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Nikolay Tokarev, President of Transneft: “We use only our own resources and do not borrow money abroad.”

Date of publication: 8 September 2017 Printable version

In his interview for Kursiv newspaper Transneft President Nikolay Tokarev explaines why his Company remains the world’s biggest player in the crude oil transportation market and why cooperation is so important in this industry. He was interviewed in Astana where he came to take part in a meeting of the International Association of Oil Transporters (IAOT) which brought together oil pipeline companies of Europe, CIS and Asia.

– At the present time the oil and gas industry goes through hard times. Did the decision by OPEC and non-OPEC countries to cut crude oil production as well as low oil prices take a toll on Transneft operations? What measures does Transneft take to assure financial stability? 

– These factors definitely affect the economic environment where our Company operates. Transneft lays its plans proceeding from the requests it receives from oil companies to pump crude oil over trunk pipelines. The said requests already take into account these factors as well as the balance of demand and supply. In the meantime, the demand for Russian oil among importing countries remains traditionally high and we do not see any ground for fears.

To a certain extent, redistribution of oil flows is an ongoing process. The industrial facilities of Transneft let us implement various schemes, based on the market demands. We are also guided by national government decisions. If we turn to figures we’ll see a slight reduction in oil transportation parameters: from January to July of 2017 about 280 million tonnes of crude oil were fed to the Transneft system, which is 1.8 million tonnes less than during seven months of last year. The matter regards both the crude fed by Russian producers and the oil supplied by Kazakhstan and Turkmenistan. Azerbaijan is the only country to have increased supplies, and then by a third. We see the same trend in oil export: the reduction by 3.2 million tonnes to 136.5 million year-on-year. Meanwhile from January to July 2017 Russian refineries received 141.4 million tonnes of crude, up 1.8 million tonnes y-o-y. The Company supplied 15.2 million tonnes of crude to China over the offshoot from the oil pipeline Eastern Siberia – Pacific Ocean (ESPO), also 2.1 million tonnes more than in January-July 2016.

At the same time, during the first three months of the year the Company’s revenue from the core business grew by 6.75% year-on-year. We cut our operating expenses and increased the productivity of labor, so Transneft looks into the future with confidence and calm.

As for the sanctions, we’ve been dealing directly with the import substitution program and 94% of all equipment procured by Transneft is homemade. Moreover, in order to localize the manufacture of technological equipment in Russia, we launched a pumping equipment plant in Chelyabinsk last year together with our Italian partners. Next year we’ll start manufacturing electric motors for these pumps. Transneft does not borrow money abroad, using only its own resources.

– What’s the short-term and mid-term outlook for the oil market as you see it? Are there any pessimistic scenarios looming ahead?

– The Russian Ministry of Economic Development expects the oil production to rise to 553 million tonnes by 2019; it’s their basic scenario. Given the gradual modernization of refineries and deeper oil refining, the oil export will reach 277.6 million tonnes by 2019. Supplies to far-abroad markets are expected to grow to the level of 252.2 million tonnes by 2019, mainly due to growing exports to APR markets. Export to CIS markets will keep at the level of 24 million tonnes throughout the entire projection period.

We also expect a moderate drop in crude refining volumes to 269.5 million tonnes in 2019 as well as an increase in refinement depth to 79.8%. A moderate growth of home demand for petroleum products and lesser economic efficiency in the export of heavy petroleum products will lead to gradual reduction of petroleum products export to 145.5 million tonnes by 2019 (down 8.1% against 2016). Light petroleum products will replace heavy petroleum products if we talk about export.

– Is the Transneft capacity sufficient to meet the needs of oil producers? Are there any new routes in the “pipeline”?

– By launching several longest oil trunk pipelines of the recent decade, built and operated in most challenging climatic conditions, such as ESPO, Purpe – Samotlor, Zapolyarye – Purpe and Kuyumba – Taishet, Transneft laid a solid foundation for the future development of oil production at new fields in Siberia. We commissioned the pipeline system Zapolyarye – Purpe that gave an impulse to the development of more than ten new fields in Messoyakha and Urengoi groups as well as the fields in Bolshekhetsky depression. The resource potential of the fields hooked up to the oil pipeline comes to 2 billion tonnes of crude. The pipeline’s annual throughput capacity is 45 million tonnes of crude transported in the extreme climatic conditions of the Arctic. The second project that kicked off in 2016 is the oil trunk pipeline Kuyumba – Taishet meant to receive into the Transneft system the crude from new fields in the Krasnoyarsk region, specifically Kuyumba and Yurubcheno-Tokhomsky fields. At the second stage, to be completed in 2023, its capacity will reach 15 million tonnes of crude a year. Works are under way now to extend oil trunk pipelines for extra volumes of crude from the Timano-Pechorsky region to be fed to the Transneft system. For now, there is no need to lay new oil transportation routes.

– Transneft operates lengthy oil pipelines. What’s their technical condition today? Is there any ongoing modernization of the oil pipeline? If yes, then how is it done?

– Reliable and uninterrupted operation of oil trunk pipelines is our unconditional priority. That’s why the transport capacity of Transneft is closely and constantly monitored by the Company’s experts. This is about 69,000 km of trunk pipelines, more than 500 pump stations, 23 million cubic meters of storage tanks. The development, technical upgrading and revamping of the entire transport infrastructure form the basis of the Company’s effective and stable operations. 

In the previous year alone Transneft commissioned more than 1,700 greenfield development projects, technical upgrading and revamping projects, including more than 2,800 km of trunk pipelines. We invested more than RUB 183 billion in technical upgrading and revamping. This effort brings forth notable fruit: as reported by the audit firm KPMG, in 2016 the accident rate in oil transportation over the trunk pipelines of Transneft was 2.7 times lower than the average figures reported by leading foreign oil transportation companies. This impressive performance has been achieved thanks to regular quality inspection of pipelines using proprietary equipment that has no analogues in the world.

– Is there any problem with illegal tapping? If yes, then in what regions?

– This problem does exist and it is global in nature. Crude oil and petroleum products are stolen via illegal tapping into trunk pipelines in Western Europe, for example, and thefts are counted by hundreds. Transneft makes persistent effort to preclude illegal tapping in close interaction with law enforcement bodies.

We have stabilized the situation in the territory of Dagestan, Khanty-Mansiysk AR and Irkutsk region where the number of illegal tie-ins keeps falling. Leningrad and Moscow regions are most notorious in terms of illegal tapping.

In 2016 we exposed 300 tie-ins to oil trunk pipelines and petroleum products pipelines of Transneft, down 6% year-on-year.

– Transneft cooperates with CIS companies, including Kazakhstani firms. What would you say about the current level of collaboration? Is there any growth potential?

– The current level of cooperation is rather high. All issues arising between our companies are addressed expeditiously and in a constructive manner.

In accordance with intergovernmental oil transit agreements, Transneft engages with KazTranOil for transportation of Kazakh crude oil via the territory of the Russian Federation over our system of oil trunk pipelines. During the first half of 2017 some 8.1 million tonnes of crude has been exported. In its turn, KazTransOil receives Russian crude to supply it in the direction of China via Kazakhstan (4.8 million tonnes during the same period). Furthermore, Russian producers supply petroleum products to Kazakhstan. In H1 2017 they supplied 23,222 tonnes of these.

Based on long-term contracts with pipeline companies of Belarus and Ukraine, Russian crude is supplied to the refineries of Belarus and also via the territory of Belarus in the direction of Europe.

From January to June 2017 we supplied 7.5 million tonnes of crude in the direction of Poland via Belarus and 9.7 million tonnes of crude in the direction of Germany. During the said period we also shipped 9 million tonnes of crude to Belarussian refineries over our oil trunk pipelines.

In H1 2017 the transit of crude across the territory of Ukraine in the direction of Slovakia amounted to 2.5 million tonnes, in addition to 1.9 million tonnes pumped in the direction of Czech Republic and 2.3 million tonnes – in the direction of Hungary. Transneft also transits crude on the basis of commercial contracts with shippers from Azerbaijan and Turkmenistan.

As per the agreements between Russia, Kazakhstan and Uzbekistan about the transit of crude to the refineries of Uzbekistan via the territory of Kazakhstan, we expect the beginning of pilot deliveries in Q3 2017.

– Please tell us about the successful joint projects of Transneft and KazTransOil. What’s your vision of the future relationship with KazTranOil?

– The supplies of Russian crude to China is undoubtedly one of the key projects. Cooperation is also under way to transport crude oil from the fields of Western Kazakhstan via the Russian territory over the oil pipeline of the Caspian Pipeline Consortium to the sea terminal Yuzhnaya Ozereevka in Novorossiysk. In H1 2017, some 27.2 million tonnes of crude were shipped via CPC, including 24.6 million tonnes of Kazakh crude and 2.6 million tonnes of Russian oil. By now Transneft and KazTranOil have completed essential measures to increase the throughput capacity of the oil trunk pipeline Tuimazy – Omsk – Novosibirsk to 11.0 million tonnes a year. Another joint project worthy of note is transportation of “light” Kazakhstani oil from Kashagan field over the route Atyrau – Samara – Novorossiysk, which have started using this year. During 7 months 0.4 million tonnes of crude was shipped to Port Novorossiysk from Kashagan.

– High quality of transported oil is a relevant concern for oil producers. What does Transneft do to separate oil flows? Does the Company contemplate the creation of a crude quality bank in the system of Transneft? It’s not a secret that CPC is in much higher demand among the shippers (consignors), due to this mechanism of crude quality assessment in money terms.

– To control the quality of crude fed to the system of Transneft, a task force for crude quality monitoring was established in 2015, based at the Russian Energy Ministry. At the present moment the final decision for choosing the quality stabilization mechanism on the main export flows has not been made, but we continue analyzing the current situation.  Meanwhile, the process of creating a quality bank in the Transneft system is under special control.

However, given the technological complexity of the Company’s network of trunk pipelines and historically assumed liabilities to the shippers in regard to crude oil quality, it is not possible to adopt the best practices of CPC at the present moment.

– ESPO construction is one of the grand-scale projects delivered by Transneft nowadays. What are the Company’s further plans regarding new routes and the development of functional oil transportation routes?

– Indeed, it’s hard to overestimate ESPO in terms of its significance and outlook. Commissioning of the pipeline system in 2009 kick started the biggest production projects in Eastern Siberia and redirected the export of Russian crude from west to east. We’ll keep enlarging the ESPO capacity on all sections until 2020: the capacity of ESPO-I will increase to 80 million tonnes a year and the capacity of ESPO-II – to 50 million tonnes. This will enable Russian producers to build up crude export to APR markets. This year we plan to complete the works aimed at increasing the throughput capacity of the oil pipeline Skovorodino – Mohe to 30 million tonnes of crude a year, to ensure oil supplies to China in accordance with the agreement between the Russian and Chinese governments.

At the present moment Transneft focuses on developing a system of petroleum products trunk pipelines: by 2020 we plan the volume of light petroleum products transported over our system to reach 56 million tonnes a year. Sever and Yug projects will open additional export routes for growing volumes of light petroleum products put out by Russian refineries, to be transported via the Baltic Sea and Novorossiysk ports. The matter regards up to 25 million tonnes exported via Port Primorsk, as part of the second phase of Sever project, and up to 11 million tonnes a year exported via Port Novorossiysk over the petroleum products pipeline Yug, now at the second stage of delivery. To increase the supplies of petroleum products to the Moscow region, Transneft is revamping a system of trunk pipelines in the Volga and Central federal districts. The works are scheduled for completion in 2018.

– Starting in 2014 Russian crude has been transported over the system of KazTransOil pipelines in the direction of China. In 2017 the volume of oil transit has increased from 7 to 10 million tonnes. Petro China representatives recently stated that they would like to increase this volume of crude by another 3 million tonnes. Is Transneft ready to ramp up oil transportation over the given route? Is the Company ready to transport crude oil in the direction of Uzbekistan and Kyrgyzstan via the territory of Kazakhstan?

– We’ve received a request from Rosneft to increase crude supplies to China by 3 million tonnes. It should be noted that at the present time the oil trunk pipeline TON-2, over which crude oil is transported to Kazakhstan is fully loaded. Given all stated extra volumes, it is necessary to transport up to 18 million tonnes of crude a year over this pipeline. There is no possibility to increase the volumes of crude pumped in the direction of China and in the direction of Uzbekistan and Kyrgyzstan. Transneft has developed essential technical measures to increase the throughput capacity of TON-2 in the sphere of operational responsibility of both our Company and KazTransOil. In accordance with a preliminary estimation, these measures may cost RUB 11.5 billion. After the oil companies supplying crude oil in the said directions confirm their readiness to finance these works to be done by Transneft together with KazTransOil, we’ll be ready to start them. The tentative time needed for completion of these works is 36-40 months from the moment of deciding on the source of financing.

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