No. 2, 2009

LUKOIL-BUNKER assumes the leading position on Russia’s market for vessel fueling

Bunkering, or the filling of vessels with fuel and oil, is one of the most promising segments of the petroleum products market. A long experience of working in the field, along with a reputation as a serious business partner, help LUKOIL-BUNKER maintain its position as one of Russia's most rapidly developing bunker companies.

A promising market

The market for bunker services rightly holds an important place in the system of worldwide trading in petroleum products. Around 90% of the volume of all global cargoes is shipped with the help of sea- and river-going vessels. Bunker provides the fuel necessary for the entire world's shipping, which - according to estimates by a number of experts - accounts for 10-20% of global GDP.

Based on different estimates, the volume of fuel sales on the world bunker market is in excess of 300 million tons per year. According to forecasts by certain analysts, the need of the world's merchant fleets for bunker will reach a level of 380-400 million tons a year by the year 2020.

Over the past decade, Russia's bunker market has demonstrated consistent growth at a level of 4% per annum. In the past four years, the volume of the Russian bunker market rose steadily by an average of 100-150 thousand tons per month.

The Russian market's overall volume of vessel fuel - including riverine bunker (approximately 900,000 tons per navigational period), for which mostly light fuel is needed, - exceeded 7 million tons in 2008.

It is largely the operations of bunker companies that are making Russian ports more attractive to shippers. Prices for bunker fuel are, as a rule, lower than in Western ports. From the point of view of bunker, the largest and most dynamic ports in Russia are St. Petersburg and Novorossiysk. The volume of sales for vessel fuel on the bunker market in St. Petersburg's Grand Port was more than 1 million tons in the first six months of 2008, showing growth of 16%.

In Russia, bunker remained outside the large oil companies' sphere of interests for quite a long time, and the market was dominated by a multitude of small companies. High profitability, however, forced the majors to turn their attention to this attractive segment of the fuel business.

Taking a leading position

LUKOIL was the first leading Russian company to get involved in bunker. The oil giant entered the St. Petersburg bunker market in 1998. In 1999, LUKOIL Neva, a company dedicated exclusively to bunker, was set up in St. Petersburg. Within a year, the company became a leading supplier of fuel to all of Russia's northwestern region. In 2005, the geography of the business extended to the ports of Lomonosov, Kronshtadt, Vyborg, Murmansk, Kaliningrad, Svetly, Vladivostok and the Vysotsk marine oil terminal. The retail sales of vessel fuel exceeded 650,000 tons.

In 2008, the company was renamed LUKOIL-BUNKER. By this time, LUKOIL had extended its operations to the cities of Astrakhan, Rostov, Volgograd, Saratov, the port of Olya, and the Azov and Black Sea basins (Azov, Yeysk, Taganrog, and the port of Kavkaz). According to the figures for 2008, retail sales of bunker fuel were in excess of 710,000 tons.

Last year was quite eventful for the company. In June, LUKOIL-BUNKER won a tender to bunker the ice-resistant stationary offshore loading jetty and support vessels of the Varandey terminal. The same year, the company entered the international bunker market, setting up its own office in Bulgaria to ensure deliveries of fuel to the vessels of Bulgaria's river and sea ports.

Today, the company's fleet consists of wholly-owned and rented specialized bunker tankers of various types and tonnage, with the help of which LUKOIL-BUNKER supplies fuel and lubricants for any kind of vessels. It should be noted that LUKOIL-produced marine oils have successfully passed tests in the laboratories of leading world producers of marine engines, such as MAN B&W, Wartsila, and MTU, and at Chevron's testing center for marine oils, proving that the operational quality of LUKOIL's oils is of the highest standard.

All barges are outfitted with a selection of state-of-the-art equipment for taking samples and monitoring the quality of petroleum products in accordance with international ISO standards. Tankers are equipped with blenders - devices that allow the intermediate petroleum products mix to be expanded swiftly and pumped into other vessels.

LUKOIL-BUNKER's greatest and most indisputable advantage is the mighty productive potential of the Company, operating on a well to wheel basis.

Since the production, refining, transportation, storage, and delivery of petroleum products is done within the confines of one company, bypassing intermediaries, LUKOIL-BUNKER guarantees the high quality of its goods and offers a full range of marine petroleum products at the best possible price, providing reliable deliveries that are always on time.

The company works closely with and regularly trains ships' crews, maintains high-tech equipment, and keeps a close watch on the quality of fuel and the promptness of its delivery. The LUKOIL-BUNKER team is a collection of people with a great deal of experience in the field of vessel bunkering, shipping, and selling marine petroleum products. The company has a reputation for reliably delivering quality petroleum products and providing a high level of vessel servicing.

Under conditions of growing competition

The global bunker market is going through an era of change: fuel quality requirements are growing stricter, and bunker companies are switching over to expensive twin-hulled tankers. As a result, smaller companies are being squeezed out of the market. Experts believe that Russia's bunker market will not be able to remain on the sidelines under these conditions. The economic recession will only facilitate the further consolidation of the bunker business, and the bunker market will be rearranged in favor of high-tech companies and large oil corporations.

Competition is growing in the bunker business. In May 2008, Rosneft, which earlier provided bunker services on a relatively small scale, created a special subsidiary, RN Bunker, to carry on its bunker operations. Beginning in 2007, the company embarked on a program to develop a centralized bunker business across the territory of Russia. Rosneft intends to develop its bunker business in the deep-water ports of the Primorsky and Khabarovsk Territories, on Sakhalin, on the Black, White and Barents seas. It is also targeting fishing expeditions and Russia's inland waterways. The company plans for the near future include supplying bunker fuel to the ports of Tuapse, Syzran, and Rostov.

Farther down the road, Rosneft is preparing to expand the range of services offered by its marine terminals, and to use them to create state-of-the-art bunker centers; to develop the production of bunker oils at the company's refineries; and to increase annual sales of its bunker petroleum products to 10 million tons by 2020.

A subsidiary of another major company, Gazpromneft Marine Bunker, intends to capture up to 30% of the Russian bunker market by 2010. In 2009, the volume of its petroleum products sales should, according to company plans, reach 1.5 million tons per year.

Nevertheless, LUKOIL-BUNKER is prepared for competition. The high quality of both its bunker fuel and its level of service have created for LUKOIL the image of a reliable bunker company. Many large shipping companies, traders, and brokers with internationally-known names, based in Russia and abroad, are permanent LUKOIL-BUNKER clients, and their number is constantly growing. More than 100 firms are among LUKOIL-BUNKER's permanent partners and buyers of its petroleum products. They include some of the largest consumers and petroleum products traders in the Russian northwest. In addition, the company is participating in the Northern Stockage programs, making large wholesale deliveries of petroleum products to Russia's northern regions. These include riverine shipments along the Lena and Yenisey rivers, and maritime deliveries over the Northern Sea Route.

The sales sector is of special importance to the company so far as guaranteed channels for the marketing of petroleum products are concerned. In developing this sector, LUKOIL is aiming to create added value by marketing its products directly to the end consumer.

During the period of high oil prices, LUKOIL was busily acquiring sales networks of gasoline filling stations and expanding its marine and aviation bunker business. Time has demonstrated the correctness of the company's strategy. Today, with crude oil prices low, it is the downstream segment that is the oil companies' profit-making center.