies to India resumed in April, prompted by the Black Sea prices, which were the worlds lowest … at that moment.
Russian base oil marketers have increasingly used the Black Sea port of Novorossiysk after Russias annexation of Crimea resulted in the closure of the peninsulas railway transportation and idled the Feodosia port as the war in Eastern Ukraine entered in a stalemate. Novorossiysk is Lukoils primary base oil export hub, and it has seen a 4 percent growth in export volume from 80,000 tons in 2013 to 83,000 tons in 2014, he confirmed. The Baltic Sea ports of Riga, Lijapaja and Kaliningrad have also saw increased use in 2014 compared to the year before.
Varaksin indicated that Novorossiysk and the Baltic ports are Russias transportation hubs for
export to distant destinations. He said their increased use is at least one positive result since Russian base oil exports slumped 12 percent in 2014, according to Integral Petroleum. Another positive trend is that some Russian base oil marketers started to offer their products in flexi containers, which is considered a very convenient and safe way to ship and deliver base oil to the end user, he concluded.