Russia has committed to cut crude oil production by 300,000 barrels per day in the first half of 2017 under the agreement between Opec and non-Opec producers. Sergei Andronov, vice president of Transneft, Russia's state oil pipeline operator, tells Nefte Compass how the agreement might impact Russia's oil exports and what are the key export trends in 2017.
Q: Transneft has recently given its forecast for crude oil exports via the company's pipeline network. Could that be amended given Russia's commitment to cut production?
A: Exports via the Transneft pipeline system might average 232 million-233 million metric tons (4.66 million-4.68 million barrels per day) in 2017. This forecast is based on requests from oil firms that had been sent to us before Russia joined the Opec members' plan to cut production.
Q: When did you get the requests?
A: We have been collecting the requests from August till end-November 2016. The figures provided should certainly change on the back of Russia's commitments to cut production in the first half of the year and because of possible amendments in oil companies' refining plans in Russia.
Q: Russia agreed to cut production by 300,000 b/d -- or roughly 15 million tons. Transneft said planned exports might drop by 11 million tons. Why?
A: You are right: 300,000 b/d is much more than 11 million tons. However, we should understand that production should be cut steadily. Russia's energy ministry is monitoring and controlling production cut, while Transneft specialists only assist it. The energy ministry is in charge.
Q: What is the role of Transneft?
A: At the request of the ministry we provide all the necessary information on the volumes of crude taken into the Transneft system for a broader analysis.
Q: What other factors might impact crude exports in 2017?
A: We should certainly take into consideration the impact of the tax maneuver on oil companies' refining plans in Russia. This is a question of economics. If refining netbacks are lower than export netbacks, then the volumes might be amended in favor of exports. In any case, the energy ministry and the Federal Antimonopoly Service are monitoring the situation in order to avoid an oil products deficit on Russia's domestic market. So crude exports might change both as a result of lower or higher refining at Russian refineries and as a result of Russia's commitments to cut production.
Q: The energy ministry forecasts a possible drop in refining volumes of 7 million tons (141,000 b/d) in 2017. Does this automatically means export increase by 7 million tons?
A: We can probably talk about communicating vessels [where either side balances the other out]. However, it would only be possible to look at changing dynamics for one or the other direction at the end of the first quarter.
Q: Oil companies' requests show that crude exports from Russian ports might drop. What is the reason?
A: Transneft transports the crude based on requests from oil companies and taking into consideration the facilities of its transportation system and export schedules. Oil producers build their strategy and choose the destination taking into consideration the above mentioned factors and their economic interests. Anyway, as I said earlier, initial analyses on exports might only be made at the end of the first quarter.
Q: Do oil companies usually provide slightly lower export requests?
A: They do, traditionally.
Q: When should oil firms provide amended requests?
A: Last year, amendments should be made no later than Sep. 1.
Q: Are there surplus export capacities along the key export routes?
A: There are. Those are estimated at 50 million tons in 2017.
Q: Does this mean that Transneft might boost exports by 50 million tons if it is necessary?
A: Right. There is such an option.
Q: At what destinations?
A: We have some surplus in the ports -- Primorsk, Ust-Luga and Novorossiysk -- while the key surplus is along the Druzhba pipeline.
Q: What about Kozmino?
A: There are no spare capacities. The East Siberia-Pacific Ocean (Espo) pipeline is fully loaded.
Q: Can you evaluate shipments bypassing the Transneft system?
A: Last year, Transneft took 483.4 million tons of crude into its system, out of Russia's total crude production of roughly 547.3 million tons, which means that transportation bypassing the Transneft system totals some 64 million tons.
Q: Turning to the eastern direction, can the Kozmino port take the extra 3.5 million tons of crude under the Russia-China intergovernmental agreement that would not be shipped via the Skovorodino-Mohe pipeline because of infrastructure constraints on the Chinese territory?
A: This is the responsibility of the energy ministry. We have confirmed Kozmino's technical capacity at 31.5 million tons. But I think that we would be able to ship those 3.5 million tons through Kozmino.
Q: What other routes could the crude be shipped through if Kozmino is not able to take it?
A: If there is such a situation, we will look for ways to solve it together with the energy ministry and Rosneft. But we don't see the risks for now and believe that those volumes would be shipped from Kozmino.
Q: Is there a threat that the Chinese side would not be able to take 30 million tons through the link to Mohe starting from 2018? Where would those extra volumes go?
A: As of today, we don't have any official requests from the Chinese on the issue. The Chinese partners have informed us that starting from Jan. 1, 2018, their part of the infrastructure would be ready to take 30 million tons. We have no other information.
Q: Will Transneft's system be ready to ship those volumes by then?
A: It will.
Q: When can negotiations with the Chinese start on 2018 shipments?
A: The volumes are set by the government-to-government agreement. Requests for 2018 should start coming from this August.
Q: There is a general belief that the Chinese benefit from taking the crude at Kozmino. Is it true?
A: This is probably the result of the existing constraints on the Chinese side of the pipeline, and its unavailability to transport the volumes set by the government-to-government agreement.
Q: Rosneft recently agreed to boost shipments to China via Kazakhstan. Supplies to China via Kazakhstan are also of interest for Kazakh producers, but rising Rosneft shipments leave no space for other companies, right?
A: All the technical capacities of the line would be fully used by Rosneft for its supplies under the government-to- government agreement seen at 10 million tons. However, there is a tiny ability to boost the shipments by using anti- turbulent additives.
Q: Have you got requests from Kazakh producers?
A: We had.
Q: Rosneft has recently inked several new crude supply agreements for various directions. Were there requests to boost Rosneft's shipments?
A: No comment. As I said, we act on the basis of requests from oil firms, technical capacities of the system and export schedule.
Q: The eastern direction still remains the most premium one. However, shipments via the Espo pipeline and from Kozmino are limited by Rosneft's significant volumes for this direction. Are there capacities to boost shipments from other producers?
A: There won't be significant changes in 2017. However, starting from 2018 some 30 million tons should start flowing via the Skovorodino-Mohe pipeline to China, which will allow us to take extra volumes through the Espo line from other producers.
Q: What producers?
A: First of all, from those producing crude in East Siberia, where there is no other logistics other than through the Espo pipeline. Production should grow at the fields of Surgutneftegas, Irkutsk Oil Co. and some other producers.
The Espo pipeline expansion program was initially coordinated with oil producers' production growth plans, including those in East Siberia.
Q: Rosneft is building the Far East Petrochemical Co. (Fepco). Espo's initial expansion plans didn't include plans to ship some 12 million tons to Fepco. How can the project impact the expansion of both the Espo line and the Kozmino port?
A: Exports from Kozmino will depend on the schedule of the Fepco project implementation. Our task is to ensure that Kozmino is able to ship 36 million tons before the Fepco launch. Both the Espo pipeline and Kozmino expansion programs should be completed in 2020. We have already carried out dredging work and berth fortification works, and we are now building two extra reservoirs. The two berths at the port are already now able to load tankers with a deadweight of 140,000 tons. In February we plan to load one 140,000 deadweight tanker with Lukoil crude from the second berth, which we have recently rebuilt. Until recently, we were loading 140,000 ton deadweight tankers only from the first berth.
Q: What is Kozmino's current capacity?
A: It is no more than 32 million tons, given the capacities of the Espo pipeline's linear part. As I said, it should reach 36 million tons by 2020.
Q: How much crude will be shipped through the Zapolyarye-Pur-Pe and Kuyumba-Taishet pipelines in 2017?
A: Shipments via the Zapolyarye-Pur-Pe pipeline should in 2017 total 7.2 million tons. Of that, Rosneft should ship 2.7 million tons, Messoyakhaneftegas -- 3 million tons and Lukoil -- 1.5 million tons. Shipments should stand at 12.6 million tons in 2018; 16.9 million tons in 2019 and 20.8 million tons in 2020. By 2020, a total of some 57.4 million tons should be supplied via the line, coming from Rosneft (23.9 million tons), Lukoil (6.8 million tons), Messoyakhaneftegas (19 million tons), Gazprom (5.2 million ton starting from 2018), and Arcticgas (2.6 million tons starting from 2018). Shipments via the Kuyumba-Taishet pipeline should total 945,000 tons in 2017, 2.8 million tons in 2018, 6.5 million tons in 2019 and 7.7 million tons in 2020. Overall, shipments should total some 18 million tons by 2020, comprising 4.9 million tons from Slavneft and 13.1 million tons from Vostoksibneftegas (Rosneft).
Q: Kazakhstan used to send crude oil to Russia in lieu of products supplies. Will the practice continue in 2017?
A: No, the program was completed in 2015 and there were no supplies in 2016.
Q: Transneft and the St. Petersburg Mercantile Exchange (Spimex) were discussing an option to prepare two-month loading schedules for Primorsk as part of the deliverable Urals futures initiative. Is there a need for such schedules today?
A: As part of our cooperation with Spimex, we provide a provisional loading plan for two months before the actual loading month. Spimex wants to have the final loading schedule, which is quite difficult in the current realities because the port of Primorsk is used by many producers as a residual direction.
Q: What does this mean?
A: When planning where to send their crude to, oil companies look at the economics of both exports and refining in Russia. Deliveries to refineries are usually planned first followed by premium export destinations. So this is some kind of a stable practice that the ports of Primorsk and Ust-Luga are the destinations where export plans change more frequently. Thus, when we started planning February loading in mid-January, the schedule was amended by six to seven positions in just a few days. This is why it is quite difficult to prepare the final loading schedule for Primorsk for two months in advance. We are currently providing only a provisional loading plan.
Q: What is it?
A: This is general information on oil producers' plans to ship their crude via the port, just the volumes without firm loading dates.
Q: Why can a two-month schedule be prepared for Kozmino?
A: This is a premium direction where amendments are almost excluded.
Q: Is Spimex ready to take the provisional plan only?
A: We are jointly working on the issue.
Q: When can we expect first shipment of crude under the Urals futures contract?
A: As far as we know, this can happen in March.
Q: Should there be a free position in the loading schedule for that?
A: No. We send the provisional loading plan to Spimex and then this is their responsibility.
Q: What is the status of the discussions over the deterioration in the quality of Urals? When might a decision be taken on singling out the high-sulfur crude flow?
A: A special working group was set up at the request of the energy ministry, which monitors crude quality at refineries and key export directions. Data are provided every month and meetings are held on the issue. If there are sharp quality changes, then some decisions will be made. We still believe that singling out a high-sulfur crude flow is the most reasonable solution that should help balance the crude quality at refineries and key export directions.
Q: Are there complaints on quality from European producers?
A: There are some during our day-to-day operations. We try to avoid any sharp quality changes when transporting the crude to European customers.
Q: Crude exports via the Druzhba pipeline have been relatively stable for several years. However, European consumers have recently become more active in their attempts to substitute Russian crude. How does Transneft view the competition on the European market?
A: It is the oil companies that sell the crude on that market that should evaluate the level of competition. However, it is correct that exports in that direction have been rather stable. But even if shipping volumes via the Druzhba pipeline change, we can always reroute crude to our ports. The pipeline system will be utilized in any case, even under corrections to production plans.