Independent Oil Traders Demand Access to Transneft Pipelines

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Independent wholesale oil buyers in Russia have sent an official complaint to Russia’s Federal Anti-Monopoly Service (FAS), arguing they should have access to purchase oil products through the pipelines of Transneft, the country’s biggest pipeline operator.

State-owned Transneft owns and operates more than 53,000 kilometers of oil and gas pipelines in Russia, China, Europe, Ukraine, and other post-Soviet states. It transports about 90 percent of oil products produced in Russia.

Independent traders are often forced to buy oil shipped by rail, which can be more than three times the price as by pipeline.

At the St. Petersburg International Mercantile Exchange (SPIMEX), traders buy oil products and petroleum with the terms of shipment already included. However, when given the choice, most companies deliver by rail and pass on the price to the independent traders.

“The current problems are connected to the fact that oil companies – the fuel producers – sell and deliver very little fuel by pipe (where the seller pays for transport and insurance), and the majority of goods are sold by delivery via rail,” Alexey Soldatov, Director of Development at Algorithm Fuel Integrator, told Neftianka.

“Delivery by pipe is usually 2 times cheaper than by rail, and, therefore, major companies have an advantage in selling fuel to the final customer at a lower, more competitive price,” Soldatov said.

According to the signatories of the letter to Russia’s FAS – C.A.T. Oil AG, Solid Commodities Markets, ATI, and Transtekinvest, transport can be up to five times more expensive, especially when delivering oil products to remote and far away locations.

A map showing Transneft's vast pipeline system across Russia. From Transneft.ru
A map showing Transneft’s vast pipeline system across Russia. From Transneft.ru

For example, delivery from Rosneft’s refinery in Samara via pipeline costs 604 rubles (about $9) per ton, but by rail it costs 1933 rubles (nearly $30).

“Oil companies have an advantage in sales: we cannot deliver our products in several regions of the country, since it doesn’t make sense because of the loss of margin,” said Ilya Moroz, CEO of Solid Commodities Markets, one of the signatures of the complaint.

Having access to Transneft’s pipelines would help keep the final price of the product down for independent traders. For smaller players, this is especially important to survive the current bout of low oil prices, which have decreased more than 40 percent in the last year.

In the letter, the independent traders reference statistics from the St. Petersburg International Mercantile Exchange (SPIMEX), which show companies are keeping more pipe-delivered products to themselves, and selling less on the market. The data shows since the beginning of 2015, Bashneft and Lukoil haven’t traded any of their diesel fuel delivered via pipe on the exchange, and that Gazprom Neft didn’t sell any from its Moscow or Omsk refineries. Rosneft, Russia’s largest oil producer, hasn’t sold any diesel fuel from its Samara refinery, but only 5,000 tons from its refinery in Yaroslav. Surgutneftegaz, another major oil producer, only delivered 10,200 tons of diesel fuel for traders to buy.

In October, Rosneft produced 686,500 tons of petrol, but only sold 197,000 tons, or 25.9 percent, on the SPIMEX. Even less of their diesel fuel ever made it to the trading floor: 1,212,700 tons were produced and only 159,700 tons, or 11.9 percent, was brought to the SPIMEX.

Without more access, independent traders that sell petroleum products cannot compete with the major companies like Rosneft, Gazprom Neft, Lukoil, Bashneft, and Surgutneftegaz, which deliver products directly through Transneft’s pipeline system.

In 2014, 5.15 million tons of diesel fuel was transported in Russia’s domestic market, and independent companies only purchased 355,000 tons on the exchange market, or about 7 percent, according to data from Commodity Markets Analysis.

“Large Russian oil companies want to protect their monopoly. Since it is cheaper to deliver by pipe than by train, the transport tariff is less and can trade oil for a lower price,” Mikhail Turukalov, Development Director at the Moscow-based Commodity Markets Analysis, told Neftianka.

Wholesale buyers argue Transneft has a monopoly on oil and oil product distribution. In any market, less competition means less profit, and therefore higher fuel costs for customers.

The average price of a liter of diesel fuel in Russia is 34.9 rubles per liter, which has increased partly as a result of more expensive rail transport.

The Russian government owns 75 percent of Transneft, which was created in 1993 and inherited the pipeline network from the Soviet operator Glavtransneft.

Louise Dickson

Russia’s Highest-Paid CEO is Gazprom’s Alexey Miller at $27 million

bloknot.ru
Photo of Alexey Miller from bloknot.ru

Alexey Miller, chief executive of Russia’s largest gas producer Gazprom, topped Forbes Russia’s top-paid managers list for the first time ever, hauling in an estimated $27 million in 2014.

Miller, who has been at the top post at Gazprom since 2001, was one of the few top-paid Russian executives to see his salary increase in dollar terms this past year, given the ruble’s massive devaluation.

Forbes published its annual ranking of Russia’s best-compensated CEOs on Thursday. The estimates are calculated using the companies’ compensation disclosures, in addition to analysis by Forbes journalists.

In second place was Andrey Kostin, CEO of Russia’s second-largest lender VTB, who saw his salary drop to $21 million from $37 million in 2013. In third place is another energy tsar, Igor Sechin, head of Rosneft, who made $17.5 million in 2014. This is the first time Sechin’s salary was published by Forbes Russia’s since the magazine was sued after reporting his salary was $50 million in 2013. After that, the Russian government ordered top executives from state-owned companies to make their salaries public.

Miller and Sechin’s pay are on par with companies that are far outperforming either Russian energy giant. ExxonMobil boss Rex Tillerson’s salary was estimated at $33 million in 2014 and Bob Dudley was compensated $12.74 million by BP.

Both Miller and Sechin are considered longtime confidants of Russian President Vladimir Putin, and have both worked with him since the 1990s, dating back to the president’s time in the St. Petersburg mayor’s office.

The more than $10 million gap between Miller and Sechin’s salaries would make sense if Gazprom were performing much better than Rosneft this year, which is not the case. Net income fell steeply and net debt increase by almost 50 percent.

Like Rosneft, Gazprom is suffering from low oil prices, but due to decreased demand from Europe, Gazprom is massively under producing. It is estimated in 2015 Gazprom will only produce 450 billion cubic meters of its 617 billion cubic meter capacity.

Back in 2008, when the company was valued at $360 million, Gazprom head Alexey Miller forecasted that within a decade the oil conglomerate would become the world’s largest company with a market capitalization of $1 trillion.

Now its market capitalization hovers around $51.5 billion. In the last year, stocks have lost more than 35 percent of their trading value.

However, it’s not all doom and gloom for Gazprom, as projects such as Nord Stream II, a pipeline from Russia to Germany, and two potential pipelines to China could strengthen the company’s position.

Louise Dickson

Russia looks for new friends in Japan, forgetting what goes around comes around

The Sakhalin-1 oil production platform, which Japan's Sakhalin Oil and Gas Development Co (Sodeco) has a stake in
The Sakhalin-1 oil production platform, which Japan’s Sakhalin Oil and Gas Development Co (Sodeco) has a stake in

Russia’s Rosneft, the world’s largest publicly traded oil producer by output, has offered Japan partnership in Far East and Siberian oil projects, to the tune of 6 billion barrels and a resource base of 100 billion barrels of oil equivalent.

Igor Sechin, CEO of the state-owned oil company offered Japanese companies to participate in Russian oil projects, including drilling at Sakhalin and Siberian oil fields. Sechin, who was in Japan last week, offered unnamed Japanese partners participation in 10 projects.

He said that he is ready to offer cooperation “from exploration, commercial, and development stages.” However, more likely than not, Rosneft, one of the world’s most highly-indebted oil companies, is looking for upfront capital.

“Rosneft offers our Japanese partners production projects with reserves totaling 6 billion barrels and the resource base of 100 billion barrels of oil equivalent,” Sechin said at the Russian-Japan energy conference in Tokyo on November 6.

Sechin also offered Japanese firms the chance to participate in Rosneft’s Siberian oil fields Verkhnechonskoye, Srednebotuobinskoye, Tagulskoye, and Russkoye.

Joint work with Japanese companies in the Far-East Petrochemical Co refining and petrochemical project and the development of Zvezda shipyard are also potential areas of cooperation.

Sechin said that his oil company would consider involving Japanese partners in building a potential natural gas pipeline from Sakhalin to Japan.

Currently, the two countries only collaboration is offshore drilling off the Sakhalin-1 and Sakhalin-2 LNG facilities. Sodeco has a 30 percent share in Sakhalin-1 with Rosneft and Japan’s Mitsui and Mitsubishi are shareholders in the Sakhalin-2 project with Gazprom.

Japan has been eager to get involved in energy project in Sakhalin (ever more so since the Fukushima disaster), despite the fact that the island and its waters have been under Russian (then Soviet) jurisdiction since the end of World War II, and is still a diplomatic sore spot for Tokyo.

Both Russia and Japan have historical ties to the island of Sakhalin, and up until 1945, both co-inhabited the island. In 1905, the island was split at the 50th parallel between the Russian and Japanese empires.

stratfor
Source: Stratfor

Another dispute, dating back to the Russo-Japanese war at the beginning of the 20th century, is the territorial dispute over the Kuril Islands, which has made diplomatic relations between the two countries frosty since.

As the world’s largest consumer of LNG, Japan is an important client for Russia, which is trying to expand its LNG market share.

Japanese companies could provide Russia with advanced technology, as well as upfront investment for Rosneft projects, in exchange for stakes in oil fields or LNG projects. Beijing is taking advantage of Moscow’s precarious economic situation, and now maybe it is time that Tokyo does the same.

Vladimir Putin was expected to make a state visit to Japan by the end of this year, but this could be delayed until 2016. Whenever Putin makes his trip for a one-on-one with Prime Minister Shinzo Abe, more concrete details on the energy deals can be expected.

The most recent diplomatic meeting between the two states was in September when Japanese Foreign Minister Fumio Kishida visited Moscow and met with counterpart Sergey Lavrov.

Japan has joined US and EU allies in sanctioning Russia over its annexation of Crimea in March 2013.

 Louise Dickson