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   Environmental issues are also high on the agenda. In Russian cities, there is 100 kg of atmospheric solid discharge annually for every person – and some 85 percent of the discharge falls at motor transport.

   For this 100 kg/person weight not to crush us, and for the ability to export domestic oil products abroad to remain intact, Russian government approved on 27 February 2008 the whitepaper “On the Requirements for Petroleum and Aviation Fuel, Diesel Fuel, Marine Fuel, Jet Fuel and Fuel Oil.”

   “Now there are suggestions to postpone yet again the deadline for adapting the production of environmentally-friendly gasoline, expanding the timeframe for another 7-10 years,” noted recently Vladimir Putin at the government session. “I think that regardless of all the difficulties, the oil companies have to find finances for upgrading the facilities and for the switchover to producing the higher-standard fuel. Of course, as I have just said, in some cases certain state support could be given, for example in the form of credit guarantees.”

   According to the Government Decree of December 2008, production of Euro-2 gasoline must cease on December 31, 2010; of Euro-3 gasoline – on December 31, 2011; of Euro-4 fuel – on December 31, 2014. Similarly, production of Class 2 and 3 diesel fuels is to cease on December 31, 2011 and production of Class 4 diesel fuel is to cease on December 31, 2014.To achieve these targets, a thorough modernisation of Russia’s refining industry is required (between $50 million and $100 millions, according to estimates). Such endeavour is impossible without the state’s help.

   What is the current state of refining industry in Russia?
Judging by the production capacity, things do not look bad – Russia comes up second after the U.S. There are 27 large refineries and over 50 mini-refineries operating  in the country. The key problems of the Russian refining industry are as follows: the high depreciation level of the capital assets (over 80 percent), low quality of the yielded oil products, insufficient refining depth, the usage of energy-intensive and environment-damaging technologies. There is also irregularity in refineries location throughout the country: the refineries were installed more than 50 years ago and due to strategic reasons were placed far away from marine terminals and foreign consumers. The refinery throughput is also low – only 82 percent, compared to global average of 90-95 percent.

   Lukoil, one of the largest domestic oil companies, pays great attention to the refining segment. Development of this segment enables the company to reduce its dependency on the high price volatility of the oil market, also improving its competitive position by producing and selling high quality added value products. Development of the refining segment is an essential part of the company’s strategy, which targets balancing its upstream and downstream arms. Currently the company’s refineries can utilize 60 percent of the produced oil. Lukoil retails its oil products and production of gas processing and petrochemistry in almost 30 countries. The company owns seven refineries, four gas processing plants, four petrochemical facilities and 6,090 gas stations, exports over 25 million tons of oil products and sells over 90 million tons of oil products domestically.

   Lukoil continuously upgrades its refining facilities: instantly reacting to the market trends; the company prioritizes introduction of European quality standards on all of its plants. For the past five years, the share of high quality diesel fuel (Euro-3 to 5) produced by the company grew from 10 percent to 70 percent. Starting 2007, the company’s refineries yield products at least one step ahead of the existing domestic standards.

   But what’s in it for the company itself? It would give the company sizeable competitive edge in the future, while already providing an extra premium for environmental level and high quality of the production. Thus, usage of Lukoil Euro-4 diesel fuel cuts in half emission of carcinogens to the atmosphere, while also extending engine lifetime and giving fuel economy. In 2007 Lukoil’s Russian refineries produced some 6.2 million tons of Euro-4 diesel fuel.

   In 2008, Lukoil and Italian company ERG S.p.A. set up a joint venture on managing a refinery in Sicily. The installation has NCI of 9.3 and is one of largest in the region, being oriented towards manufacturing middle distillates (primarily, kerosene and diesel fuel), which are in high demand in Europe. The complex includes two refineries linked by piping system and integrated into a unified process system with 16 million tons per year refining capacity.

   “Creation of a refining JV in Italy is a step of paramount importance in the company’s strategy of downstream development in Western Europe. This would increase Lukoil’s total refining capacity by 13%, boosting overseas refining capacity by 60 percent. The high appeal of this project is granted by advantageous location of the facility and its ability to process Russian crude”, noted president of Lukoil Vagit Alekperov.

   Lukoil’s overseas refineries produce Euro-5 compliant gasoline, required in Europe starting 2009, while Russian refining units produce Euro-3 gasoline required as of 2009 by the Russian laws. The company has also developed new gasoline brand EKTO-92 and EKTO-95, which use multipurpose additives to improve cleansing, rust-proof and other performance qualities of the fuel.

   Production and sale of motor oils are regarded as another important business directions for the company. Lukoil’s motor oils comply to the demands of the Society of Automotive Engineers (SAE), American Petroleum Institute (API) and the European Automobile Manufacturers Association (ACEA). The motor oils have been tested in western certification centres using the engines manufactured by leading global companies.

   An example of the company’s modernization strategy is the upgrading of Lukoil-Nizhegorodnefteorgsintez’ refinery, which only recently had 66.3 percent refining depth and NCI of 3.6. The company has designed and is now implementing the three-stage refinery modernization program. The investment strategy for the project conforms to the motor fuel regulations and recognizes falling market demand for high-sulphur fuel oil.

   During the first stage (2006–2010) the company will increase gasoline production levels, reaching Euro-4 standard levels on the launch of VGO hydrofining unit, integrated gasoil catcracking unit with propylene concentration block, hydrogen production unit, integrated unit for elemental sulphur production, and integrated alkylation unit with n-butanes isomerization block. Installation of the tar visbreaking unit visbreaking unit, launched in 2008, ensures that the plant is ready to start setting up the catalytic cracking complex. The visbreaking unit is required for lowering the viscosity of heavy vacuum residue (tar) by using thermal conversion of carbohydrates in vapour-fluid stage. The visbreaking process is licensed by Foster Wheeler Iberia, while project documentation has been drafted by Neftekhimproekt institute. “The launch of the tar visbreaking unit is an important stage of the large-scale modernisation of the plant. The next step is to install the catalytic cracking complex, to be launched in 2010. This would ensure 100 percent high octane gasoline yield at the refinery, putting the plant to the highest levels within the industry ranks,” said Lukoil’s president Vagit Alekperov during formal opening of the unit.
The catalytic VGO catcracking process is licensed by UOP; the company has already presented the framework project of the unit. The licenser was selected via the tender by a joint team of the plant’s professionals, Nizhegoorodniinefteproekt (chief designer of the project) and Neftekhimproekt process designer.

   The second stage of the modernization process (2008–2012) would enable the capacity expansion up to 20 million tons of oil per year. The company plans to install a new primary distillation unit AVT-8 with capacity of 8 million tons of oil per year while decommissioning two old units AVT-1 and AVT-2. The gasoline reforming unit L35/11-300 will be switched to isomerisation process with 440,000 tons per year yielding capacity. Lukoil also plans to launch a new distillate hydrofining unit with 2.6 million tons per year capacity and a gasoline reforming unit with capacity of 0.6 million tons per year. With the launch of the catcracking complex, Nizhegorodsky refinery would produce 2.5-3 million tons of gasoline per year in full compliance with the Euro-4 standard  (10 ppm sulphur content), while the diesel fuel quality would rise to Euro-5 standard.

   The third stage (2012–2017) includes installation of coking production, coking unit and a hydrofining unit for secondary gasoil. For 2008–2017 Lukoil will invest in total $1,907 million; of this amount $780 million are allocated to the  catalytic cracking complex, and $450 million – to the coking complex and to the secondary distillates hydrofining unit.

   The project also has high social standing, as it will have positive impact on the regional economy and will create new jobs, both in the course of its implementation and upon its completion. In addition, the project will enable manifold increase of contributions to the local budget.

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