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No. 4, 2012

Vladimir Mishin


The Russian oil giant is continuing its successful implementation of fuel projects in Asia Minor

The potential for Russian-Turkish economic links is impressive. The experts predict that, in a few years' time, the mutual trade turnover between Russian and Turkish government- and privately-owned companies will reach the $100 billion mark. The key element in the Russo-Turkish business cooperation is the energy sphere. This involves both deliveries of petroleum products and natural gas from Russia to Turkey and cooperation in nuclear power and a number of other areas. A substantial contribution to expanding and deepening the energy cooperation between Russia and Turkey is made by the Russian energy giant, oil company LUKOIL, whose subsidiaries have been operating on the Turkish fuel market for several years already.

Large but dependent on energy supplies from abroad

At the beginning of the 21st century, the Turkish economy is developing dynamically. In 2000, for instance, Turkey's per capita Gross Domestic Product (GDP) stood at $8,000, whereas by 2011, it had reached $14,500 (a rise of 81.3%). In absolute terms, Turkey's GDP 2011 amounted, according to the International Monetary Fund, to $1.074 trillion, demonstrating an increase of 10.8% year-on-year, compared to 2010.

Turkey's GDP growth is inevitably entailing a rise in energy consumption in the country, through supplies from abroad, moreover. According to the International Energy Agency (IEA), for example, the total energy consumption in Turkey in 2011 amounted to 114.1 million tons of oil equivalent, whereas it produced only 33.3 million tons of oil equivalent itself. In other words, last year Turkey covered only 29.2% of its domestic energy consumption with its own resources, while having to import 70.8% of the energy resources used. Turkey is currently virtually 100% dependent on imports of petroleum products: in 2011, according to the International Energy Agency, 19.4 million tons of gasoline, diesel fuel, kerosene and other petroleum products were imported into the country.

There is similar situation on the Turkish fuel market in relation to natural gas: in 2011, according to IEA data, Turkey consumed 36.7 billion m3 of gas, of which 36.1 billion m3 were supplied from abroad (almost 72% of the total volume of Turkish gas imports consisted of Russian natural gas).

In Turkey, 51% of the gas consumed is used in thermal power plants (TPP) and 49% for domestic purposes. In 2011, Turkey's thermal electric power plants generated 170 billion kWh of electricity, or 74.7% of the total electricity produced in the country. In 2019, Turkey plans to start up the first power unit at Akkuyu, the first Turkish nuclear power plant, which, in 2022, should reach its design capacity of 4.8 GW. The Akkuyu Nuclear Power Plant, which Russia is building for Turkey, will generate up to 33 billion kWh of electricity per annum. Even so, the Akkuyu NPP will not resolve all Turkey's energy problems, as the country's consumption level is forecast to rise to 580 billion kWh by 2020. In other words, considering the specific weight of TPPs in electricity generation in Turkey, gas consumption in the country will grow and is forecast to reach 63 billion m3 in 2020.

The dynamics of motor fuel consumption in Turkey are more complex, being determined primarily by the stable increase in the number of road vehicles in the country. Indeed, in 1995 there were 5 million vehicles in Turkey, whereas the country's cars, trucks and buses, etc. numbered over 16 million in 2011 (a rise of 220% over 15 years). It should be noted that, last year, Turkey itself produced 1 million motor vehicles, but the global economic crisis also affected the dynamics of motor fuel consumption in Turkey. The stable rise in the number of motor vehicles in the country did not produce a linear rise in sales of products at Turkey's gasoline filling stations.

The crisis is no obstacle to success

LUKOIL Eurasia Petrol and other subsidiaries of JSC LUKOIL operating in Turkey provide quality fuel for owners of various types of motor vehicle, as well as ships transporting both cargo and passengers on the Mediterranean, Black, Aegean seas and the Sea of Marmara.

Turkey is a country with a dynamically growing economy that is helping raise the welfare of the population. As a consequence, in Turkey, despite the global economic crisis, growth was demonstrated last year in the number of vehicles on the roads by almost a million or 6.7%.

On the other hand, however, the crisis did "modify the operating system" of cars, buses, tractors and other vehicles in Turkey, making it more rational, economical and careful. As a result, in spite of the increase in the number of vehicles, no similar growth was demonstrated in Turkey in the total sales of petroleum products during the crisis period (compared to 2008).

The aggregate consumption of gasoline in 2011 amounted to 2.47 million m3 compared to 2,715 million m3 in 2010 (a 9% fall in consumption) despite the fact that 50.4% of Turkey's vehicles are passenger cars which are the main "consumers" of gasoline.

As for diesel fuel, in 2011 Turkey consumed 16,654 million m3 and 16,303 million m3 in 2010 (a rise of 2.2%).

The crisis years have seen an even more substantial drop in consumption in Turkey of black oil and furnace fuel - by 59%. Such a sharp drop in the interest of Turkish consumers in black oil and furnace fuel is connected, of course, not only with rational use of energy resources by the population but primarily with the fact that natural gas is being used more and more actively on Turkey's fuel market.

Given the negative dynamics of consumption on Turkey's fuel market from 2008 through 2011, however, and, as a consequence, the growing competition between energy companies operating in Turkey, LUKOIL subsidiaries managed, during the crisis period, to retain their worthy position on the country's fuel market, stretching across Asia Minor.

Success comes to those who deserve it

"The acquisition of major sales assets in Turkey is increasing our overseas retail network immediately by 18% and constitutes a major element in the Company's downstream strategy on the Black Sea and Mediterranean markets for bringing our products with a high value added to the end consumer," LUKOIL President Vagit Alekperov stated in 2008.

During the crisis years in the world economy, in Turkey LUKOIL successfully continued its policy of flexible response to the global economic challenges.

In particular, during this period, some of LUKOIL subsidiaries, including LUKOIL Eurasia Petrol, were reshuffled to optimize their management structures and operating processes.

For instance, the regions of the Black Sea and the Mediterranean were combined within the regional management structure. As a result, the distribution of gasoline filling stations by region and use of manpower at LUKOIL filling stations were streamlined. In particular, the powers of field personnel were expanded and the operating processes at filling stations were optimized.

There are currently LUKOIL subsidiaries operating in six regions of Turkey. These are the regions of the Sea of Marmara, Central Anatolia and the Black Sea, the Aegean Sea, the Mediterranean, Western Anatolia and Southern Anatolia.

In order to optimize the production activities of LUKOIL subsidiaries in Turkey, the number of LUKOIL filling stations in many provinces of the country has been reduced from a total of 723 (on January 1, 2010) to 586 (on January 1, 2012) that are operating more efficiently. The forecast of the number of LUKOIL filling stations in Turkey for 2013 is 580. The staff numbers at the Company's head office in Istanbul were also cut during the crisis years (by 12%).

Despite the drop in the number of LUKOIL filling stations in Turkey, however, the average daily fuel sales at each of the Company's gasoline filling stations in 2011 reached 1,630 tons of diesel fuel and 158 tons of gasoline (1,788 tons in total). Sales forecasts for 2013 stand at 1,684 tons of diesel fuel and 136 tons of gasoline, totaling 1,820 tons of motor fuel a day.

LUKOIL Eurasia Petrol achieved sustainable success during the global economic crisis thanks to a series of programs recently implemented by LUKOIL.

First, in order to improve the quality of client service at filling stations, 5,000 personnel underwent special professional training. Second, the operating processes at the filling stations were optimized (online systems being used to monitor sales, fuel levels in tanks and so on). Third, LUKOIL Eurasia Petrol and JSC LUKOIL-Inter-Card together presented, in 2010 in Turkey, the first LUKOIL overseas loyalty program for filling stations customers. For LUKOIL, Turkey is one of the priority regions for development of the fuel retail business, which is why it was so important to launch implementation of the first overseas customer incentive program precisely here. As a consequence, the commercial results and the experience gained during loyalty program implementation will be of fundamental significance for all LUKOIL subsidiaries operating on the fuel retail markets of Europe, Asia and America.

Within the scope of the program, loyalty cards are distributed for LUKOIL filling station customers in Turkey, gift cards are introduced, launching of other types of cards is planned, and price cut campaigns are conducted that increase the popularity of the program and attract new customers to LUKOIL filling stations.

The broad scale introduction of the customer loyalty program promises to increase the volume of sales at Turkish LUKOIL filling stations of gasoline, diesel fuel and motor oils, the prices of which are very dynamic in Turkey, and, as a consequence, to bring the Company substantial economic benefits.

Achievement of the cost-effective operation of JSC LUKOIL subsidiaries in Turkey is also promoted by supplies of LUKOIL petroleum products to the Turkish fuel market. These are delivered to the Turkish ports of Izmit, Samsun, Nora, Hatay, and Mersin from LUKOIL refineries in Volgograd, Odessa, Burgas and Sicily. The choice of refinery and the petroleum product delivery schedule are determined by economic feasibility, optimal logistics and other factors. Considering that, at the beginning of 2011, Turkey adopted European motor fuel standards, high quality gasoline and diesel fuel are supplied to the Turkish domestic market.

Advantages of vertical integration

LUKOIL is to build a new refining complex at the LUKOIL Neftochim Burgas refinery in Bulgaria. The cost of the project is estimated at $1.1 billion and start-up of the complex is scheduled for 2015. The complex will help increase production of Euro-5 quality diesel fuel by 1.2 million tons a year and phase out production of high sulfur fuel oil.

The "well to wheel" principle, which underlies the operation of LUKOIL, is thus fully implemented at its filling stations in Turkey.

In 2009, LUKOIL refineries supplied Turkey with 340 thousand tons of petroleum products; in 2010 - 330 thousand tons; in 2011 - 300 thousand tons (another 50 thousand tons were received from other producers).

Timely delivery of LUKOIL petroleum products to Turkey is ensured by LITASCO (the supplier) and Palmali (the carrier). Batches of petroleum products of up to 10-12 thousand tons are delivered to Turkey by Palmali tankers, whereas tankers of the requisite deadweight operating on the world sea carrier market are chartered for larger volumes of gasoline, diesel fuel and other petroleum products from LUKOIL refineries.

LUKOIL has nine of its own terminals for rapid and quality unloading of LUKOIL petroleum products at Turkish ports. In 2009, their tank farms had an aggregate capacity of 270 thousand m3 and, in 2010, this was increased by 4.6%, to 282.5 thousand m3.

Other components of LUKOIL's work on the Turkish fuel market are the bunkering business and sale of liquefied natural gas to consumers.

According to the forecasts, this year LUKOIL will bunker 1,100-1,300 vessels of various types at anchorage in Istanbul and the ports of the Izmut Bay (Sea of Marmara) and will sell about 60 thousand tons of petroleum products here.

As for the work of the LUKOIL subsidiaries on the very promising Turkish gas market, the capacity of which, despite development in the country of the nuclear and alternative electric power sectors, is likely to grow by 70% by 2020, the Company's main goal here is to ensure stable and steady growth of gas sales to Turkish consumers. To this end, LUKOIL Eurasia Petrol has drawn up a strategic plan envisaging expansion of the LUKOIL terminals in Turkey (the five current storage facilities have a capacity of 7.65 thousand m3 of LNG), optimization of logistics and an increase in marketing activities.

The important bilateral agreements between Russia and Turkey and creation of the Russian-Turkish summit-level Cooperation Council provide convincing evidence that further cooperation between the two states will be effective and bring both countries and their peoples tangible new benefits, above all in the energy sphere, where the Russian oil major LUKOIL is already operating so successfully in Turkey.

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Oil of Russia, No. 4, 2012
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