Lukoil's 10-Year Refinery Modernization Program Estimated at $20 Billion

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Researched by Industrial Info Resources (Sugar Land, Texas)--The decade-long refinery modernization plans of Lukoil (OTC:LUKOY) (Moscow, Russia) are likely to cost the company an estimated $20 billion. In a bid to augment refinery yields to more than 90% of installed capacity, the company is planning to upgrade two overseas refineries and four Russian refineries at an investment of $2 billion per year. The exercise will be carried out for a period of 10 years. During this time, Lukoil will also implement process improvements at these units to fully comply with the environmentally friendlier Euro-5 standards.

The upgrade has been planned in three phases. During the first phase, 2006-10, Lukoil will focus on increasing the production of Euro-4 compliant gasoline. The second phase, 2008-12, will involve augmenting oil production capacity to 428,000 barrels per day (BBL/d), with a new 171,000-BBL/d distillation unit set to replace two older units. In addition, the production of gasoline with a sulfur content of 10 parts per million is also slated to increase to 53,000 to 64,000 BBL/d. At the end of the second phase of the upgrade, the quality of diesel fuel is expected to meet Euro-5 standards. A coking unit and a secondary gasoil hydrofining unit are scheduled for installation during the third phase of the modernization operation, which will run 2012-17.

The six refineries to be upgraded as part of this venture include those in Volvograd, Perm, Nizhny Novgorod, and Ukhta in Russia, the Burgas refinery in Bulgaria, and the Odessa refinery in Ukraine.

The Volvograd refinery in southern Russia has a combined production capacity of 235,000 BBL/d of fuels and lubricants.. As part of the modernization program, a 20,000-BBL/d delayed coking unit is proposed to be set up by 2011. A diesel-fuel hydrotreater and a fluid catalytic cracking (FCC) unit are scheduled to be developed by 2012 and 2013, respectively.

The Perm refinery, located near the city of Perm, is involved in the production of petrochemicals in addition to fuels and lubricants. The facility refines crude mix from western Siberia and the northern Perm region using hydrocracking, catalytic cracking and coking processes to yield an output of 270,000 BBL/d. The refinery will house a new catalytic cracking complex by 2016.

Lukoil's refinery in Kstovo in the Nizhny Novgorod region has a production capacity of 364,000 BBL/d. Feed for the refinery comprises a blend of Tatarstan and West Siberian oils, which is refined primarily through the visbreaking process. The visibreaker is capable of processing 41,500 BBL/d of blend. A new refining complex, including facilities for alkylation, catalytic cracking and vacuum gas oil hydro-treatment processes, will be developed at the refinery premises by 2011.

The Ukhta refining unit at Komi processes about 14,100 BBL/d of oil blend of Yareg heavy oil and crude from the Komi oil fields. A new isomerization unit is due to be added to this facility.

Two overseas refineries that are part of the overhaul include the Burgas and Odessa plants. The Burgas refinery, located on the Black Sea coast in Bulgaria, primarily focuses on processing Russian export blends to produce both fuels and petrochemicals. The unit's production capacity is 188,000 BBL/d. The facility handles only about 61,000 BBL/d, of which 34,800 BBL/d are processed using catalytic cracking and 26,400 BBL/d through the visbreaking process. The operations of the refinery will be expanded to include an alkylation unit, an FCC unit, and hydrotreatment units for gasoline and diesel by the end of this year. A few existing facilities will also be refurbished. A new heavy-residual-stock-refining unit is being planned for development by 2013.

The Odessa refinery, which handles Urals crude oil, will be equipped with an 18-megawatt power-generation unit by the end of this year. The unit processes 12,300 BBL/d.

In addition to upgrading existing refining facilities to meet Euro-5 standards, Lukoil has also acquired a 45% stake in the TRN refinery in the Netherlands, owned by Total SA (NYSE:TOT) (Paris, France). The stake, valued at $600 million, excludes product and crude oil inventories. The refinery is strategically situated in the Vlissingen Oost harbor region, which provides access to markets in northwestern Europe. The refinery has a production capacity of 158,000 BBL/d. The cracking unit, reportedly one of the largest in Europe, has a processing capacity of 68,000 BBL/d. In addition, the facility can handle a varied feedstock mix including vacuum gas oil, straight-run fuel oil, as well as Urals blend crude oil from Russia. This flexibility allows the plant to be easily integrated with the existing process chain of Lukoil, which can now leverage the additional capacity to strengthen the company's position in the European markets. Lukoil will also stand to benefit from the pre-established infrastructure of TRN, including access to the Maasvlakte Olie terminal, in which the latter has a 22% stake.

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