Anna Ovyan
Russian oil companies claim that oil export turns loss-making business
The Russian oil sector, which has long been considered the main source of Russia's prosperity and the driver of its economic growth (on a par with Vladimir Putin's policy, of course) helping Russia to rise from its knees, has been hit by the crisis. The heads of oil majors are begging for money everywhere - from its own government to China. With only three-quarters of Russian pipeline capacity being used, state-run pipeline monopoly Transneft is asking for additional funds to build new pipelines.
It's clear that it is of vital importance for the country to produce and export as much oil as possible in order to boost budget tax revenues. Therefore, the country is interested in building new pipelines to increase its infrastructure potential. It is also interested in the development of new oilfields. However, oil companies may be lacking funds for this development under the present conditions.
Moreover, they are beating the alarm and asking for cuts in export duties. The top managers of Russian oil majors appealed to Prime Minister Vladimir Putin recently to cut the duty rates. Otherwise, they say, they will not be able to repay their debts, and they will have to substantially slash their investment programmes.
After a long behind-the-scenes bargaining session, export duties were cut retroactively (as of November 1, 2008) by 22.8%, to $287.3 per metric ton. Nevertheless, the oil companies were disappointed. The Prime Minister showed understanding for their critical situation and instructed the sector's agencies concerned to work out a new formula for the oil export duty rate tied to the market price.
Recently, the Finance Ministry calculated the new oil export duty, which will amount to $192.1 and take effect on December 1, 2008. In 2009, with a forecast oil price of $50 per barrel (as estimated by Deputy Prime Minister Alexei Kudrin), it will amount to about $150, according to the estimate made by Dmitry Lyutyagin of the Veles Capital investment company.
It is true, if oil prices come to that, the Government will have to slash the federal budget. In the past eight years, Russians have already forgotten what budget cuts mean. The good thing is it will be easier to explain that budget cuts have come to Russia from abroad, along with all the other evils.
As for oil companies, they want not only duty cuts but also cuts in transportation costs. The problem is that, in order to achieve this, the Government must freeze or even reduce Transneft tariffs. However, Transneft is a natural monopoly under the law. Perhaps, even a "double" monopoly, considering that Transneft's head Nikolai Tokarev is on good terms with the Putins and his chances are no worse than those of Igor Sechin, [Rosneft's chairman and the Kremlin chief of staff].
Therefore, the choice between the interests of Transneft and Rosneft will be long and painful, especially considering the difficult financial situation of the pipeline monopoly. As strange as it sounds, Russia's Chinese partners are to blame for this. They promised a loan of $8-$10 billion to the company but on terms which make the loan inexpedient, especially when the funds can be received from the Russian Government.
Alexei Kudrin said talks were under way but refused to disclose the exact amount of the loan saying simply that it will exceed the planned 6-7 million roubles by far. True, a loan of $8-$10 million is much bigger.
In commenting on the situation, analyst Dmitry Lyutyagin said: "It is quite possible that our Chinese partners will fail to fulfil their commitments. The government directly owns a major stake in Transneft's authorised capital, so the government can offer full support to the company."
Note that, according to Transneft's top managers, tariffs are its only source of profit. Consequently, any extra expense, including loan servicing, may show up new in tariffs.
According to Dmitry Lyutyagin, it is possible that interest rates on government loans will not be too high, and in that case there will not be any tangible increase in tariffs for Transneft's services. Lyutyagin forecasts their indexing by 15% to 19%. The oil companies' appeals to freeze Transneft's tariffs will fall on deaf ears. However, Vitaly Kryukov, an analyst with the Capital investment group, says that oil companies can at least prevent a steep rise in future tariffs.
The main question is why Transneft needs such a big loan now. There is no acute need to refinance short-term loans, an in Rosneft's case. As for Transneft, it must build pipelines.
The top of the list is the East Siberia-Pacific Ocean (ESPO) oil pipeline. China is one of the biggest oil consumers in the region. However, we must not forget that China's anti-crisis programme is oriented to cuts in oil consumption.
Then, the projected profitability of the ESPO pipeline may be put in doubt. Vitaly Kryukov of Capital thinks it is too early to talk about a plunge in China's fast growing demand for oil: there are signs of a slowdown, but the ESPO pipeline's low profitability is explained by poor economic efficiency of the project rather than a slowdown in demand.
Prospects for the Baltic Pipeline System-2 (BPS-2), which is to run to Europe, are even more uncertain. Dmitry Lyutyagin of Veles Capital says it cannot be used to its full capacity because the construction of field facilities at the deposits from which oil is to be supplied via the BTS-2 has not yet started.
Vitaly Kryukov believes there is no economic need to build additional pipelines to Europe now: Transneft's exports are not at capacity, while oil companies reorient their supplies from oil to petrochemicals sharply reducing oil exports. So, the reasons for building more pipelines may only be political.
Some experts forecast a fall in oil production by 5-6 million metric tons next year. Meanwhile, only 75% of our pipeline capacities are used now. Also, oil transportation costs have surged from $70% per metric ton to $100, which is too much considering high oil production costs in East Siberia. High oil transportation costs coupled with low oil prices are actually burying projects for developing new East Siberian fields.
