No. 4, 2009

Oil of Russia magazine talks to Alexey Kovalenko, General Director and Chairman of the Management Board of JSC LUKOIL-Odessa Refinery

Within the structure of the LUKOIL Group, the Odessa Refinery holds a special place. LUKOIL Odessa Refinery is a key element of the downstream strategy of the Company in Ukraine. In 2008, after a three-year overhaul, it started up again and, over the last year, managed to consolidate itself in the role of one of the leaders in the Ukraine's fuel and energy complex.

Q: In 1999, LUKOIL acquired the controlling block of shares in the Odessa Refinery. What has changed for the plant since then?

A: The advent of a strong and reliable owner, LUKOIL, was a turning point in the plant's history. The fact is that, until the Russian oil industry leader appeared in Odessa, the refinery was suffering serious difficulties in obtaining supplies of raw materials and with its capacities utilization. At that time, moreover, its depth of refining was the lowest of all the Ukrainian enterprises. Nor did the refinery's staff feel secure, since there were delays in paying salaries. LUKOIL's arrival meant guaranteed supplies of oil and employment of the team, social protection for all the employees.

The second important factor is technical re-equipment of the enterprise. The Company invested in the order of $200 million in reconstruction of the plant's capacity, construction of a new isomerisation plant for producing high-octane gasoline, installation of visbreaking and re-tooling of existing installations.

Today we produce EURO-4 diesel fuel and EURO-3 standard gasoline, which is successfully sold at LUKOIL network gasoline filling stations in Ukraine. The refinery's output is highly appraised by consumers and LUKOIL means a quality brand here. After its reconstruction, the plant very soon regained the efficiency of its production.

I should mention the excellent work done by the staff and our contractor

organizations. It is indicative that, even during the crisis, our workers, as well as those of the plant's servicing partner companies, feel confident, having jobs that are well paid by the country's standards.

Q: How would you describe the position of the LUKOIL-Odessa Refinery on the refining market of Ukraine?

A: The volume of oil extracted in Ukraine is insufficient to supply the refineries on the territory of the Republic with local raw materials. Moreover, the country imports not only oil, but also petroleum products. About 50% of the gasoline and diesel fuel are imported into Ukraine. The country's potential for building up production of its own motor fuel is tremendous.

Our plant is logically geared to the domestic market. We strive to sell the maximum possible quantity of petroleum products to local consumers, since this is significantly more profitable than exporting.

I should mention the convenient geographical location of our refinery and its proximity to the Black Sea. At the same time, the oil is supplied to the plant over a pipeline, without requiring transportation by rail or tanker. The existing "refinery-road transport-consumer" logistic scheme makes it possible today to sell the petroleum products produced by the plant profitably on the domestic market. The fact is that the population in the Odessa, Kherson and Nikolaev Regions, located in the vicinity of the refinery, number about 10 million.

Today the plant has only one drawback - it lacks its own oil terminal. We are provided with services here by the Odessa Seaport, together with the company Sintezoil. As a consequence, we incur certain costs, but this is not all that critical owing to our focus on the domestic market.

LUKOIL and TNK-BP (the Lisichansk Refinery) are the companies developing their plants most actively in the country. The Drogobych, Nadvornyansk and Kherson refineries are virtually at a standstill today. The Kremenchug Refinery is working at only 20-30% of its design capacity of 18.6 million tons a year. The Lisichansk Refinery does not plan to raise refining to more than 4 million

tons a year (given its design capacity of 16 million tons a year). Yet we are striving to operate at our full capacity of 2.6-2.8 million tons a year. At the same time, we so far have no incentive to expand production at all significantly. The fact is that Ukraine applies an "excise approach" to gasoline - the state has no tariff distinction for excise depending on the quality of the product. I should note, it is true, that a more progressive tax approach is taken to diesel fuel.

Q: To what extent has the reconstruction deepened the refining?

A: The reconstruction of the production capacities has entailed 23% deeper refining, bringing it to about 75%. First of all, this has made is possible to produce considerably more vacuum gasoil, this being the refinery's main export, and to increase somewhat the output of gasoline and diesel fuel for the extensive domestic market.

Q: How will the start-up of the power generation unit at the end of 2009 affect the refinery's operations?

A: The power generation unit means, primarily, energy security. First, any refinery requires special safety among its priorities. Ideally, it should have two independent sources of power - one from external grids and the other - its own source. Until recently, our only power source was the Moldavskaya HPP, which engendered certain risks in the event of possible interruptions to the power station's operations.

Second, the boiler plant at the refinery was built at the end of the 1930s. Since then, it has been modernized on several occasions but, even so, it remains the most "problematic zone" from the environmental point of view. In addition, even back in Soviet times, the boiler plant was allocated the function of providing heating to residential premises located relatively close to the refinery.

So we were faced with the choice of either fundamentally reconstructing the boiler plant or building a power generation unit to be fuelled by the black oil produced during visbreaking.

Once the power generation unit is started up, the refinery will use the steam and electric power generated, while the boiler plant will be put into "cold storage". Start-up of the power generation unit will mean uninterrupted supplies of heat and electricity to the refinery. Moreover, LUKOIL will gain an opportunity to sell considerable volumes of electric power to Odessa.

Let me note, by the way, that, in contrast to the boiler plant, powerful purification equipment will be installed on the power generation unit.

Q: What else is the refinery doing to minimize the man-induced impact on the environment?

A: LUKOIL Group enterprises traditionally pay considerable attention to the environment and we are no exception here. A substantial share of the millions invested in reconstruction of the plant has gone into environmental programs.

One of the main spheres in which the plant is working to improve the state of environmental safety in Odessa and the south of Ukraine in general is production of environmentally clean products. Tetraethyl lead is no longer used at all as a component in high-octane fuels.

The plant's nature-protection activities are geared to reducing pollution of the atmosphere, surface and ground water and the soil and to improving the system for management of environmental safety.

Back in 2003, the refinery introduced an environmental management system in accordance with the ISO 14001 international standard. The plant has been certified by the Bureau Veritas. In 2009, LUKOIL-Odessa Refinery received confirmation of its high environmental standards.

As a result of using new, resource-saving technologies, the quantity of pollutants discharged into the atmosphere has been reduced by about 30% since 2000. This was achieved by equipping reservoirs with Ultra-Float booms ensuring a reduction in light fraction evaporation and reducing the volume of emissions through breathing apparatus by 95%. A new loading rack for light petroleum products has been built, the discharge technology ensuring hermetic filling of road tankers and thus preventing evaporation of gasoline fumes.

For the purpose of exercising control over sources of emissions, the refinery has a fixed and a mobile sanitation laboratory for environmental protection, with the latest equipment.

The plant's main water sources are the city water main and artesian wells. Since 2000, the volume of potable water consumed has fallen to 150 thousand m3 a year. The Odessa Refinery uses 0.15 m3 of water per ton of oil refined, this being one of the lowest indicators for refining in the CIS.

The plant uses a water recycling system. Purified waste water leaving the ozone treatment unit returns to replenish the recycling systems.

Q: From the point of view of social responsibility of business, how important is the Odessa Refinery's role for Odessa?

A: First of all, being not the biggest enterprise in Odessa, the plant is the city's biggest taxpayer.

Moreover, right from the start, LUKOIL-Odessa Refinery assumed social obligations to assist a number of children's institutions in Odessa and has provided financial support to Russian Orthodox Church organizations. For instance, the plant participated in restoring the Cathedral of the Transfiguration of Christ, the biggest Russian Orthodox church in Odessa and a symbol of the city. The plant has also sponsored many local festivals.

Even so, logically, from the time the refinery came to a halt for reconstruction in 2005, owing to the enterprise's limited free funds, charitable assistance had to be temporarily suspended. However, the plant's personnel continued, within the limits of their own funds, to assist their charges on a personal basis, particularly our "oil friends" - a boarding school.

As we reach a higher level of returns, we are again undertaking targeted charitable assistance. The main "social" cost item at the moment is to move the residents from blocks close to the refinery. The fact is that LUKOIL inherited the problem of a so-called buffer zone. For many years, even back before the Russian company came on the scene, people lived right next to the plant. The city recently allocated us a site for building housing and we have undertaken this difficult project.

Q: What are the plans of LUKOIL-Odessa Refinery for the near future?

A: Stable development, fulfillment of the production plans determined by the management of LUKOIL and efficient, profitable operations. The last of these is no simple matter under the conditions of the economic crisis, but we are holding our end up.

LUKOIL President Vagit Alekperov set the task of making specific proposals for further development of the refinery. In the very near future, the plant's long-term strategy will be determined - to construct new facilities, increase refining depth, increase output volumes.

From 2011, EURO-4 standards will come into effect in Ukraine. By that time, we plan to bring up the quality of all the motor fuels produced by the plant up to the highest European standards. Besides, LUKOIL-Odessa Refinery already produces EURO-4 diesel fuel.

The Odessa Refinery is a worthy representative of LUKOIL in Ukraine and we are convinced that, in the future, too, the plant will retain leading positions in the country's fuel and energy complex.