Always moving forward

Refining Macroeconomics in Russia/Europe and LUKOIL Refineries business development

Mikhail Antonov

Deputy Director of Refining, LUKOIL International Trade and Supply Company

24-25 September 2012

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Market Environment: Crude Refining Gross Margin $/bbl

2006

2007

2008

2009

2010

2011

Ever since 2008 Europe there was a decline in refining margin, while in Russia it quickly recovered to pre-crisis levels

2012 1

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Global Supply / Demand balance

Source: BP 2012 Energy Outlook

Source: Exxon 2012 Energy Outlook

Although robust motor fuel consumption growth is forecasted, the most of it comes from non-OECD contries. Whereas in OECD transport consumption some decline is expected

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Demand of Quality Gasoline in Russia Russian Gasoline Consumption

Gasoline production at LUKOIL refineries in Russia, mmt

+73%

Russian Gasoline Consumption Structure

• Over a last decade Russia

experienced a 50 % growth in gasoline consumption.

• Structurally, high octane gasoline

almost replaced a low octane one

• To meet the growing demand, LUKOIIL increased gasoline production by 73% ahead of competition

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DIESEL SUPPLY FORECAST

Producer

Production, Mln. t.

87

+5 %

68

Main projects

23,7

+7%

4350

2014

Distillates hydrocracking complex

2000

2014

3500

2015

3000

2015

5500

2016

2000

2016

1600

2016

900

2015

2930

2012

15,4 +5%

ROSNEFT

GAZPROM BASHNEFT

Commissioning year

VGO hydrocracking complex

Residue HCK

LUKOIL

Capacity, kT/year

2d FCC complex

16,4 12,3

+3%

Crude distillates

10,2 8,7 7,7 6,0

HCK complex

9,1

+3%

Coker

6,3

TNK

+1%

17,5

21,2

Crude distillates VGO HCK (Kirishi)

+3%

OTHERS1

2011

2017

HCK complex («Taneko»)

2900

2013

19 mln.t diesel production increase will come mostly from investments into hydro cracking installations (1) Include: Surgutneftegas, Slavneft, Alians Oil, TAIF, Krasnodarekoneft, Neftegasindustria, Tatneft 1

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DIESEL DEMAND FORECAST Consumers

Consumption, Mln. t.

Main Drivers GDP average annual growth (per capita) by 2017

44 +5 % Autotransport Bunkering Agriculture Railways

Passengers

34 4% 4% 6%

5% 4% 5% 7% 9%

+9% +4% 0% +1%

average annual growth of bunker fuel consumption - 4% due to the river transport growth

0%

average slight increase of fuel efficiency in the agricultural sector for the same arable land area

9% average annual growth of consumption in Railways 1% with turnover increase of about 4% with target fuel efficiency 5% in 2020

12% 69% Freight and commercial transport

increasing diesel cars fleet by 2017 - from 13 to 22 vehicles per 1,000 people, or 69%

The slight decrease in passenger bus transport and the current level of consumption of diesel

64% +6%

Fleet of diesel trucks increased from 2.9 to 4.1 million vehicles (+29%) The average annual fleet growth - 6%, the new trucks are used more intensively than fleet average Annual average mileage of new diesel trucks 40000 km, average fuel consumption - 28l/100km

2011

2017

Domestic diesel demand is to increase by 10 mln.t.p.a due to both truck fleet growth and increased usage

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Export tariffs for products in Russia Diesel - Fuel Oil Differential

Introduction of 60-66 export regime

03.10.2011 325 USD 30.09.2011 245 USD

Since 2004 Russsian goverment created a big incentive to export VGO and fuel oil by lowering a export tariff to 40% of the crude one. In 2011 the tariff was raised to 66% and made a universal one for both dark and light products. A further toughening of export tariffs for the products is expected to bring them on par with a crude one

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Motor Fuel Quality in Russia Transition to European quality standards in Russia

Excise tax savings, $/t

EURO-5 Diesel

Euro

EURO-4

Gasoline

Regulations

EURO-3

  

Over the last 3 years Russian government set up a road map to motor fuel specs. The original plan was adjusted to accommodate a gasoline deficit in 2010 LUKOIL has a competitive advantage in fuel quality

•

Excise tax quality differentiation allows LUKOIL to monetize this difference today 7

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What Next?

Change in export regime (60/66 ) with simultaneous mandatory refinery upgrades will change a product slate and export profile Long term tendency-100% export duty for heavy-ends Growth of gasoline consumption in Russia will allow to absorb all incremental production growth but diesel surplus will increase

Differentiated export tariffs will create a positive incentive and healthy margins in Russia and additional pressure for European refiners

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Downstream in Europe and Russia • • • •

Europe

5 refineries, total capacity 572 kbpd More than 3,000 stations in 23 countries Power generation 400 MW 1 petrochemical plant

• • • • •

Russia

4 refineries, total capacity 914 kbpd 2 gas plants, total capacity 1 bcm/year 2 petrochemicals plants More than 2,000 stations Power generation 4,700 MW*

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Refining throughput Refining Volumes (2005-2011)

40% increase of refining volumes (more than 1/3 is increase of Russian refineries capacity)

Downstream/Upstream Integration

20 percentage points increase

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Refining Contribution to Total EBITDA of the Group

Refining segment is a large profitable business 11

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LUKOIL Refineries strategic program 2012-2020 List of main projects

LUKOIL Refineries strategic program is oriented at: GROUP А. Gaps closure program (Solomon system), production automation (IT) – minimum investments – maximum efficiency;

Capacity, mta

Beginning

Completion

2000

2012

2015

Nizhny: construction of hydrocracking complex

4800

2014

2018

Volgograd: construction of VGO hydrocracker

3500

2011

2015

1 800

2011

2015

Project Nizhny: construction of second FCC hydrocracking complex

GROUP В. Products quality improvement; GROUP С. Increase of conversion, increased share of products with a high added value; 100

Perm: construction of delayed coking complex

Strategy: Refineries Indexes,%

Strategy: Production structure

тыс. т 40000

Gasoline + 3,8 mta

0 2010 Conversion

2020

10

30000

Light products output

Diesel Fuel + 5,0 mta

20000

8

Strategy: Nelson Index

6 4 2

9,4 5,8

0 2010

0 2010

10000

2020

Fuel Oil – 5,7 mta

2011

2012

2013 Other

2014 FO

2015

VGO

DF

2016

2017

Fasoline

2018

Kero

LPG

2019

2020

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Investment Performance: Successfully Implemented Projects gasoline gasoline

Hydrotreater

2004

Euro-3

Catalytic Cracking

Reformer

Visbreaking

Hydrotreater

Isomerization

Visbreaking

Hydrotreater

2007

2009

2011 2010

2008

2006

2001

Euro-4

T-Star

Isomerization

Isomerization

Coker

Hydrotreater

Isomerization

Alkylation

Alkylation

Hydrotreater

Isomerization

Reformer diesel

Euro-4

gasoline

Euro

Visbreaking

diesel

Euro

• Capital expenditure since 2001 totals over 6.2 billion USD • Nelson Index* increased from 4.6 to 6.7 * Excluding stakes in ISAB and Zeeland refineries.

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LUKOIL Russian refineries Solomon performance dynamics for 2004-2010 Refinery Utilization (RU), %

95,0

90,6 88,5

85,7 85,0

81,6

85,1 83,7

91,6

92,7 90,1

88,5 85,0

83,6

82,7

84,5

84,0

2004

2008

96,0 94,6 94,0

90,0

96,0

96,6 95,1 94,0 92,4

110 104 93 86

2010

90

97,4

95,5 95,3

94,8

97,4

2004

2004

Perm

Perm*

Q3 Q2 Q1

2010

Q3

80

Nizhny

54

44

48 37

34

2010

56

49

5567

20 2008

2008

28

2004

Q2

58 53 50 46

45

Q1

31

2006

Volgograd

2008

2010

Ukhta

TRN

Indexes and quartiles are estimated according to investigation methodology for 2008 * Calculation of indexes for Perm Refinery according to the change of hydrocracking unit type into High Speed Diesel

450

459

441 271

Cash Operating Expenses (OPEX/UEDC), USA cents / UEDC

42

2006

2006

68

Q4

88,6

118 116 110

110

Q4

81

Q1 Q2 95,6 95,3Q3

91,7

123

82

96,6

95,0

120

117

33 86,0

133

581

587

137 130

70

Mechanical Availability (MA), % 98,0 96,9

152

162 161 146

Q3 2006

900 731

Q1

84,1 Q2 83,0 82,3

80,3 75,0

187

190

150 83,7

Personnel Index (PI), hours/100EDC

Energy Intensity Index (EII)

298 208

377 262

70

2004

2006

Q4

297 215

134 99 79 0

432

2008

260 242 199 180

Q3 Q1

2010

 Beginning from 2004 survey it is observed a positive dynamics of Energy Intensity and Personnel indexes  Reduction in Refinery Utilization index in 2010 comparing to 2008 is aligned with:  Volgograd – turnaround;  Perm – productive capacity increase and unscheduled shutdown of units  Reduction of Mechanical Availability at Perm Refinery is mainly aligned with unscheduled shutdown of Catalytic Reforming units (35-8), Hydrocracking and Catalytic Cracking  Calculation of indexes according to investigation methodology for 2008 resulted in the reduction of Cash Operating Expenses in comparison with 2008, based on the results for 2010, correction of index is expected

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Refining strategy update New macroeconomic changes affected LUKOIL refining strategy with more focus on conversion and creating “super sites”: New second FCC installation in NORSI refinery -

New super sized resid hydrocracker in NORSI New coker complex in Perm refinery - New hydro cracking installation in Burgas

• •

Staging of big projects into separate stand alone projects for the purpose of managing a cash flow (residual hydrocracker in Burgas, FCC installation in Volgograd) Cancelation or minimising capex for marginal refineries (Odessa, Petrotel)

Execution of new refining strategy is to allow LUKOIL: • • • • • •

Increase distillation capacity to 67 mln .t.p.a. (1, 340 tbd) Increase Nelson complexity index from 7,5 to 9,4; Increase conversion ( “depth of refining”) from 79% to 92%; Increase light yeilds produciotn from 60% to 73%; Improve overall quality of refined products and meet all the spec requirements ; Make a significant progress on Solomon benchmarking

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Future Opportunities: Nizhny Novgorod Refinery Supersite

Capacity – 345 kbpd Nelson index (2011) – 6.3

Light products growth

Capacity, mmt/year

Investment, $ bn

IRR

Launch

Catalytic cracking of VGO

+1.2 mmt/year gasoline

2.0

0.7

16%

2016

Residue hydrocracking

+ 1.7 mmt/year diesel + 0.5 mmt/year gasoline

4.8

3.1

>20%

2018

• To address the shortage of gasoline in the domestic market of Russia Second FCC Project was launched. Project is expected to save money and time by duplication of existing design

• Advantageous market logistics ( product pipeline and river terminal access). Synergy with Perm Refinery (LS VGO) 16

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Future Opportunities: Volgograd Refinery Upgrade

Capacity – 223 kbpd Nelson Index (2011) – 5.4

Light products growth

VGO hydrocracking

+ 1.8 mmt/year diesel + 0.6 mmt/year gasoline

Capacity, mmt/year

Investment, $ bn

IRR

Launch

3.5

1.8

>20%

2016

• VGO Hydro cracking into high-quality distillates and gasoline: +0,9 mln tpa of Euro 5 gasoline, +2,4 mln tpa Euro 5 diesel • Enable production of high-quality Base III for lubricants • Opportunity for second phase VGO FCC with gas fractionation and propylene concentration units

• Integration with marketing sales and power generation network

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Future Opportunities: Perm Refinery Upgrade

Capacity – 264 kbpd Nelson index (2011) – 7.9

Coking complex

Light products growth

Capacity, mmt/year

Investment, $ bn

IRR

Launch

+1.2 mmt/year

2.1

0.7

>20%

2015

• High conversion residue processing to light products and coke • Market synergy with metallurgical industry • Synergy with Nizhny Novgorod Refinery (LS VGO processing) 18

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Future Opportunities: Burgas Refinery Upgrade

Capacity – 199 kbpd Nelson Index (2011) – 8.9

Light products growth

H-oil complex

+ 1.2 mmt/year diesel + 0.5 mmt/year Gasoline

Capacity, mmt/year

Investment, $ bn

IRR

Launch

2.5

1.4

>20%

2015

• The only refinery in Bulgaria, enjoys solid position in domestic market • Costal location and good infrastructure for exports • Resid HCK project will turn Burgas into best-in-class refinery • HCK EPC contract is signed , completion expected in 2015

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Logistics Optimization allows LUKOIL to reduce transportation costs • Russian refineries generally have significant transportation costs moving products mostly by rail road to export ports. • Product pipelines «Transneftproduct» network development are to reduce transportation costs (project «South», «Kstovo-Nagornaya») • 2 LUKOIL refineries in PERM and N. Novgorod enjoy access to product pipeline, while refinery in Volgograd is expected to have it by 2015

Project “North” diesel pipeline Commissioning – 2010

Ukhta Refinery Exports by river via StPetersburg

Primorsk Nizhny Novgorod Refinery

Ventspils Moscow

LUKOIL export by transportation mode

Pipeline 11 %River 8%

2011 Railway 81 %

Railway 51 %

Perm Refinery

Kstovo-Nagornaya gasoline/diesel pipeline

Pipeline 33 %

Exports by river via Kerch

Volgograd Refinery

2021

2021 River16 %

Novorossiysk

Project “South” diesel pipeline Planned commissioning– 2015

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LUKOIL Western European Refineries ISAB refinery, Italy (LUKOIL share increased to 80% recently)

• • •

16 MMTA crude distillation capacity (156 kbbl/d)

•

Integration with ISAB Energy for asphalt/resid gasification

•

Energy efficiency and cost optimization programms are in progress to improve a profitability

Nelson index 9,3 Good logistics and large infrastructure at Augusta Bay, Sicily

Zeeland (ex.TRN) refinery, the Netherlands (LUKOIL share – 45%)

  

8 MMTA crude distillation capacity (70 kbbl/d) Nelson index 9,8-oversized VGO/resid Hydrocracker Large infrastructure: own Borselle terminal and pipeline to Maasvlakte oil terminal in Rotterdamfor

 

1 st Solomon quartile perfomer



HCK expansion project is in progress

Synergy with LUKOIL refineries: dedicated VGO and resid fuel stram for TRN 2121

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Conclusions • Since 2008 there was a decline in refining margin in Europe, while in Russia it recovered quickly to precrisis levels • Although a global motor fuel consumption growth is forecasted, the most of it comes from non-OECD contries. Whereas in OECD transport consumption some decline is expected • Change in Russian export regime (60/66 ) with simultaneous mandatory refinery upgrades will change a product slate and export profile • Long term tendency-100% export duty introduction for heavy-ends • Growth of gasoline consumption in Russia will allow to absorb all incremental production growth but diesel surplus will increase • Differentiated export tariffs will create a positive incentive and healthy margins for Russia refineries in and additional pressure for European ones • LUKOIL refineries have executed a number of investment projects to benefit from these changes. Further investment are expected to bring them on par with world class refineries



Implementation of Solomon gaps closure program in 2006-2010: impressive results in all Solomon metrics



Successful integration of newly acquired refineries in Western Europe 2222

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THANK YOU FOR YOUR ATTENTION!

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