No. 1, 2010
Vladimir Igorev
LUKOIL’S BALTIC SHORES
LUKOIL strengthens its leading position in the Baltic countries under conditions of intense competition in the petroleum products market
A leader in Russia's economy, LUKOIL operates profitably in the East European Baltic nations' fuel market through its LUKOIL Baltija Group of subsidiaries, comprising four companies: LUKOIL Baltija (Lithuania), LUKOIL Baltija R (Latvia), AS LUKOIL Eesti (Estonia), and Teboil (Finland).
The Lithuanian gambit
LUKOIL Baltija was set up in the Republic of Lithuania in November 1992. At the start of its operations, the company was involved exclusively in coordinating the Russian crude oil trade and refining in the Baltic region. Later, it began purchasing oil and shipping it to refineries, while the finished products were sold on the Lithuanian and foreign markets. In 1994, LUKOIL Baltija opened its first filling stations in Lithuania.
During LUKOIL's initial period of operations in the Baltic countries, the local media began circulating various reports based on Russophobic stereotypes of the Cold War years. "Seventeen or eighteen years ago, when we were taking our first steps here, we really did hear a lot of skeptical views on our prospects. Even our direct competitors, Statoil, Neste, and Shell, didn't take us seriously. They were all soon convinced, however, that LUKOIL was a modern, progressive company. And we overtook our competitors quite quickly, too," recalls Ivan Paleychik, LUKOIL Baltija Board Chairman and LUKOIL's Presidential Representative in the Baltic countries.
Nowadays, the local press coverage of LUKOIL's operations is indeed quite objective, and a large part of the population is quite positive toward the Company.
The Baltic countries' fuel market is exceptionally saturated with both large foreign companies and small local firms. With reference to the majors, Statoil and Neste are widely represented here along with LUKOIL. In the recent past, this market was also part of Shell's sphere of interests, but its Baltic assets have now been transferred to Statoil. The Hydro-Texaco joint venture has also abandoned the market due to intense competition. Today, there are 332 companies licensed to carry on retail and wholesale petroleum product trade in Lithuania alone. In a country of three million inhabitants, there are 850 filling stations. In Vilnius, for example, one can sometimes find three or four gasoline stations at a single intersection, all sporting different brands.
In Lithuania, LUKOIL's nearest competitor, Statoil, has 70 filling stations, while the Russian major has 118, or 14% of all local gasoline filling stations. LUKOIL Baltija's share of sales exceeds 23%, considerably greater than that of other market players, and the company isn't about to rest on its laurels.
LUKOIL's main supplier of gasoline and diesel fuel in the Baltics is the Mazeikiu Nafta refinery. Around 70% of the fuel sold at company filling stations comes from it, due primarily to the convenient logistics and consistently high quality of the refinery's products. LUKOIL Baltija and Statoil get some of their gasoline jointly via marine terminals; to a certain degree, this allows to constrain Mazeikiu Nafta's monopoly in the region. Even so, LUKOIL products and refineries are penetrating the local market. Some 30% of the diesel fuel sold at Lithuania's gasoline stations is produced at LUKOIL refineries in Nizhny Novgorod and Perm. In the foreseeable future, says LUKOIL Baltija Board Chairman Ivan Paleychik, LUKOIL gasoline will also manage to offer some healthy competition to locally-produced fuels.
LUKOIL intends to further build up its presence in the Baltic fuel market as well. At the same time, no major increase in its Lithuanian market share is expected, since antimonopoly laws set a ceiling of 30%, and we have so far managed to acquire 23-25% of the market. Meanwhile, in Estonia and Latvia, where LUKOIL has been operating since 1993, the company has yet to win a 20% market share. At the moment, LUKOIL Eesti (Estonia) owns around 40 filling stations, while LUKOIL Baltija R (Latvia) owns 45. LUKOIL is actively working to expand its network of filling stations through acquisition, renting, and new construction. The time is right for this, as there are a great many offers on the market.
At the same time, the current financial crisis is having a palpable effect on the Baltic market for petroleum products. Overall, demand for petroleum products has now fallen by around 23%, even though this indicator isn't quite so discouraging in LUKOIL's case (18%). The main cutbacks have been at the expense of the Company's legal entities.
It should be emphasized that increases in Lithuania's excise taxes on gasoline and diesel fuel had been detrimental since they were introduced in early 2009. Prices were consequently higher in Lithuania than in neighboring countries, and growing numbers of Lithuanian, Latvian, and Estonian truckers (whose position in Europe is very strong) began filling up in Poland. The government, however, realized that the earlier rates were a miscalculation, and excise taxes returned to their previous levels in August 2009. More and more truckers have subsequently begun filling up in Lithuania once again.
In the Baltic countries, LUKOIL has undertaken impressive consumer acquisition programs. Both private individuals and legal entities can use club cards to get discounts, accounting for around half of all fuel sales. Weekly marketing promotions are held at LUKOIL filling stations, with prizes going out to lucky customers.
Ivan Paleychik lists three reasons why the LUKOIL Baltija Group consistently manages to maintain its position: the unfailing quality of its fuel, the high level of its service, and the affordability of its prices.
In the Land of a Thousand Lakes
LUKOIL arrived in Finland in 2005, after it acquired the assets of Teboil and Suomen Petrooli, two Finnish traders in petroleum products. Today, LUKOIL is represented in Finland by its subsidiary OY Teboil Ab, the country's oldest oil company which celebrated its 75th anniversary in 2009.
At the moment, Teboil has 455 filling stations. In the first ten months of 2009, sales were in excess of 1.7 billion euros, making Teboil one of LUKOIL's largest foreign outlets. With 26% of the Finnish market, Teboil is in second place after government-owned Neste. LUKOIL's own petroleum products (mainly diesel fuel and fuel oil) account for approximately 8% of all the fuel sold at Teboil stations.
In addition, the share of ancillary goods sold at Finland's filling stations is unparalleled anywhere else. Generally speaking, all of the Company's Baltic affiliates are by this criterion leaders among LUKOIL's petroleum product supply outlets. In Finland, however, the volume of ancillary goods sales at gasoline stations (various snacks, beverages, auto accessories, tanks of liquefied natural gas, and so on) is especially high. The reason for this is the country's system of family farms. Most people live in isolated rural locations. Filling stations with adjacent cafeterias and shops are important focal points of the nation's social life, and people even gather at them to celebrate major holidays.
Teboil oils, produced at the modern high-tech refinery built in the Finnish city of Hamina in 1992, are a best-selling item both in Finland itself and in Russia's Northwest. It is also in demand in Estonia, where Finnish products are traditionally popular.
It should be noted that the volume of oil consumption in the Baltic countries has gone down considerably in recent years. It is now dozens of times lower than it was in the 1990s. This is primarily due to many of the large-scale manufacturers who had traditionally used large quantities of lubricants having simply gone out of business. The only major customers left are the railroads, the merchant marine, and a number of enterprises, among which is the Mazeikiu Nafta refinery. At the same time, many customers have historically used lubricants produced in Russia. For technical reasons, and because of their attractive prices, they would still rather buy these oils, and under the LUKOIL brand in particular.
Environment-friendly fuel
LUKOIL's favorable prospects continue in the area of marketing natural gas motor fuel in the Baltic countries. The use of liquefied natural gas as a motor fuel is especially popular in the Baltics. The price of butane-propane mix is about half that of 95-octane gasoline, thanks largely to the low excise taxes on LNG.
In Lithuania, 99% of all service stations are equipped for filling automobiles with liquefied natural gas, and LUKOIL is once again the indisputable leader in this line of business. In the Baltic countries, by the way, the Company also pioneered the setting up of filling stations that dispense LNG.
LUKOIL's filling stations are supplied with very good quality natural gas containing a high percentage of propane. Its use guarantees low fuel consumption and high engine power.
Earlier, company employees filled tanks with natural gas. As of the year 2009, however, in accordance with EU standards, self-service was introduced at LUKOIL Baltija natural gas pumps. Only state-of-the-art customer-friendly equipment is used, so they encounter no difficulties in filling up.
LUKOIL Baltija has also been energetically marketing fuel of this sort in recent years. In line with EU policy, market players simply must use fuel bioadditives in the Baltics and in Finland. These are 5% RME (rapeseed oil methylester) for diesel fuel and 5% ethanol for gasoline. A system of this type has been in use in Lithuania for two years now, and came into force in Latvia in September 2009.
LUKOIL Baltija foresaw these changes, and its infrastructure was earlier adapted to accommodate the new standards. All of the Company's tank farms were reequipped to blend fuel, and can now even offer such services to other market players, including the Mazeikiu Nafta refinery. There is no shortage in the supply of either rapeseed oil or bioethanol, since the farming community produces them in abundance.
Incidentally, LUKOIL-Baltija's short-term plans provide for selling E85 fuel (85% of ethanol + 15% of gasoline) at several filling stations to boost the Company's image and profits. This fuel can easily be found in the Nordic market, and Statoil is selling its small batches in the Baltic countries as well. LUKOIL-Baltija is adopting global best practices in a bid to maintain its market edge in the region.
Good deeds and business
The LUKOIL Baltija Group finances various cultural events and organizations, charity projects, and sporting competitions. The difficult economic situation has naturally forced certain changes, and the amount of sponsorship assistance has shrunk somewhat. Nevertheless, the Company has continued its main lines of charity work: helping solve the social problems of children and young adults and supporting cultural institutions.
In Lithuania, LUKOIL Baltija is helping with the Children of the Millennium project (Lithuania celebrated the 1000th anniversary of its name in 2009), encouraging the future efforts of gifted children who won a television competition by awarding them valuable prizes. Their classmates also receive free excursions to historical sites around the country. In addition, LUKOIL Baltija has set up several scholarships for students at the Higher School of International Business. The Company believes that young people should be helped to take the first steps in developing their talents, or they might be lost to the world forever.
This year, LUKOIL Baltija also provided assistance to the University of Klaipeda's schooner crew, who took part in the traditional International Tall Ships' Race. The event's mission is close to the Company's values: its aim is the spiritual and physical development of young adults, character building, attracting a new generation to a healthy way of life and the marine professions, instilling tolerance, and strengthening good relations among nations.
In Estonia, LUKOIL helps maintain an orphanage and provides assistance to the Pjuhtica Nunnery of the Assumption.
In Finland, Teboil is sponsoring the Tretyakov Gallery's exhibition at the Helsinki City Museum of Art, scheduled to run from October 2009 to March 2010.
By taking an active part in charitable activities, the LUKOIL Baltija Group demonstrates its high level of social responsibility to the public.
