Save for later Print Download Share LinkedIn Twitter Russia is rapidly increasing its capacity to export diesel to Europe (related). But lower demand and tough competition in the market are raising new doubts over whether such a strategy is needed. Vladimir Nazarov, deputy vice president and head of the oil products transportation, registration and quality department at Russia's national oil pipeline monopoly Transneft, tells Nefte Compass in an interview why it is necessary to increase the country's export potential, at the same time as dealing with challenges in the domestic market. Q: Is there an understanding of the volume of petroleum products that will be produced in Russia in 2016 and 2017? A: The situation is rather complicated in terms of long-term planning because there is both a lower demand in the domestic market as well unfavorable market conditions in the external market. Oil companies have already amended their refineries' modernization plans and have signed the necessary supplementary agreements to the earlier signed four-sided agreements with state bodies. However, we believe that today the country's key plants have already decreased their capacities to the minimal level. This means that there should be no further decrease. As a result, the output of petroleum products should stabilize at a certain level in 2016. Next year, the situation is likely to improve as some refineries, including the Taif, Taneco, Antipinsky and Volgograd plants, should by the end of the year launch units allowing them to boost their yield of light products. This means that even if primary refining stays flat, the output of light products should grow. Moreover, there is still an unresolved issue over canceling a decision to increase export duty rates for mazut [fuel oil] to 100% of crude oil export duties, which means that oil companies should try to boost the outcome of light products. So we are optimistic about 2017 when the output of light products should grow rather than fall. Q: What will be the output of light products in 2016? A: We hope it will be flat with 2015, although there might be a 2%-3% growth for gasoline and diesel. Q: How significant might the decline in domestic demand be in 2016? A: We see a decline in jet fuel demand of 13% compared with 2014. Both passenger and freight traffic have dropped. We are in constant contact with oil companies and Rosaviacia (Russia's Federal Agency For Air Transport) on the issue. According to our forecasts, jet fuel domestic demand should stay flat on the year in 2016. Starting from 2018, we expect demand to grow and grow significantly by 2020. So Transneft's plans on building the necessary infrastructure for jet fuel deliveries to the Moscow aviation hub would be relevant. As far as gasoline is concerned, we also see a domestic demand decrease in 2016, although it should be not as dramatic as with jet fuel. We expect gasoline demand to return to 2015 levels next year. As far as diesel is concerned, Transneft is mostly interested in exports. Transneft has advantages over other means of transport, mainly over railway, as far as exports are concerned. We expect diesel exports to grow both because there will be lower domestic demand and a reshuffling of those unutilized volumes for exports. Taking those factors into consideration, Transneft is boosting the capacities of the trunk oil products pipeline system for diesel exports. Q: What are the capacities? A: First of all we are talking of boosting capacities with the Sever products pipeline and construction of the Yug line. Q: Where do the projects stand now? A: As far as the expansion of the Sever pipeline is concerned, the project is being implemented in two stages, the so-called Sever-15 and Sever-25. In 2016, work on Sever-15 should be completed allowing to boost shipments to Primorsk to 15 million metric tons per year. In 2017, shipments should stand at 15 million-16 million tons. In 2017, work on Sever-25 should be completed. Starting from 2018, shipments in system should stand at 25 million tons/yr. All plans are being implemented in accordance with the schedule. The Yug pipeline project is also being implemented in two stages. The first one includes the launch of the Volgograd-Novorossiysk section, which would connect the Volgograd refinery to the trunk oil products pipeline network. In the first stage, which should be completed in the second half of 2017, shipments should total 6 million tons/yr. In the second half of 2020 we expect work to be completed on the Priboi-Volgograd section. As a result, the diesel export terminal in Novorossiysk should be fully connected to the trunk oil products pipeline system, allowing all the producers to ship 11 million tons/yr of diesel for exports from Novorossiysk. Q: How are oil products shipped to Novorossiysk now? A: By rail. Many companies use a combined transportation: by pipeline to the loading Nikolskoye station, reloading and further shipment by rail to the port. The scheme is rather complex as there are more passengers traveling to the Russian Black Sea coast in the summer, while there is always the weather factor in the winter, which also impacts shipments to Novorossiysk. Q: And this should be more expansive, right? A: Absolutely. When we eliminate the railway element from the shipping scheme, we will help oil companies to cut their logistics costs and simultaneously give some room to the railway for passenger travel. So we'll kill two birds with one stone. Q: What are the costs for both the Sever and Yug projects? How are they financed? A: We are building few new infrastructure units for the Sever product pipeline; we are using the existing crude oil pipelines to pump petroleum products. The Yug pipeline involves new construction. As far as financing is concerned, Transneft is using both its own funds and oil companies' funds to expand the local pipelines running from the refineries to the trunk oil products pipeline system. For example, the Taif-NK and Taneco refineries currently annually ship 1.5 million tons and 500,000 tons of diesel respectively through the trunk products pipeline network. Once the Sever-25 project is implemented, those should be ready to ship 3 million tons/yr of diesel each. Transneft expands the trunk pipes, while oil companies expand pipes from their refineries to the trunk system. We believe this is reasonable. If a company wants to ship more, it needs to expand its capacities. Q: There were talks on financing the projects using a special shipping tariff. Why was the decision made to use Transneft's own funds for the job? A: The company made a decision not to slow the projects down. A special shipping tariff would have required long approval procedures with both the regulators and oil companies. Q: Are there supply guarantees from oil companies to fill the Sever and Yug pipelines? A: When we offered oil companies to sign the ship-or-pay agreements, they insisted Transneft should sign similar commitments. Talks dragged on. As a result, we decided to abandon the idea. However, there are agreements with oil companies on the resource base for each project, which means that we understand from which plant and which volumes of oil products would be supplied. On the one hand, those agreements include no financial commitments for oil companies, but on the other hand, Transneft also has no financial commitments. If we fix certain shipping volumes for a particular company, we might conflict with the governmental decree on nondiscriminatory access to the pipeline. So the decision not to use the ship-or-pay accords was a mutually acceptable one for both Transneft and the oil companies. Today we have an accord from oil companies to ship certain volumes through the system. We are closely watching the implementation of the refineries' modernization programs and the volumes produced and understand that oil companies are not currently violating their commitments to supply diesel into the system under the volumes agreed. Q: Which companies would use the expanded Sever capacities and the new Yug products pipeline? A: Gazprom Neft, Rosneft, Lukoil, Bashneft, Taif-NK, Taneco, the Antipinsky refinery and Gazprom Neftekhim Salavat should use the Sever capacities, while the Yug main users will be Lukoil, Rosneft, Gazprom Neft, Bashneft and Gazprom Neftekhim Salavat. Q: What will be the additional export capacities Russia should get once the projects are implemented? A: Some 23.5 million tons/yr of diesel is currently shipped using the products pipeline system. The Sever-25 and Yug projects should together bring 36 million tons/yr of capacity. Options also remain to use our products pipeline in Belarus, which is also focused on exports to Europe through Ukrainian territory. Q: Might it happen that the capacities will be underutilized? A: There are several factors to mention. It is true that Europe is currently looking more at electric traction as far as cars are concerned. It was not long time ago that Europe declared a move to dieselization, but we can see now the trend is to stimulate the purchase of electric cars. On the other hand, we see that diesel demand in Europe should stay at the level of 2016, even if those plans to electrify the car fleet are implemented, because both traffic and the well-being of people are rising. If diesel demand remains flat, the next question is who enters the market and what supply source Europe will use. Europe would need to buy diesel as its downstream sector currently covers only gasoline demand, while diesel output is not enough. This gap gives some room for diesel exports to Europe. We believe that our task is to give oil companies the most effective logistics so that they get extra advantages over other diesel fuel suppliers to Europe. Both the Sever and Yug projects should help oil firms cut costs. And then much will depend on oil firms' trading skills. There is a golden supply-demand rule. We believe that demand should be flat. Then there is the supply issue. If you make a better offer, you enter the market. I would repeat -- we give Russian oil firms the most effective transportation routes. If they manage to sell effectively, they'll get the market and get profits as well. We are quite optimistic and believe both the Sever and Yug pipeline capacities would be fully utilized. Q: What are the advantages of Russian export ports? A: Russia is definitely closer to Europe than India. So this is where we win. The next question is what transport we use. Russian oil companies ship their products to the port via cheaper pipeline transport, load to tankers and ship by sea to Europe. Sea shipping for long distances is also quite a cheap way of transportation. India has a longer sea distance to Europe, even if it uses large-deadweight vessels. So Russian oil firms use the most effective logistics. But definitely questions remain on the costs of petroleum products. Q: You said there remains an option to ship diesel fuel through Belarus and Ukraine. Transneft recently sold its product pipelines in Ukraine. How is this route currently used? A: Diesel supplies to Ukraine were resumed in May. In June, shipments should total 100,000-120,000 tons. We expect the volumes to remain flat in the second half of the year. If there are requests from oil companies, we will boost deliveries in that direction. Q: Is diesel supplied to Ukraine or through Ukraine to Europe? A: First cargoes were supplied to Ukraine. But discussions are on today on shipping diesel through Ukraine to Hungary and other countries. Q: Which companies are interested? A: Rosneft was the first to start supplies. In August we should get requests from other companies and would be ready to discuss that. We see that many companies are interested. Q: What are the pipeline capacities in that direction? A: Historically, supplies to Ukraine and through Ukraine reached 1.8 million tons/yr, although the pipeline capacities are much higher. If there is demand, Transneft would be ready to boost the capacities. Q: Are there any risks for Ukrainian transit? A: We see no risks as Transneft is only responsible to Russian oil companies for shipping diesel to the Russia-Belarus border. Q: When Transneft boosts export capacities in Russian ports, it simultaneously decreases shipments to the Baltic states. However, Transneft has a stake in LatRosTrans (a company shipping crude oil and products from Belarus to the Latvian port of Ventspils), which means Transneft is losing profits because of lower shipments to the Baltic states. A: Indeed, we are boosting export capacities in the Russian ports. It is more reasonable in terms of economics for Russian companies to export from Primorsk. Costs for shipping to f.o.b. Primorsk compared to those of shipping to f.o.b. Ventspils are $10/ton lower. So we give oil firms more effective routes, but we do not impose any limitations on the Baltic direction. If there are requests from oil companies, the direction will be used for Russian oil products' exports. Q: But the trend is that shipments to the non-Russian Baltic ports are decreasing? A: Right. We see lower exports in that direction. Transneft has both a stake in Latvian infrastructure and a Belarus subsidiary focused on shipments to the Baltic states. There is a 500 kilometer pipeline section [in Belarus], which is only utilized if products are shipped through it to Ventspils. Transneft currently has a task to keep both its assets working, to keep the staff and not to cut jobs. Q: Are there plans to sell the assets? A: We believe that the company should not currently sell these two assets. We are looking for solutions. One of the options for our Belarus asset is to use products from Belarus refineries for pipeline shipments to Ventspils. This is what we have been trying to do for the last year and a half. Today, Belarus plants send their oil products to Ventspils by railway. Our task is to get them to the pipeline simultaneously loading our assets. The Naftan refinery last year shipped 500,000 tons of products to Ventspils through our pipe. This year, we plan to double the volumes to 1 million tons. If we manage to get 3 million tons shipped, our assets will not lose profits. This is an ambitious aim, but we can achieve it. Q: Were there offers to purchase the assets in Belarus and the LatRosTrans stake? A: No. Q: Is Transneft planning to connect other plants to the trunk products pipeline system, including the Tuapse and Angarsk refineries? A: As far as Tuapse is concerned, there is no need to connect it. All the necessary infrastructure is in place there to ship oil products directly to the Tuapse port and onward for exports. As far as the Angarsk refinery is concerned, Rosneft so far hasn't asked for it to be connected to the trunk network. The plant is rather oriented to the far eastern market and there is no reason to connect it to the Europe-oriented system, so as not to overload the markets. We had talks with Rosneft several years ago on connecting its Achinsk plant to the system. The move would require construction of a 350 km pipeline to the trunk product pipeline network. But the resource base the plant has is not enough to recoup costs. Q: What is Transneft's share in the overall products transportation? Are there plans to boost the share? A: In 2015, Transneft shipped 25% of all light products produced. Apart from diesel exports, we plan to expand jet fuel and gasoline supplies to the Moscow region. Those are domestic supplies. The target for us is to ship 38%-40% of all light products produced. This is an ambitious aim, but we can achieve it. Q: What are the advantages of pipeline transport over rail? A: The railway has a more extensive network and has an ability to ship oil products of various quality. We understand that Transneft will never be able to transport 100% of gasoline produced. Our advantage is that we can deliver large cargoes of a single quality product over long distances, coupled with cheap transportation. Diesel export capacities are another advantage. Thus, 75% of all diesel fuel being exported could be exported by pipeline.