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No. 4, 2012


FOCUS ON EFFICIENCY AND QUALITY


Oil of Russia magazine talks to Vadim Vorobyov, LUKOIL Vice-President for Petroleum Product Sales Coordination

In recent years, LUKOIL has been intensively increasing its presence in the petroleum product retail sale sector. The LUKOIL Group sales network as of January 1, 2012 covered 26 countries, including Russia, CIS and European countries (Azerbaijan, Belarus, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Estonia, Finland, Georgia, Hungary, Italy, Latvia, Lithuania, Luxembourg, Macedonia, Moldova, Montenegro, Poland, Romania, Serbia, Slovakia, Turkey and Ukraine), as well as the United States, with 183 oil tanks farms with an aggregate reservoir capacity of 2.7 million m3 and about 6,000 gasoline filling stations (including franchises). Having fulfilled the task of intensively building up the network of filling stations, the Company's main objective in the sphere of retail sales is now to reach a new level of efficiency in the work of the sales network.

Q: How would you assess LUKOIL's performance in petroleum product sales over the last five years?

A: Looking back over the last five years, LUKOIL's retail network in Russia has grown by 650 facilities (42%) since 2006. Let us recall that, in 2006, our Russian sales network consisted of 1,500 filling stations, the average daily volume of sales was 7.2 tons a day and the aggregate volume of retail sales amounted to 4 million tons. Today, our network in Russia consists of 2,150 filling stations. In 2011, we doubled the volume of retail sales compared to the result five years ago, by selling 8 million tons of petroleum products. Let me note the substantial leap forward in terms of the efficiency of the sales network's operations - the 40% rise in the number of the network's facilities brought a doubling of sales volumes.

In 2005-2011, investments in the Russian network amounted to nearly 77 billion rubles, about 70% of this going on construction and acquisitions. This structure of investments fully complied with the goal of developing the Company's business during the above period - the Strategy of Intensive Growth.

The Company's overseas sector also demonstrated substantial growth. In 2006, the network consisted of 1,860 filling stations, with an average daily sales volume of 5.5 tons a day and a total volume of retail sales amounting to 3.7 million tons. Since 2006, our network of filling stations has grown by 1,500 facilities to a total of 3,360 gasoline filling stations in countries of Europe, the Baltics, the CIS and the United States. The sales volume for 2011 stood at 7.4 million tons.

In 2005-2011, investments in the overseas sales network amounted to approximately $3.1 billion. At the same time, the investment structure was 50/50 in construction and acquisition/reconstruction and supporting investments.

We have virtually fulfilled the task of building up the number of facilities of the sales network both in Russia and in the overseas sector. Our main goal today is to provide for a rapid rise in the volume of sales and growth of average daily sales, that is, it is a matter of increasing the efficiency of the sales network.

Q: Were LUKOIL's expectations on the Russian and overseas fuel markets in 2011 justified? What are the Company's benchmarks for 2012?

A: In general, the operations of the business sector in 2011 may be assessed positively. The subsidiaries achieved the targets set for them by the Company's management with respect to both retail sales and the business' profitability.

The aggregate volume of sales of petroleum products (and gas products) by petroleum product supply organizations in the Russian Federation during 2011 amounted to 11.4 million tons, which is 6% more than in 2010. The volume of sales of petroleum products through the Company's retail network of gasoline filling stations amounted to 8.4 million tons, this being 18% more than the 2010 sales volume. The target for retail sales volumes of petroleum/gas products was exceeded by 13%.

The average daily sales in 2011 amounted to 11.7 million tons per day, compared to 10.3 million tons per day in 2010. The target for average daily sales through one filling station for the group of petroleum product supply companies was also exceeded by 13%.

The volume of investment in developing the Russian sales network in 2011 amounted to 7 billion rubles. Seventy new filling stations were started up and 35 existing filling stations were renovated.

The plan targets set by the management for the overseas petroleum product supply sector in 2011 were also met: the volume of retail sales amounted to 6.6 million tons of petroleum products or +5% over the 2010 level and +2% above that of the plan. The average daily sales volume amounted to 6.8 million tons per day, or 5% above the 2010 level and 2% above plan.

The 2011 investment budget of $116 million for development of the overseas sales network was successfully implemented to start up 18 new filling stations and renovate 80 filling stations.

In budgeting for 2012, we approached determination of the targets quite pragmatically: retail sales in 2012 were planned at the 2011 level of 8 million tons for Russian petroleum product supply companies and 6.6million tons for the overseas block.

The main reason for such a conservative approach consists in the need to optimize the sales network, meaning that inefficient filling stations need to be shut down. Accordingly, in view of the plans for opening up and closing down filling stations in 2012, the number of operating filling stations should fall somewhat in relation to both Russian and overseas companies.

Q: What is the current scope of the Company's sales network in Russia and abroad? Which regions, in your opinion, have the greatest potential for further development of the LUKOIL sales network?

A: LUKOIL is Russia's biggest oil company in terms of the number of gasoline filling stations. We operate in 59 regions of the Russian Federation, from Kaliningrad to Novosibirsk, managing more than 2,000 filling stations. The Company is represented in 23 countries of Europe, the Baltics and the CIS, and in the United States. The network of filling stations of the Company's affiliates operating outside the Russian Federation includes, in aggregate, more than 3,400 facilities.

In Russia, we are most widely represented in the Perm Territory, the Nizhny Novgorod and Volgograd regions and the Republic of Komi. In these regions, the Company has historically held very strong positions. The most promising regions for further development of our network in Russia are Moscow and the Moscow Region, St. Petersburg, the Sverdlovsk Region, the Krasnodar Territory and the Rostov Region, primarily Rostov-on-Don. Our strategy in Russia is to create, in the medium term future, a retail network providing for sale of the entire volume of gasoline produced by Russian refineries of the LUKOIL Group.

The regions of the Company's traditional presence abroad are Romania and Bulgaria. In these countries, our network is operating successfully in synergy with the Petrotel and Burgas refineries. In Bulgaria, including franchises, we have 220 filling stations and 20% of the market. In Romania, including franchises and leased facilities, we have 330 filling stations and 20% of the market again.

The regions that we consider to be the most promising for developing the retail business abroad are the Balkans, Turkey and the Benelux countries. For instance, further development of the CODO network in Belgium, Holland and Luxembourg will provide additional synergy with the Company's refining capacities in the Netherlands (the Zeeland Refinery). In the Balkans, modernization of the sales network, development of wholesale supplies and target construction of gasoline filling stations will also strengthen the synergy with the Company's refineries in Romania and Bulgaria.

Our plans also include further development and optimization of the Company's sales network in Turkey, in the regions of the Mediterranean and the Black Sea. At the same time, the task of optimization is a current one not only for Turkey but also for other operations areas where we have acquired assets. Block acquisitions initially presuppose existence of a network of both highly efficient and extremely inefficient filling stations. We endeavor to close down such inefficient assets.

In Europe, the Baltic states and the CIS countries, one of our chief tasks is to create a premium sales network offering a full range of services for consumers.

Q: At filling stations in Russia, LUKOIL sells Euro-3, Euro-4 and Euro-5 standard fuel. At the same time, Euro-4 is to be introduced as the official standard in Russia from 2015, and Euro-5 from 2016. What was behind the Company's early marketing of these grades of fuel?

A: Observance of high environmental standards is a vital aspect of the Company's operations. In the age of oil and gas, when alternative sources of energy have not yet become universally available and the main source of energy is hydrocarbon feedstock, a substantial share of the responsibility for maintaining the environmental balance in the country is borne by the oil and gas companies. LUKOIL is fully aware of this responsibility and does its best to make the entire well to wheel chain environmentally friendly.

At the same time, our efforts to improve product and service quality are reflected in consumer preferences on the fuel market. The high quality and environmental friendliness of the products do, indeed, help to make the LUKOIL brand increasingly popular among motorists. Over the last 5 years, for example, we have observed a steady growth of the volume of fuel retail sales through the retail network of our sales organizations. The capacity of the retail market in the Russian Federation has grown by 16% since 2008, whereas LUKOIL sales through filling stations have gone up by 38% (the volume of fuel sales through 1 LUKOIL filling station per day has risen by 19%).

It is the introduction of the Technical Regulations on the "Requirements on motor and aviation fuel, diesel and marine fuel, fuel for jet engines and furnace oil," approved by resolution of the Government of the Russian Federation of February 27, 2008 that explains precisely why we are putting new fuels on the market with improved environmental characteristics. LUKOIL's refineries in Russia have been producing Euro-3 gasoline and Euro-4 diesel fuel since 2004. Euro-5 diesel fuel has been produced since 2007 and, in July 2012, we started producing Euro-5 gasoline at all the Company's refineries in Russia. So today, even before the new standards come into effect, the quality of the Company's fuel complies fully with the highest European standards.

In the 2000s, LUKOIL invested substantial amounts in upgrading its refining capacities in order to provide for production of high quality motor fuels meeting the Euro-5 standard, including startup:

  • at JSC LUKOIL-Ukhtaneftepererabotka of a light naphtaisomerization unit with a capacity of 120 thousand tons per year and a hydrodewaxing unit for diesel fuels with a capacity of 850 thousand tons per year;
  • at JSC LUKOIL-Volgogradneftepererabotka of a reforming unit with a capacity of 1.0 million tons per year, an isomerization unit with a capacity of 390 thousand tons per year, a diesel hydrotreating unit with a capacity of 1.4 million tons per year;
  • at JSC LUKOIL-Permnefteorgsyntez of the Russian Federation's first hydrocracking unit for vacuum gasoil with a capacity of 3.5 million tons per year, and an isomerization unit with a capacity of 470 thousand tons per year;
  • at JSC LUKOIL-Nizhegorodnefteorgsyntez of a reforming unit with a capacity of 1.0 million tons per year, an isomerization unit with a capacity of 400 thousand tons per year, a catalytic cracking complex comprising a gasoil hydrofining unit, a catalytic cracking unit and a hydrogen fluoride alkylation unit. In addition, diesel hydrotreating units with an aggregate capacity of 4.6 million tons per year have been upgraded.

The total investments made from 2000 to 2010 in modernizing the refining capacity of the LUKOIL Group amounted to 115 billion rubles. As a result, the refineries of the LUKOIL Group are today the best technically equipped of all refineries on the territory of Russia.

All the Company's refineries are currently producing Euro-5 standard diesel fuel and gasoline. The switch over to Euro-5 gasoline helps sizably reduce harmful emissions into the atmosphere from motor transport and virtually nullify emissions of sulphur oxide, which has an adverse effect on the environment.

Large-scale projects are now being implemented at LUKOIL Group refineries to increase conversion ratio and production of light petroleum products further. In particular:

  • at JSC LUKOIL-Nizhegorodnefteorgsyntez, in 2015, it is planned to start up the second catalytic cracking complex, which will allow production of Euro-5 gasoline to be raised to 1.2 million tons per year. The investments in the project will total 23 billion rubles. It is also planned at this refinery to build a complex for heavy still bottoms processing based on the VTB hydrocracking process with a capacity of 4.8 million tons per year, to be started up in 2018. This project will phase out high sulphur furnace oil production and increase production of Euro-5 diesel fuel by 2.4 million tons per year, and of Euro-5 gasoline by 0.5 million tons per year;
  • at JSC LUKOIL-Volgogradneftepererabotka, construction is under way of a complex for deep refining of vacuum gasoil, to be started up in 2016. This will increase production of Euro-5 diesel fuel by 1.8 million tons per year, and of Euro-5 gasoline by 0.6 million tons per year;
  • at JSC LUKOIL-Permnefteorgsyntez, a delayed coking complex is being built to transfer to zero fuel oil production and increasing the output of Euro-5 diesel fuel by 1.0 million tons per year.

In 2006, a project was successfully launched for putting Russian EKTO premium motor fuels on the market. EKTO gasoline and diesel fuel are now produced on the basis of fuels meeting the Euro-5 requirements. LUKOIL was the first company in Russia to bring out European quality gasolines and diesel fuel with improved performance and environmental charateristics.

The geographical coverage of the project is expanding. In 2006, 98 filling stations of petroleum product supply companies in Moscow, St. Petersburg and Nizhny Novgorod were taking part in the project. In 2011, the number of filling stations in the Company's operating areas selling EKTO products reached 960 for gasoline - half of LUKOIL's existing filling stations. For diesel fuel, the number of filling stations selling EKTO products amounted to 1085, that is more than half of LUKOIL's filling stations.

Since the project was launched, the volume of EKTO gasoline sales has increased eleven-fold. Sales of EKTO diesel fuel have gone up ninety-fold. In 2011, 1.6 million tons per year, of EKTO gasoline were sold, with the tendency remaining for sales of EKTO Plus and EKTO Sport to rise. As for EKTO diesel fuel, 1.3 million tons per year, were sold.

Quality is both our slogan and our strategy. And LUKOIL guarantees quality control all along the supply chain: all our affiliates, both refineries and petroleum product suppliers, are certified according to the OHSAS 18001:1999 (environmental), ISO 14001:2004 (health and safety) and ISO 9001:2000 (management) international standards.

Q: What opportunities do you see in the gas engine fuel segment?

A: We see the main prospects for sales of gas engine fuel in the public transport sector. Private cars have gasoline engines. Over the next ten years, no alternative to gasoline as the main engine fuel is likely to appear. In this respect, Russia is following the US trend: from 90% of road vechicles using gasoline in 2010 to 85% by 2021. An increase in use of diesel is engendered by SUVs, MPVs and PickUps, which will account for a maximum of 20% of new vehicles. Over the next decade, the priority line of car development will be the hybrid engine (electricity plus gasoline or diesel fuel).

As for LPG sales through LUKOIL filling stations, it accounts for 1% of the total retail sales of engine fuels in the Russian Federation and 13% for overseas companies. LUKOIL has nearly 160 LPG and multipurpose filling stations in Russia and 1313 abroad. Over the next ten years, we plan to bring the number up to 200 in Russia and 1337 abroad.

Q: What is your opinion about the future prospects for developing the non-fuel business at LUKOIL filling complexes?

A: Given the anticipated drop in the margin on petroleum products, development of the non-fuel products and services is one of the key opportunities for making our filling stations more competitive.

Over the last five years, despite the negative consequences of the economic crisis, sales of non-fuel products and services have increased substantially. LUKOIL is introducing best world retail practices at its filling stations, the result being more efficient retail business.

Our vision of the filling station of the future is either one providing a full range of services (and we propose to work on identifying the most economically effective set of services individually for each facility) or an automated filling station.

Q: Which long-term goals have been set for the LUKOIL Group sales companies under the Company's Strategic Development Program for 2012-2021?

A: As I have already mentioned, the task of intensive growth in the number of sales network facilities is virtually fulfilled. So the Company's management has set the business sector a new strategic target: to provide for sustainability and competitiveness of the petroleum product sales business by monitoring sales outlets' rate of return and improving the mechanisms for cost regulating management and preventive measures implementation to minimize business risks and achieve the targets and objectives set for the business sector organizations.

From 2012 to 2021, it is planned to invest $2 billion in Russian petroleum product supply companies, over 50% of which will go on renovation and development of existing assets, about 25% on maintenance and 25% on new construction. Startup is envisaged of 188 new filling stations, mainly in the regions of priority development: Moscow and the Moscow Region, Yekaterinburg and the Sverdlovsk Region, the Krasnodar Territory and Rostov-on-Don.

In the 2012-2021 period, it is planned to invest $1.3 billion in the overseas block, including 32% in renovation and development of existing assets, 57% in maintenance of the network and 11% in new construction. The plan is to open 101 filling stations in priority development regions.

Given the drop in the market margin for petroleum products and the aggressive marketing policies of vertically-integrated companies, it will not be possible to provide for sustainability and competitiveness of the sales business without implementing a robust client-orientated policy and strengthening relationships with the end consumer: expanding the range of products and services provided to customers, ensuring a high standard of services and customer support. These are, indeed, the key spheres of the strategy of our business sector for 2012‒2021.




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Oil of Russia, No. 4, 2012
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