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Transneft’s Statement in Response to Russian Government’s Order to Present Position on Rosneft’s Submission “On Comprehensive Measures to Improve Oil Quality Control in Oil Trunk Pipeline System”

Date of publication: 8 September 2019 Printable version

In accordance with the order of the Government of the Russian Federation dated 5 June 2019, Transneft (hereinafter also “the Company”) proposed a set of measures aimed at strengthening liability for violation of technical regulations; a change in regulation regarding the introduction of mandatory accreditation of testing laboratories; improving the methods of objective monitoring of the work of custody transfer points, including by unifying requirements in ensuring measuring coherence; and establishing operational control over shippers' CTPs by the Company.

It is clear that completely eliminating the chance of low-quality raw materials getting into the oil trunk pipeline system due to the human factor, including by intentional criminal acts, is in principle impossible. At the same time, the measures developed by the Company are comprehensively interconnected and are meant to reduce this risk.

Regarding Rosneft Oil Company's statements and objections to Transneft's initiatives, set out in the former's letter of 24 August 2018 to Russian Prime Minister Dmitry Medvedev, we state the following.

1. The statement by Rosneft that the incident allegedly caused “huge material and reputational damage to Russian suppliers, significantly undermining confidence in the quality of Russian oil.”

Even during the period when the incident caused the oil trunk pipeline system to be contaminated with substandard oil, the export of Russian oil to European consumers continued. In May-June of this year, European oil terminals significantly increased their oil receipt volumes. At the same time, most of the oil received during this period, for example, by the port of Gdansk, was provided by supplies from Transneft System ports (Ust-Luga and Primorsk), which allowed Russian companies to maintain export positions in Europe.

Rosneft’s statements about Russian shippers suffering “huge material and reputational damage” are thus untrue. To date, none of the shippers has provided the Company with documentary evidence of the occurrence and extent of such damage.

2. Transneft's proposals concerning operational control over shippers' CTPs.

On 30 April 2019, Russian President Vladimir Putin set the task of strengthening oil quality control at the point of its acceptance into the trunk pipeline system.

In advancing this order, and in carrying out clause 8 of order No. DK-P9-4635 dated 5 June 2019, the Company sent the Russian Ministry of Energy proposals for passing shippers' custody transfer points (CTPs) – through which oil is delivered to the Transneft System – under Transneft's operational control.

At the same time, in determining specific methods for establishing operational control over CTPs, work is in progress to determine the necessary control functions of Transneft. 

Transneft’s proposals are not aimed at imposing any kind of services or interfering in the business activities of the Company's counterparties.

Currently, the admission of Transneft System organizations' specialists to third-party shippers' CTPs is limited to facilities directly involved in commodity-commercial operations (LACT, their auxiliary facilities, connection points for oil production facilities and information technology systems for monitoring, management and registration of indicators of the process of oil delivery at CTPs).

At the same time, many third-party shippers' CTPs have a system of loading racks with tanks designed to receive oil not only from field pipelines, but also from tank trucks and other types of transportation. These operations are not controlled by Transneft System's staff due to the remoteness of the facilities from the main CTP facilities, as well as the lack of requirements for their mandatory control during the CTP's operation, which allows unscrupulous shippers to introduce not only marketable oil, but also heavy processing residues, as well as other chemical products and reagents. The activities of such CTPs are completely opaque and create the basis for various kinds of operations of a criminal nature.

The proposal to establish Transneft’s operational control over shippers' CTPs is aimed at ending this negative practice and increasing the very transparency of the quality control system for oil entering the oil trunk pipeline.

In addition, it should be noted that along with the proposal to introduce an operational control procedure, Transneft proposed introducing at the regulatory level the principle of mandatory accreditation of testing laboratories participating in the quality control of oil delivered to the trunk pipeline transport system – whether owned by Transneft System organizations or third-party shippers.

These initiatives should be considered as a single set of proposals aimed at improving the oil quality control procedure by all participants in this process, without changing the existing management system of oil production and oil refining enterprises. They are precisely about the Company exercising control over the formation of oil flows, including crude supplied to custody transfer points, in order to increase the transparency of this process, and not about transferring control over management decisions at other companies to Transneft.

Rosneft Oil Company's accusations about the Company monopolizing the oil quality control process seem strange and contrived, since Transneft is a natural monopoly in the field of transportation of oil and petroleum products via trunk pipelines.

3. On Rosneft's proposal to invite surveyor organizations to conduct daily monitoring of oil quality both when receiving oil and when it is dispensed from the trunk pipeline system, we explain the following.

Rosneft’s position on this issue is contradictory: by subjecting the Company’s proposals on establishing operational control over CTPs at the oil trunk pipeline system entry point to unconstructive criticism, claiming that this would supposedly lead to “an unreasonable increase in shippers' expenses,” Rosneft simultaneously proposes additional daily oil quality checks when receiving and delivering oil from the oil trunk pipeline system with the participation of independent inspection (surveyor) organizations.

Oil quality control at the trunk pipeline system’s terminal points is carried out by foreign and Russian surveyor organizations at all export points at present. Such independent inspectors only record quality indicators in comparison with the values established by GOST and cannot have any influence on changing these values.

Particular attention should be paid to the fact that not a single oil company today engages independent inspectors to monitor the quality of its oil before its delivery to the pipeline system.

The only effective solution, in our opinion, is strengthening oil quality control at the entrance to the Transneft System. In order to optimize producers' costs on independent inspections, the Company is prepared to provide a limited list of third-party CTPs where, according to the accumulated information, there have been abnormal changes in certain quality parameters of the delivered oil.

It should also be kept in mind that international surveyor organizations bear practically no liability for the accuracy of the results of their oil quality checks. For example, according to information from the official websites of the largest surveyor companies SGS (www.sgs.ru) and Saybolt (www.corelab.com), their liability in any case cannot exceed US$20,000.

In view of this, the involvement of surveyor organizations in conducting mandatory daily oil quality checks is excessive and impractical.

At the same time, the Company considers the current practice to be optimal, in which interested participants in the oil transportation market have the opportunity to attract independent surveyor companies to carry out additional oil quality checks on a voluntary basis and at their own expense.

4. On the unreasonable costs associated with additional expenditures on oil quality control that shippers would be burdened with in the event that operational control over CTPs is transferred to Transneft, in accordance with the provisions of the Technical Regulations.

The requirements of the EAEU Technical Regulation 045/2017 “On the Safety of Oil Prepared for Transportation and (or) Use” (hereinafter referred to as the Regulation), which entered into force on 1 July 2019, establish compulsory conformity assessment before putting oil into circulation in the Customs Union market in the form of testing six mandatory parameters of oil quality, with the registration of a safety data sheet for the oil.

This implies that regardless of the presence or absence of Transneft's operational control over CTPs, according to the Regulation, shippers must ensure that oil meets the established quality parameters before it is transferred to the Transneft System, that is, before the oil arrives at a CTP.

At the same time, the information set forth in Rosneft's submission, on the acceptance of oil into the system on the basis of preliminary test results obtained only by the producing company without the participation of the receiving party, is not true.

Under the agreements concluded with shippers, the Company is obliged to ensure that transported oil complies with GOST quality requirements and compensate shippers for damage they may incur as a result transporting substandard oil. This inevitably implies the mandatory participation of Transneft (together with shippers and/or shipment recipients) in the implementation of oil quality control during any technological operations for the receipt and delivery of oil from the trunk pipeline system.

Given that the requirements for access to the oil trunk pipeline system are the same for all consumers of services, the measures proposed by the Company to improve quality control should apply to all shippers, without any exceptions.

Regarding the counterproposals submitted by Rosneft Oil Company on this issue, we state the following.

1. On the issue of attracting independent surveyor organizations.

Transneft, taking into account the above-stated position, does not support the proposal to introduce the involvement of independent surveyor organizations on an obligatory basis to conduct daily monitoring of the quality of oil during the acceptance and delivery of oil from the trunk pipeline system.

2. On the issue of strengthening control over the activities of mini refineries.

We note the identical position of Transneft and Rosneft on tightening control over the activities of mini refineries in the Russian Federation.

3. On the issue of strengthening control over the quality of oil delivered to the Transneft System by enterprises accumulating oil flows from small shippers.

Transneft fully supports the proposal to strengthen control over the activities of such enterprises, to the point of introducing the practice of annual inspection of technological facilities and fields from which crude should be extracted and terminating their operations if their technological capacities are not confirmed.

4. On the proposal to introduce an Oil Quality Bank.

The Quality Bank system regulates financial relationships between shippers that deliver oil of different quality parameters. International experience in Quality Bank implementation shows that this system does not influence the improvement of quality parameters, or even the strengthening of quality control indicators. Its implementation lies in the sphere of financial regulation, and not in managing the technological processes of oil transportation and oil quality parameters. An Oil Quality Bank involves a system of compensation payments to participants who sell higher quality oil, at the expense of participants who sell oil of lower quality. Moreover, the introduction of such a system would result in the largest costs being incurred by market participants extracting hard-to-recover resources from depleted fields that require expensive innovative production methods, which may lead to their withdrawal from oil production, as well as lower tax revenues to budgets of all levels, and centralization and possible further monopolization of the oil industry into the hands of one or more of the largest holdings, to which Rosneft Oil Company has expressed its opposition.

5. On tightening regulatory requirements for oil quality in existing GOST and Technical Regulations on the parameter of the content of organic chlorides to 1 ppm, we explain the following.

According to the data for 2018, about 25% of domestic oil received by the Transneft trunk pipeline system had an organic chloride content level above 1 ppm. Toughening the requirements for this indicator with a 6-fold reduction relative to the requirement of the EAEU TR 045/2011 will lead to an increase in oil producers' costs, and therefore requires discussion with all oil and gas companies in the Russian Federation.

In light of this proposal, we are once again forced to note the inconsistency of the position of Rosneft, expressing on the one hand concern about the increase in expenses of oil production companies for additional measures to control oil quality, and, on the other hand, proposals to tighten the qualitative characteristics of the received oil, which will inevitably lead to higher costs for its preparation and additional costs in the industry.

6. Regarding the proposal of Rosneft Oil Company on introducing amendments to the contract for oil transportation services aimed at ensuring the transparency of Transneft's work, including by expanding the list of information disclosed by Transneft to oil companies using its services, we state the following.

Transneft, being a natural monopoly, in accordance with the requirements of Article 8 of the Federal Law of 17 August 1995 No. 147-FZ “On Natural Monopolies” and the Standards for Disclosing Information by Natural Monopolies Providing Oil and Oil Product Transportation Services via Trunk Pipelines, approved by Decree of the Government of the Russian Federation of 18 October 2010 No. 844 (hereinafter also referred to as the Standards), discloses information about its activities in the volume and in the manner prescribed by the Standards.

The Company discloses information on tariffs for oil and petroleum products transportation services; on the main indicators of financial and economic activity; on the main consumer characteristics of regulated services; on the availability (absence) of technical feasibility of access to regulated services for the transportation of oil and petroleum products and other information required by the Standards.

It should be noted that according to clause 12 of the Standards, the list of information to be disclosed is exhaustive.

In this regard, Rosneft's allegations of insufficient transparency of the Company's operations are completely unfounded. At the same time, Rosneft’s proposal to expand the list of information disclosed by Transneft as usual lacks specifics: the letter of Rosneft does not indicate what information about its activities the Company, according to Rosneft, should additionally disclose to shippers.

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