Sales of Petroleum Products

On November 18, 2009, the Company’s Board of Directors approved a marketing strategy for petroleum product sales in Russian and CIS markets up to 2020. The strategy sets ambitious marketing goals which can be summarised under three headings: business upscaling, brand development, and increase of business efficiency.

Petroleum product outputs

In 2011, Gazprom Neft increased its output of petroleum products by 7.6% to 38.3 mn t. This growth was achieved through increased crude oil refining volumes, supported by expansion of the retail network, shorter periods between maintenance at the Omsk Refinery, and consolidation of the volumes of external refining of oil at Moscow Refinery.

Upgrade programs at the Company’s refineries and product range optimization increased output of automotive gasoline by 11.7%, high-quality jet fuel by 5.6%, and Euro 4 and Euro 5 diesel fuel by 2.6 times in 2011.

Implementation of strategy targets for petroleum product sales will place Gazprom Neft among the top three largest vertically integrated oil companies in Russia and the CIS by retail sales in 2020.

Gazprom Neft already owns one of the most extensive retail networks in Russia and the Company secured its positions in the retail fuel market in 2011.

The Company sells petroleum products in Russia and the former Soviet Union mainly through 15 subsidiaries specialised in wholesale and retail marketing of petroleum products.

Sales of petroleum products in the domestic market grew by 18.3% in 2011 compared to 2010 and reached 24.29 mn t.

As of December 31, 2011 the Company’s marketing subsidiaries added 74 new premises to their network of 1,670 filling stations in 2011, of which 1,245 are in Russia and the CIS. Average sales per filling station in Russia rose by 40% to 14.2 t per day.

Small wholese business grew by 70% across the network to reach 7.9 mn t, wholesale (transit) business declined by 55.87% to 1.283 mn t as volumes were reallocated to higher-margin small wholesale channels.

Expansion of filling station chains, reaching out to new regions

Gas motor fuels (LPG, CNG)

Our Petroleum Product Strategy puts particular emphasis on boosting sales of the two main gas motor fuels, which are liquefied petroleum gas (LPG) and compressed natural gas (CNG).

At present LPG and CNG represent less than 4% of total motor fuel sales by Gazprom Neft. LPG has proved more popular as a motor fuel, accounting for 3.3% of total sales, while the share of CNG is only 0.3%.

Sales forecasts show LPG sales continuing to grow at approximately the same rate until 2020, while the share of CNG in fuel sales is expected to rise from 0.3% to about 2.2%.

Gazprom Neft was offering fuel gas at 131 multi-fuel filling stations by the end of 2011. Retail sales of LPG during the year exceeded 90,000 t.

The Company strategy targets an increase in the number of multi-fuel stations selling LPG to 285 stations by 2020, when total annual sales should be in excess of 260,000 t.

Supplies of liquefied gas for the retail network will come from the Company’s own refineries (in Omsk, Moscow, and Yaroslavl), from Gazprom’s gas-processing plants (in Astrakhan, Orenburg, and Surgut), and from SIBUR.

CNG motor fuel infrastructure in Russia is currently rudimentary at present. In 2011, there were 226 automotive natural gas stations in Russia and they were operating at just 17% of capacity on average. Most automotive natural gas stations are run-down and obsolete (their intended service life is 30 years). About 100,000 vehicles in Russia (0.3% of all vehicles) run on natural gas and most have been modified to do so, although some vehicles are specially manufactured in Russia to use natural gas. (Information from the Russian Ministry of Energy, Russian Automotive Manufacturers Association and Gazprom Neft analysis).

Retail Project Implementation
(as part of the Gazprom Neft Petroleum Product Sales Strategy ion Russian and CIS Markets up to 2020)

No.

Achievements

1

We now have a business presence in 27 regions and have increased the number of filling stations in Russia and the CIS to 1,245, all of which carry the retail brand Gazprom Neft. According to an online poll by Romir Research Holdings in 2011, Gazprom Neft filling stations were among the three best-known brands in Russia.

2

A unique loyalty program for individual customers — ‘ We’re Going the Same Way’ — was designed and introduced at filling stations and is now available wherever the Company has a retail presence in Russia. Nearly 2 mn people had joined the program by the end of 2011, proving its attractiveness to customers and benefit to the Company.

3

We have begun sales of premium-class motor fuel under the G-Drive brand. G-Drive gasoline accounted for 19% of AI-95 gasoline sales in 2011 at stations where it was available. Pilot sales of G-Diesel began at the end of 2011.

4

A non-cash payment system was created and implemented for corporate clients and helped to raise sales to corporate clients to 1.8 mn t in 2011, with more than 40,000 corporate contracts signed.

5

Standardization of filling-station design reduced planning and construction time per station from 12 to 8 months.

6

Rapid development of non-fuel goods and services at filling stations boosted sales to RUB 4.9 bn in 2011. Trading space in filling stations increased in the period to 32,100 m2, and sales per m2 rose to RUB 153,000. All outlets adopt a uniform product range.

7

Operating standards for filling stations and a compliance monitoring system were put in place (in the form of a Manual of Work Rules for Gazprom Neft Filling-Station Personnel and a Quality Control Manual for Filling Stations).

Numbers of filling stations in operation, sales growth per station

2009

2010

2011

2020

Active filling stations

Russia

921

947

1,043

CIS

152

181

202

Eastern Europe

473

468

425

Total

1,546

1,596

1,670

2,100

Average daily sales per filling station in Russia (t/day)

9.1

10.3

14.2

Targeted LPG supplies by Gazprom Group units to Gazprom Neft’s regional retail network

The main obstacles to development of CNG as a motor fuel in Russia are the absence of a developed network of filling stations, lack of service infrastructure for gas-fuelled vehicles, low volumes of gas-fuelled vehicles manufactured in Russia, outdated legislation and regulation, and lack of Government support for use of natural gas as an automotive fuel.

CNG is environmentally friendly and cost efficient. These are key criteria for public transport and commercial transport in large cities So these segments of the transport market could be a natural starting point and showcase for large-scale use of natural gas fuel. Most of the potential consumption for CNG is concentrated in major cities, particularly Moscow and St. Petersburg, and could be up to 3 bn m3 annually, or 10 times current consumption. Current limitations on development of CNG as a motor fuel, and the long payback period for relevant investments, mean that development of CNG fuel use is best implemented in Russia’s two capitals — Moscow and St. Petersburg.

Launch of the Loyalty Program:
‘We’re Going the Same Way’

In March 2010, the Company launched its nationwide loyalty program for individual customers: ‘We’re Going the Same Way’. The program offers a system of deferred discounts: after buying products and services from Gazprom Neft filling stations, participants are entitled to discounts that are recorded as bonuses on their card. The cardholder can use the bonuses they accumulate to pay for other products and services. At present, the program has been taken up in 23 regions where Gazprom Neft has network filling stations, including Moscow, St. Petersburg, Tver, Omsk, Ekaterinburg, Chelyabinsk and elsewhere.

Program results:

  • 1.9 million individual members by the end of 2011
  • Program is active in all regions where Gazprom Neft has a retail presence

Progress of the Rebranding Program

Between 2009 and 2011, the Company built 57 filling stations, refitted 163 more and re-branded a further 507.

Development of fuel retail has great importance for Gazprom Neft. Establishment of a nationwide brand that is instantly recognizable and trusted will be instrumental in achieving the Company’s strategic goal — to be the leader by sales of petroleum products in Russia.

In 2011, fuel sales through our filling stations in Russia grew by 40% to 4.905 mn t. Sales of gasoline rose by 49% to 3.212 mn t, while sales of diesel fuel rose by 97% to 1.620 mn t.

Asia in Kyrgyzstan, and LLC Gazprom Neft-Belnefteprodukt in Belarus. In 2011, these companies sold a total of 1.396 mn t of petroleum products, representing 20.15% y-o-y growth.

In 2011 small wholesaling volumes in all regions of presence rose by 41% compared to 2010, reaching 7.90 mn t. Traditional transit wholesale through subsidiaries dropped by 55.87% to 1.283 mn t as sales were redirected into the higher-margin small wholesale channels.

Electronic trading & commodity exchange trading

Gazprom Neft actively supports development of commodity exchange sales of petroleum products in Russia as a mechanism that ensures efficient, fair and transparent pricing.

We view commodity exchange trading as a mechanism for wholesale marketing of petroleum products that helps to build a universally recognised market indicator (index).

Gazprom Neft is a co-founder of CJSC St. Petersburg International Mercantile Exchange (SPIMEX) and has traded petroleum products there on a regular basis since November 2009. Company sales through the Exchange rose by 2.5 times y-o-y in 2011, when Gazprom Neft sold more than 2.5 mn t of petroleum products on the SPIMEX, or 14.4% of total petroleum products supplied by us on the domestic market. The Company’s share in total sales of petroleum products at the SPIMEX in 2011 exceeded 22%, and our aggregate sales volumes at the Exchange were the second largest of any vertically integrated oil company.

The Company’s petroleum product sales on the commodity exchange in 2011

Source: Company data

download xls

The structure of our exchange sales of petroleum products in 2011 was as follows: gasoline (303,000 t), diesel fuel (1.336 mn t), fuel oil (668,000 t), aviation fuel (228,000 t) and aromatics (2,000 t). (These figures use SPIMEX transaction data).

The Company has ensured regular information updates on the SPIMEX concerning the Company’s target production and sales figures for petroleum products.

In 2011, the Company organized automated data transmission to report off-exchange transactions with its tradable commodity products in conformity with the Russian Government Decree of January 10, 2011, No. 65, ‘On the Approval of Regulation on Records about Off- Exchange Commodity Transactions, Including Long-Term Supply Contracts, Maintaining Registry of Such Transactions, and Disclosure of Registry Information’, and in conformity with SPIMEX rules for registration of such transactions. In 2011, the Company registered 12,600 off‑exchange transactions (since the new Decree took effect on March 1, 2011), or 60% of the total number of off-exchange transactions registered by the SPIMEX for all other companies (21,019 transactions). The total volume of off-exchange transactions registered in 2011 by the Company was above 10.5 mn t.

In its exchange practices, the Company works in strict conformity with recommendations issued by regulating agencies, including those for development of futures markets at exchanges. In 2011, the Company’s specialists assessed operation of commodity exchange trading of futures contracts for delivery of petroleum products in Russia, and the Company’s potential involvement in such a market. As a result, it was decided the Company should apply for the status of Warranting Supplier in the SPIMEX commodity futures market when contracts for supply of summer diesel are made. A service broker for the futures market transactions was selected through a tender procedure, and design work on the transaction technology (Company - Broker-Exchange-Clearing Agent) is currently underway.

Medium-term Goals & Tasks in Logistics, Refining & Marketing, 2012-2014

Refining

Marketing

The Company’s petroleum product sales on the commodity exchange in 2011

Expansion and efficiency improvements in the retail network

Development of the product range

  • Increased output of higher-quality products by retrofitting and construction of units for hydrotreatment of diesel fuel and catalytic cracking of gasoline, and by construction of an isomerization plant at the Moscow Refinery;
  • Deeper refining at existing assets: retrofitting of catalytic cracking units at all Refineries, construction of deep refining facilities at the Moscow Refinery and Omsk Refinery; construction of coking, tert-amyl methyl ether and MTBE units at the Omsk Refinery, and a hydrocracking complex at YaNOS;
  • A program of operating improvements: measures to address efficiency in fuel use and to minimize fuel losses, increase of capacity availability, energy saving measures.
  • Implementing the program to upgrade and rebrand filling stations;
  • Growth of sales through filling stations (45% by 2014) by upgrade and rebranding, the loyalty program, and other activities;
  • Major growth in sales of G-Drive branded fuel (gasoline and diesel);
  • Expansion of the filling station chain. Business growth in the Southern Federal District: upgrade and expansion of the Gazpromneft-South filling station chain, purchases of other chains, upgrade and construction of filling stations in Kazakhstan, Krasnoyarsk, Nizhny Novgorod, and Chelyabinsk Region;
  • Continuation of the program to develop the filling station chain in St. Petersburg.
  • Promoting the G-Family product line; launch and full use of the new lubricant oil packaging facility in Omsk, Fryasino, Moscow Region;
  • Building a distributor network for GPN lubricants in Central Asia and Northern Europe;
  • Construction of a chain of bunker terminals: 4 terminals to be built (St. Petersburg, Murmansk, Ust-Luga, and Kaliningrad);
  • Expanding presence on foreign markets Gazprom Neft Marine Bunker (Baltic and Balkans);
  • Development of ita own chain of modern TZK of Gazprom-Aero
  • Expansion of presence in the foreign markets (Central Asia, Western Europe, Middle East).