Russia in the era of change A review of the Russian lubricants market and trends Presentation to: The 20th ICIS World Base Oils & Lubricants Conference London, UK Park Plaza Westminster Bridge February 17-19, 2016 www.citek.ru
About the Company 1994 Chevron became our first client. We published the first edition of InfoTEK Outlook Russian Refineries, Petrochemical and Gas Processing Plants. We were the First in Russia who studied the demand for oil, all petroleum products and petrochemical products. 1993 The company was founded. We published the first number of InfoTEK Oil & Gaz Journal. 2000 All the major Russian oil companies have become our clients. 2013 We celebrated our 20 year anniversary. Today I give a presentation for you in the beautiful city of London. 2007 We began to organize conferences. 20.01.2016 We have completed over 500 consulting projects for the clients, including the lubricants market for Tatneft. 2
InfoTEK-CONSULT is a leading Russian consulting and market research company. Our clients: Our expertise : Petroleum products (naphta, gasoline, diesel fuel, gasoil, LPG, mazut, petcoke, asphalt, base oil and lubricants, paraffins, etc) Additives for lubes and fuels, catalysts Petrochemical and Chemical Products Hydrocarbon feedstock for processing (oil, gas, NGL) 3
Russian Refineries, Petrochemical and Gas Processing Plants Outlook 22nd edition, 549 pages, 90 plant The report provides a comprehensive analysis of Russian downstream, focusing on key trends, developments, challenges and business opportunities For all Refineries, Petrochemical and Gas Processing Plants are shown: Processes, licensors and catalysts producers, capacities, flow diagrams, products production for 90 Russian plants, refinery upgrading programs Base year for the study will be 2015 with projections for 2025 The Russian language edition will be in August 2016, English version (after your order not later than in Aug) will be in Spt 2016.. 4
Russian GDP, trillion $ In some sectors (e.g., agriculture, production of goods for the population, export-oriented industries) GDP has been increasing due to the sanctions, antisanctions and the rising dollar. 2,1 1,9 A positive impact on the economy was provided by the establishment of the Eurasian Economic Union given its duty-free trading The Russian government plans: 1,2 1.2 1.3 1.4 To reduce costs, including the Federal budget, and increase labor efficiency Oil & Gas export 2013 2014 2015 The GDP decline is due to many causes, chief among which is the oil price 2016 2017 2018 To invest in the expansion of production and infrastructure To increase the export of finished goods and high-tech products To develop small business Urals $/bbl 108,0 97,6 53,0 40,0 40,0 40,0 Source: IMF 5
Government policy affecting base oil and lubricants Starting from 2015, the Russian Government has changed the tax legislation for oil and gas industry to stimulate Refinery Upgrading and to increase the depth of crude processing. New Export Duties 2015 2016 2017 Crude Oil* 42% 36% 30% Black Oil 76% 82% 100% Base Oil and Lubricants 48% 40% 30% *for crude oil % of world price **for petroleum products % of crude oil duty fee The essence of the changes is to gradually increase tax on mining by 1.7 times and the reduction of customs duties on crude oil 1.7 times, and on light petroleum products 1.7-5 times. Also, the excise tax is reduced by 2.2 times. Customs duty on black petroleum products will have to rise to 100% of the customs duties on oil by 2017. The duty reduction enhances the margin of production of base oils in Russia. This creates additional investment opportunities for modernization. And it is profitable for the industry, even at low oil prices. Of course, each company has its own situation, and the main question is the demand. At the end of 2016 it was decided to freeze taxes for one year and the preservation of export duties on the level of 2015. 6
There are key interdependent drivers that have significant impact on Base Oil and Lubricants Business in the world and in Russia: 1 Consumers Consumers are the driving force behind the changes, they require greater efficiency, comfort, lower noise level, longer periods between oil change, as well as products with improved consumer qualities, reducing operating costs, especially higher fuel efficiency. 3 Equipment Equipment manufacturers, in an effort to gain a competitive advantage, develop new technical solutions to satisfy consumers. 2 Environment At the same time, the results of the global trend to reduce the harmful emissions and CO2 are the new legislative requirements and government initiatives aimed at changing the characteristics of the produced equipment, which must comply with the new emission standards, and also to allow the use of alternative fuels. 4 Globalization All this happens against the background of globalization, which further complicates the Base Oil and Lubricants Business, but also has a significant impact on the Business economy. 7
Demand for base oil in Russia is determined by the demand for finished lubricants. At the present time, for economic reasons, the demand in vehicles and industry segments is shifting towards the Russian lubricants. Key drivers in the demand for finished lubricants: Vehicles Update of vehicles and related change of requirements to quality of consumed lubricants Change of structure of consumed oils in the direction of increasing share of modern lubricants from Group II and III The growth rate of exploitation and the increase of service intervals of vehicles The Fleet growth Industry The trend of industrial production Reducing the consumption of lubricants due to the use of more economical equipment. Besides during the crisis the low price plays a significant role Due to this intensive substitution of imported goods with domestic analogues is expected 8
2015-Base oil capacities 2213 000 tons Total Russia 000 tons 90 132 Gr I Gr II Gr III 2,4 mln tons Rosneft 665 Gr I -Yaroslavl After the collapse of the Soviet Union the base oil production capacity of the Russia was 4.2 million tons. Such a capacity was not needed. Yaroslavl In 1990-2014, was closed 1.5 million tons of capacity in Ryazan, Orsk, Tutaevo, and Ufa. Novokujbyshevsk Volgograd Nizhnekamsk Ufa Perm Gazpromneft 375 Gr I Omsk In 2015, production of base oil of II and III groups in Nizhnekamsk has begun. Capacity is 90 thousand tons of base oil of group II and 100 thousand tons of group III. In 2015 the production of base oils of I group in Nizhny Novgorod was closed. Tatneft 90 100 LUKOIL 923 32 Basneft 250 Angarsk Currently production capacity for base oil of the Russian Federation is 2.4 mln tons and was used by 86%. Gr II Gr III Gr I Gr III Gr I 9
Upgrading Results 000 tons Nizhnekamsk - Perm Volgograd Angarsk Novokujbyshevsk Omsk Yaroslavl Ufa Russia Total Gr I Gr II Gr III Gr IV Total Comments 280 reduced 180 reduced 120 reduced 73 reduced 280 no changes no changes 1433 reduced No changes No changes 10 resumed - - - 180 new 128 new 217 new 150 new - 75 32 new 130 new 50 new 100 new - - - 765 487 - - - - - 10 resumed 200 280 reduced 435 reduced 280 reduced 420 480 350 250 no changes 2695 In April 2016 the upgrading of lube plant will be completed. In 2016 it is planned to produce 3 thousand tons Group IV (PAO), and since 2017 to produce 10 thousand tons. In the coming years the plant will process sweet crude oil that do not require deep hydrotreating and to produce base oils Group I. By 2019 it is planned to introduce the Russian developments aimed at improving the quality of base oils Upgrading was planned to finish in 2017. Deadline postponed to 2020. Upgrading was planned to finish in 2014. Deadline postponed to 2020 due to the delayed start-up of hydrocracking. In 2018 it was planned to complete the upgrading and produce 200 thousand tons/year of base oils of II and III groups. Due to the delay input hydrocracking start may be shifted to 2020. In 2017 it was planned to complete the upgrading and produce 100 thousand tons/year of base oils of group III. The construction goes according to plan. InfoTEK expects that by 2020 will be implemented two projects in Nizhnekamsk (PAO) and in Yaroslavl (Group III). Base oils production capacities will be by 11%. 10
Blending capacities Oil companies detached blenders 5 plants 226 thousand tons There are 56 blending plants in Russia with total capacity of 730 thousand tons. Only 16 plants are producers of automative lubricants. Some independent blenders closed. Others produce industrial lubes, greases and coolants. Russian oil companies own about 31% of the capacity. The share of independent is 69%, including capacities belong to Shell и Fuchs. Actual production of lubricants blending plants by in 2015 was only 508.4 thousand tons. So the capacities was used by 70%. Independent blenders 51 plants 504 thousand tons Oil companies detached blenders Capacity Production 226 197.4 Independent blenders 504 311 Fuchs 40 9 Shell 180 52 000 tons 11
2015 Russian lube balance The finished lubricants import share is 83%, export share 37%. Import is decreasing as in Russia it is more profitable to buy domestic finished lubricants due to US dollar rate Base oil for blending and export 000 tons Production Import Export Consumption Gr I 788.6 12.4 635.4 165.6 Gr II 20.0 7.4 13.7 13,7 Gr III 38.0 41.0 10.1 68.9 Gr IV - 0.9-0.9 Gr V - 1.0-1.0 Given that we expect that new blendings of some importer are to appear in Russia Production 26% 2% 42% 30% 1% 18% Motor Transmission Other automotive Industrial Base Export 18% 63% Total 846.6 62.7 659.2 250.1 Finished lubricants Production Import Export Consumption Import Consumption Motor 751.6 208.5 185.6 774.5 Transmission 50.8 43.0 11.5 82.3 Other automotive - 3.0-3.0 Industrial 621.8 56.7 189.7 488.8 Total 1424.2 311.2 386.8 1348.6 55% 17% 12% 1% 15% 55% 36% 6% 0.2% 12
2015 Russian base oil export destinations 660 thousand tons of base oil are exported from Russia, generally to Europe (more than 50%). Base oil partially goes to blending plants of Russian companies. As you are aware, Lukoil owns production facilities in Romania, Austria and Finland. Gazprom owns production facilities in Italy. EU 339 thousand tons 51% Ukraine 7 thousand tons 1% Moscow Base oil 000 tons % Gr I 635.4 96% Gr II 13.7 2% Gr III 10.1 2% Total 659.2 100% Турция 146 thousand tons 22% Africa 40 thousand tons 6% Others 17 thousand tons 3% Asia 111 thousand tons 17% 13
2015 Base oil import to Russia Base oil 000 tons % Base oil import to Russia is increasing significantly, although production facility in Nizhnekamsk has been put into operation. Import of base oil in Russia has more than 4 times as compared to 2010 (incl. Group III increase in 13 times, others in 2 times). The reason is the growth of demand for finished lubricants of Russian producers, which also includes Fuchs and Shell. Also about 300 000 tons of finished lubricants are imported to Russia. Gr I 12.4 20% Gr II 7.4 12% Gr III 41.0 65% Gr IV 0.9 1% Gr V 1.0 2% Total 62.7 100% Other Gr III 14.2 77% 2010 62,7 35% 65% 2015 14
Speaking about the future of the lubricants market we are faced with unknown: What will happen to the economy? What will be the price of crude oil? Uncertainties create opportunities. Welcome to Russia 15
InfoTEC-CONSULT is a Russian leader in insight for crude, gas, petroleum products, petrochemical and chemical products. We use a foundation of proprietary data and models to analyse and advise on companies and markets. Our experienced team is closely connected with our clients and markets We have been a trusted source of knowledge and forward-looking insight for over 20 years. Our insight helps clients to identify new opportunities, define strategy, and improve their Performance. If you require additional information about the contents of this document or the services that InfoTEK- CONSULT provides, please contact: Kandelaki Tamara Managing Director, professor For more information, visit www.citek.ru Our team is always ready to discuss possible projects on tel: (495) 669-70-07 or consult@citek.ru Headquarters: InfoTEK-CONSULT Pavlovskaya 6 Moscow, 115093 Russia www.citek.ru
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