No. 1, 2005

Valery Andrianov


LUKOIL has successfully carried out a comprehensive modernization of the Petrotel Refinery in Romania

On October 28, 2004 a signal event took place in the Romanian city of Ploesti some 60 km from the national capital of Bucharest, marking an important stage in the promotion of Russia's oil and gas business in Eastern Europe. It was also very important for the development of the Russian-Romanian trade and economic relations as a whole. The event was a ceremonial commissioning of the Petrotel Refinery following its thorough renovation. Why would such great significance be attached to a seemingly purely technical accomplishment?

Ploesti, an oil center

In the 1990s, the Romanian Government, intending to rejuvenate the country's fuel and energy complex, decided to privatize a number of enterprises. In February 1998, JSC LUKOIL acquired 51% of the stock of the Petrotel Refinery for a sum of $53.2 million. At present, LUKOIL already owns 93% of Petrotel's stock.

Some time later the refinery was closed down for modernization. This news was met with mixed feelings in Romania. This was due to the fact that a number of unpleasant precedents had occurred in the country: some Western concerns had been buying up Romanian enterprises, including metal-making and machine-building plants, promising to renovate them. Later on, however, their production was either altered or liquidated in general. According to experts, as a result of that, the country had practically lost, for instance, its mineral fertilizers industry. In this way foreign businessmen were trying to protect their commodities produced abroad from dangerous competition on the Romanian market. Aware of that, the Romanian authorities and the public followed LUKOIL's actions closely and not without suspicion ? particularly in view of the fact that just about then the Russian company had acquired and begun to renovate the Odessa Refinery located relatively close to the Romanian border. They were afraid that Petrotel was being closed down for good so that the gasoline and diesel fuel produced in Odessa could be marketed in Romania. By its actions, however, LUKOIL disproved such conjectures. The last of the skeptics' doubts were dispelled in October 2004.

During the modernization of Petrotel three new units were constructed: to hydrorefine gasoline, to conduct isomerization, and to produce hydrogen. All three were designed under the licenses of UOP Ltd (USA), ExxonMobil (USA), Linde (France) and Haldor Topsoe A/S (Denmark). A total of 18 technological and auxiliary facilities were renovated, including one for the hydrorefining of diesel fuel, a coking plant and treating facilities. To increase the industrial and environmental safety of the enterprise its fire-fighting and water-supply systems were also renovated. The modernization enabled the enterprise to cut down its pollutant emissions by 50%.

Petrotel will be able to refine 2.4 million tons of crude oil a year. The refinery will operate using imported raw materials. Especially for the refinery, LUKOIL will be preparing an oil mixture, which is the most suitable for its technological processes.

LUKOIL has invested $120.7 million into the modernization of Petrotel, and over $6 million were earmarked for environmental protection.

In September and October 2004, prior to the official commissioning ceremony, the Petrotel Refinery conducted the test-running of the new units, processing 42,000 tons of crude oil and turning out the first few tons of high-quality products.

Ready to meet the EU standards

"And yet, why did Petrotel have to be modernized?" I asked Vladimir Zdobnov, the Refinery General Director. "Didn't the depth of refining there, even before the renovation, come to 73.3%, which is not bad at all by Russian standards?"

"You are right", he replied, "the depth of refining was high at the enterprise even before its renovation, but now it's much higher - 94.8%. As for light oil, the proportion of its production will grow from 73.3% to 81.7%, totaling nearly two million tons.

Formerly, we turned out, among other things, products, which could not be sold normally, such as catalytic-type cracked gas oil, which was of no particular value. Now we will no longer be turning out any 'semi-products', which have no specification of their own and are not of high quality. We will be producing liquefied gas, grade 92 and 95 gasoline, diesel fuel with a low sulfur content, and coke. The Petrotel Refinery will be turning out no other 'by-products'.

Furthermore, it is essential that the refinery should turn out products of a quality that meets the requirements of the market - both current and prospective ones. Unfortunately, the refinery has never been modernized before, and the quality of its petroleum products failed to come up to the requirements of the Romanian market - the sulfur content of its gasoline and diesel fuel was too high.

The principal goal that the Company's leaders set before us was to turn out petroleum products that would conform to the Euro-3 and Euro-4 standards. Since the Republic of Romania plans to join the European Union in 2007, the requirements applied to it have already been made more stringent, and in the transitional period of 2005-2007 it is necessary for the country to bring all of its produce in conformity with the EU standards.

Another argument in favor of modernization was that by the late 1990s LUKOIL was practically not present at the Romanian retail market - we only had 15 or 20 gasoline filling stations. And when an enterprise sells its products wholesale instead of retail, its margin is much more narrow. Therefore, an idea was born: parallel with conducting renovation and raising the quality of products to gain a foothold in the local market ? that is, to expand our own network of gasoline filling stations.

Yet another argument in favor of modernization was the fact that power consumption at the refinery was excessive. And so our goal was to cut it down by 30% in such operations as primary processing, and to do that by optimizing the rates of heat flow, and so on. This goal was achieved as well".

"How would you evaluate the competitiveness of your enterprise compared with some other refineries in Eastern Europe? And how does its technological level compare with the rest of LUKOIL's refineries?"

"When we conducted the modernization, we acquired licenses from well-known engineering companies which offer identical technologies to other industrial enterprises throughout the world. And so our competitiveness is high enough, for we could choose among the best processing technologies used in the world today.

Furthermore, some of the processes employed here have not yet been introduced at the Company's subsidiaries in Russia. This, for instance, refers to the hydrorefining of catalytic-type cracked gasoline. Also, we are completing the construction of a continuous regeneration unit, which so far exists only at LUKOIL's refinery in Nizhny Novgorod. In short, the processes employed by the Company's subsidiaries are similar everywhere, but their combination, such as ours, exists nowhere else.

Of course, our volume of refining is not very large. But considering the depth of refining, for instance, or the presence of catalytic processes, or of catalytic reforming with continuous regeneration, or hydrorefining at high pressure, or the operation of a hydrogen installation ? ours is a normal high-technology industrial plant. On the whole, the average productivity of European industrial plants is lower than that of Russian ones ? five or six million tons of raw materials a year. Quite often, refineries in Russia are oriented at export deliveries of raw materials, while European ones, including Petrotel - at their domestic markets. And their rather small capacities enable them to balance production in such a way so as to satisfy the local requirements to the utmost".

"Are there plans to modernize your refinery further?"

"The basis laid in the course of the renovation is sufficient for us to maintain the high level of our competitiveness for the next three years, at the least. The leadership of the Petrotel refinery, however, intends to propose to LUKOIL to invest into the solution of problems relating to minimizing production costs and optimizing power consumption. The fact is that during the past year the price of gas and, accordingly, that of electric power in Romania grew by 30%, and if it continues growing at such a rate, production costs will keep on rising".

"What major problems did you run into during the renovation?"

"In the first place, we had to meet very stiff deadlines. In the second, the entire refinery was being modernized - not only its technological part but also its treating facilities, reservoir systems, heat and electric power plant, and communications. Practically every unit was modernized to some extent. The system of control has been changed everywhere: it used to be of a traditional kind, but now everything has been transferred to the microprocessor technology. Instrumentation has been replaced practically everywhere. In the third place, we had to carry out several renovation operations simultaneously: designing, construction and equipment ordering. For instance, while some services were engaged in purchasing a pump, the design organization allocated a foundation for it that did not have any piping system yet. Then, while the construction workers built the foundation, the necessary documents for a piping system were drawn up, and so on and so forth. And when the process of modernization was drawing to a close, we began enrolling personnel for the technological facilities - so that people would be able to learn in advance... Such parallel operations required good coordination and prompt technological solutions. In other words, we could not afford too much time for decision-making, or for hesitation; we could not afford to pick and choose.

An extremely important aspect was that we met understanding on the part of the LUKOIL leaders and the Company's managerial personnel. This helped us cope with the task set before us by the LUKOIL President.

It should be noted that the main decisions concerning technical solutions were taken collectively. A search for those solutions was conducted jointly by LUKOIL specialists and representatives of the local design institute which had worked on practically all of Romania's oil industry projects. It was such close cooperation that made it possible to devise correct solutions which were later embodied in technical documents".

"Were you given support by the local authorities?"

"Our refinery was at a standstill when LUKOIL acquired it. Had the Company not purchased the refinery, it would have simply closed down and its equipment would have been scrapped. The refinery was encumbered with debts, it had lost its competitiveness, and no investor was willing to grant it even floating funds. It was only owing to LUKOIL that the Petrotel Refinery had not been completely lost. Realizing the difficult situation in which the refinery had found itself and aware that the aim of LUKOIL was to revive the enterprise, the local authorities showed a favorable attitude to us. The Company's image was sufficiently positive, I believe, in all of Romania.

I may be mistaken but I think that a definite role there has been played by the attitude to people, which in the past was characteristic of the socialist countries and which still makes itself felt: in those countries workers were regarded not as impersonal beings who automatically performed certain functions, but rather as individuals who deserve attention and respect. Hence, support rendered to the trade union movement and various incentives to labor ? aside from financial rewards. For instance, our young workers were deeply impressed by the fact that young specialists had been invited to take part in the corporate seminars held by LUKOIL. They realized that they were appreciated and respected at the Company, and that gave them an additional incentive to work".

Vertical integration for export

LUKOIL has shown itself to be the largest, socially responsible investor into Romania's economy. Aside from the capital investment made into the renovation of the refinery in Ploesti, the Company invested $285 million into the development of the Romanian marketing infrastructure. Operating under LUKOIL's brand name in that country are 257 gasoline filling stations and 10 petroleum bulk plants. The Company's share of the local market of petroleum products is nearly 20%. About 5,000 people, including over 1,200 at the refinery, are employed at LUKOIL's subsidiaries in Romania. Within the framework of Petrotel's modernization, several social programs were implemented. Thus, its outpatient clinic was provided with modern medical equipment, and the dining room and amenity rooms at the refinery were improved. Furthermore, the Company covers up to 50% of the upkeep of the children of Petrotel's personnel at preschool establishments. Also, LUKOIL has made a material contribution to the construction of a church in Ploesti.

New projects are in the offing. As the Company's President Vagit Alekperov pointed out at a news conference held for Romanian journalists, LUKOIL plans to invest, within the next two or three years, a further $50 million into modernizing the power plant of the Ploesti Refinery. It is planned at the refinery to start producing Jet-type aircraft fuel by the end of the year. Just as its diesel fuel and gasoline do, the aviation fuel will meet the Euro-4 requirements, that is the standards which the enterprise will have to adhere to when Romania joins the European Union.

However, it is hardly possible to describe with the help of dry statistics alone the impact that LUKOIL has produced on Romania's economy. Indeed, the Company exerts some sort of "macroeconomic" influence on the country's economy by facilitating the formation of a competitive market of petroleum products there. In fact, LUKOIL exports to Romania its "signature product" - the strategy of vertical integration.

As Vagit Alekperov has noted, the presence at the Romanian market of several large companies, which have their own refining facilities and their own retail network, gives motorists the opportunity to choose, and creates a competitive environment. He has said that the Company's further development on Romania's territory may be aimed at broadening the sales network. To ensure the sale of the products turned out by the modernized refinery, it is necessary to have 350 gasoline filling stations. In the next few years the Company plans to reach that level and to stop there. Gaining a monopoly position at the market does not enter into its plans.

Also, LUKOIL is prepared to continue the vertical integration series and consider projects relating to the sphere of petrochemistry. In particular, the Company is studying possibilities associated with the Oltchim chemical plant. Regrettably, there are considerable problems there concerning raw materials supply and investments. Therefore, according to the LUKOIL President, the project is still at the initial stage and is being considered only as a concept.

Vagit Alekperov has promised to the Romanian side that LUKOIL will not be jacking up fuel prices unreasonably. Moreover, there will be no intermediaries between the refinery and those who use the services of the Company's gasoline filling stations, which will make it possible to keep the prices of gasoline and diesel fuel at an economically justified level. Besides, the head of the Company noted, LUKOIL has vast experience of maintaining relations of partnership with consumers in other countries, including farmers, to whom the Company supplies petroleum products at fixed prices the year round. Such practice could be employed in Romania as well.

In other words, LUKOIL intends to utilize all the advantages of vertical integration on Romanian soil. This will enable the Company to entrench itself at the local market and to gain a foothold for carrying out new investment projects. As for the Romanian motorists, they will be insured to some extent against unjustified jumps in gasoline prices, which often happens when the market is ruled by intermediaries and not by vertically integrated oil companies.

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Oil of Russia, No. 1, 2005
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