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It’s big politics

Date of publication: 11 February 2013
It’s big politics

Last year, Transneft, JSC completed the implementation of two of its biggest projects - the second phase of the Baltic Pipeline System (BPS) and the Eastern Siberia-Pacific Ocean Pipelne (ESPO). To learn how export possibilities for Russian oil have changed, about opposition from partners in the private sector, corruption in the company and controversial issues with the Director of Rosneft, Igor Sechin, Kommersant spoke with the President of Transneft, JSC, Nikolai Tokarev.

- Was it difficult to implement BPS-2 and ESPO-2?

- The question seems to be simple, but it should be considered from different perspectives. This is a matter of big politics, and it turned out out to be a detective story. After the Soviet Union ceased to exist, Russia, with a strong export potential in the range of 210-220 million tons of oil, was literally trapped – our country had a maritime export terminal in Novorossiysk and the Druzhba oil pipeline. This allowed us to export about 110-120 million tons. All other volumes were exported either to the Baltic countries, Poland or Ukraine, which means that almost half of all Russian oil exports were supplied from foreign territories. Of course, given that situation (but we must also take into account the realities of the 1990s), this alignment allowed oil buyers to dictate their own terms to our oil producers - prices, procedures, priorities, in general, anything convenient for them. That is, they literally didn’t get off their high horse when we spoke together.

Of course, this situation couldn’t last very long; in fact, what did oil export mean for our budget? Today, it’s one of the most important components, but at the time it was an essential lifeline upon which our entire economy rested. We decided to build our own pipeline to the Baltic Sea, which came to be conditionally called the Baltic Pipeline System. I attended several meetings at the Ministry of Energy in 1999, where the project and the prospects for its implementation were discussed. Of course, those who owned transshipments in Ventspils and generally in the Baltic States, Poland and Ukraine were opposed. The saddest thing is that they were supported by the department, the minister (Sergei Generalov - Kommersant) and his entire team that were involved in this matter. They were joined by today’s respected oil “elders”.

- Who?

- I don’t want to name names, but these are respected people. They have changed their position since then, and today, they are first in line for oil supplies through the BTS-2. But, at that time, it was convenient for them to have these Baltic handling sites, and our project would’ve been serious competition for them. Who would like that? That’s one side of the story. The other is that there was a new terminal, through which Russia could regulate its export volumes and dictate its own terms. Strictly speaking, politics and economy were intertwined. Well, now more intrigue. Thanks to Vladimir Putin’s personal intervention, the BTS project appeared. Its initial capacity was 12 million tons, and in a few years, it literally reached up to 70 million tons. You need to understand that such projects don’t just happen; you don’t just sit down, decide, resolve, order the project, design it and proceed with construction.

In parallel with the matter of exports to the West, possibilities for delivering to the Far East - the construction of a pipeline – were being considered. I was a member of the Russian delegation, which also included representatives from the Ministry of Energy, Yukos, at the talks in Beijing in July 2000, where we discussed the construction of the ESPO with our Chinese colleagues. The President of Yukos, Mikhail Khodorkovsky believed that an almost direct pipeline could be built from the Transbaikal region through Mongolia to China's Daqing, and and a refinery could be launched at that end. Then, everything would be perfect for Yukos.

- It is believed that Mikhail Khodorkovsky lobbied most strongly in favor of constructing a pipeline to China.

- This idea came up long before Khodorkovsky was born; it was actually raised by Soviet specialists. Yukos had its own resources, and he had the right to dispose of them as he saw fit. One of the options was getting to China, but going directly through Mongolia. We’ve already been through what it means to deal with such a buyer; we know how it ends. We had our own position at Transneft, JSC - leave the Transbaikal region through the Transsib corridor and reach the East, right to the Pacific Ocean. But, not getting to China through Mongolia. This topic was generally very painful, there were lengthy discussions, we all saw how the concept of the project kept changing – on the map, it was moved below, above, then right and then left. Construction began in 2006, and the skeptics were absolutely convinced that it was too unrealistic to carry out such a project. A massive attack was launched against Transneft, JSC, including an international one; more than one foreign ambassador visited my office at that time.

- Are you surrounded by enemies?

- No, not only by enemies. A lot of good words were addressed to our company.

- But, there was criticism, in particular because of increased budgets for ESPO and BPS-2.

- This is a huge building project, and there is no way that 20 thousand people who worked there in those circumstances with an enormous number of engineering equipment would always be precisely on time, adhere to the schedule, make it work the way we wanted to. Plus, the old team was involved in this project at first, and we had to reorganize. Now, everyone stands in line to use the ESPO, which represents a premium destination route for Russian companies, where they can get $30-40 US more for their ton of oil. There is a market, it puts everything in its place, and you can’t avoid it. Even if this BPS-2 is only partially filled, for us it’s like an armored train on a reserve route.

- But, it hasn’t been plain sailing, even from the technical standpoint. For example, the BPS-2 launch has been delayed for almost six months because of problems with the terminal in Ust-Luga.

- This just goes to show how they are tring to besmirch a new and important project for Russia by different campaigns. It was disgraceful, and all the problems are overblown. Yes, there were construction and engineering problems, bad decisions, but they are fixable, and they have been resolved quietly without any fuss; all the assessments have been conducted, everything has been monitored. There was no need to to cover the Ust-Luga gates with tar. Unfortunately, the story continues to echo until now.

- Can Transneft, JSC “buy out” Rosneftbunker Gennadiy Timchenko in the Neva Pipeline Company (NPC), which owns oil-loading facilities in Ust-Luga?

- The fact is that our endpoint is there and we have a common fence with our neighbors. NPC is an oil transshipment operator. We own 26%, and that’s not enough to monitor all the processes. No one can alienate or restructure this site without our knowledge. We don’t need more as yet; we’re not hampered in any way.

- In 2010, Transneft, JSC entered into long-term contracts on supplying oil to China in exchange for preferential loans. But, problems arose with the implementation of the contract – the Chinese started underpaying for Russian oil, referring to the difference in logistics after the construction of the linear segment from the ESPO. Finally, after a year of negotiations, Russia agreed to a discount of $1.5 US per barrel. Igor Sechin, who was then Deputy Prime Minister, called it a victory for the Russian side. Do you agree with him? How was it possible for such a situation to occur?

- You know, we can assume that each of the parties looked at this formula from their own position, although it’s as plain as day. But, there were some nuances, other angles to consider. The Chinese announced their new position the very next day, before the ink was even dry on the agreements. In the end, we sat down at the negotiating table, and talks lasted almost a year. In any case, today, the Chinese direction is one of the most rewarding, and oil companies can’t complain that they’re losing something there. We reached a complete consensus with our Chinese partners. The figures weren’t taken out of the blue; this was a purely commercial question - although we reduce the cost by $1.5 US, we’ll still win in the end. We must understand this… oil is not only shipped to China as we have a strategic cooperation in various fields with this country. If you look at the issue of oil supply in a complex way, it becomes apparent that our decision was deliberate, precise and reliable. We are neighbors and should develop bilateral ties, especially because of China’s incredible deficit in oil. Solving our problems allowed us to further negotiate on oil supplies to China.

- How are the negotiations going?

- Today, we’re not able to fully meet their demand without it affecting other export destinations. Once production begins on the Yurubcheno-Tokhoma and Kuyumba fields, construction is completed on the Arctic-Purpe-Samotlor Pipeline, the situation will change. During talks with our Chinese counterparts in June 2012, which I attended with the President of Rosneft, Igor Sechin, it was agreed that exports to the East would go through Kozmino. Rosneft suggested increasing oil deliveries to China through Kazakhstan, but as far as I know, there have been no negotiations on this proposal.

- Transneft, JSC was against it. Why?

- What does going through Kazakhstan mean? A 20-million-ton pipeline running from Kazakhstan to China, half loaded. Chinese buyers are trying to arouse the oil producers’ interest by low price plus the tariff through Kazakhstan is relatively low. But, it’s like robbing Peter to pay Paul - if we pump 5-7 million tons through Kazakhstan to China, than we have to get them from somewhere else. We can’t get that volume from our plants, so it turns out that it has to be taken from our exports. This means immediate and direct losses – such a venture would cost Transneft, JSC about 5.5 billion rubles, as the actual oil supply would transit via the shorter route. As a result, the budget will be 1.5 billion rubles short. The oil companies would probably benefit, but the idea is problematic.

- Less than a month ago Transneft, JSC appeared before the European Commission, which is concerned about oil supplies from Russia. Do you have an understanding with European officials?

- We were invited to Brussels by the Committee on Energy. They were concerned about the commissioning of ESPO-2. If you look at the situation from the outside, without going into detail, it seems that we’ll be taking certain amounts of oil from Europe and delivering them to the East, because they offer us a better price, a more interesting market, and the buyer is not so capricious. Therefore, the European authorities were interested in our investment program, namely what and how we’re going to build and what the volume of supplies will be. We didn’t hide anything, we have no secrets, so we informed the European Commission about all our plans and that we had no intention of leaving the traditional market. Our presentation aroused considerable interest. Especially as there is another common theme - the Burgas-Alexandroupoli project, which the Bulgarian authorities have refused... even though it could solve many questions for the European Commission.

- Did they finally abandon this project?

- Bulgarian authorities are afraid for their tourists; they believe that the project carries significant environmental risks. In addition, they are unhappy with the rates – the country could earn about $35 million per year with this pipeline. In our opinion, such explanations are far from serious and quite inadequate; moreover, we don’t feel that we really need this project. It’s more in Europe’s interests because the situation with the waterway through the Bosporus and the Dardanelles Straits is critical. The Turkish government wants to implement an alternative project – the Samsun-Ceyhan pipeline, and drive all oil through it. But, that’s not economically viable for us. I’d like to stress it once again that this whole situation isn’t critical for Russian oil companies; they have the chance to work, for example, from Novorossiysk to the BTS-2. But, it’s quite another story for Kazakh oil companies because they really don’t have enough capacity. Unfortunately, they don’t want to work with Bulgaria.

- How do you assess the implementation of the CPC Expansion Project? It’s a year behind, and there’s a general feeling that you don’t have an understanding with your partners on it, especially with Chevron.

- There are problems, and they are significant. Primarily with the organization, because everyone has money and the desire to build. The project was prepared very poorly; there were about two thousand corrections. We’re responsible for the Russian part, our Kazakh partners - for their own, and Chevron - for the maritime terminal, vapor recovery and offshore mooring. Each performs its task, all of us have problems, and they’re as serious as those in Kazakhstan… although all these issues can be addressed. I think that the appointment of Nikolai Brunich as General Director of the Russian section of the CPC will have a positive impact on the project. We just have to get our foreign partners to agree.

- How do you assess your partnership with Summa Capital with regard to the Novorossiysk Commercial Sea Port?

- You know, we got this partner historically. We’ve been collaborating with this company for many years – in instrument and technical facilities, individual programs for modernization and overhaul, and other contracts. It’s true that their importance as a contractor is gradually declining, but in the past few years, our biggest joint project has been the NCSP.

- How did you become Summa Capital’s partner on the NCSP project?

- Previously, Transneft, JSC didn’t control the maritime infrastructure in the port due to past errors. The port itself is not new and needed investment and repair. The former owners (businessmen Aleksandr Ponomarev and Oleksandr Skorobogatko - Korrespondent) didn’t do anything, although they took on firm commitments. We saw that the port was in terrible condition. We had to find other possibilities to improve conditions. I remember coming to Novorossiysk; our office building stood on the shore, our tank farm on the mountain, the entire infrastructure, but I couldn’t get to the port - it was fenced and guarded. So I had to get permission from the owners to get inside the port, to have the guard open the gate for me. When it happened that the former owners decided to sell the port, we and Summa Capital evaluated the prospects and decided to buy it together at actual cost. There was absolutely no pressure from the authorities on any of the participants of the transaction. We ourselves went to the appropriate authorities with a proposal.

If we talk about our collaboration prospects, I can say that our companies are very different, fundamentally different. Our priorities do not always coincide. What is a priority for Transneft, JSC as a state-owned company sometimes directly contradicts the objectives of a private structure. Moreover, there are moments that darken our cooperation.

- A year ago you supported Rosneft’s proposal on the government’s direct sale of 25% of the NCSP, although the package was supposed to be privatized. It’s rumored that your private partner was very surprised by this position.

- It’s simple arithmetic. If Summa Capital acquired 20% of NCSP through privatization, then given their existent share of the market and the purchase of yet another 5%, it would become the majority owner of the package. Transneft, JSC would have been in the same situation as before the purchase of the share. We wouldn’t be able to resolve important questions or control the situation, and the board of directors would’ve again been relegated to the sidelines. Summa Capital would start acting as best for the company. Rosneft has the Tuapsinskiy PS right near the NSCP, a large volume of transshipment through the port, so that the purchase of 25% is in its interests and the interests of other shareholders, because then it would be a well-balanced structure.

- According to one version, you were pressured and threatened that your contract of President of Transneft, JSC would not be renewed...

- No, that’s absolutely not true! First, I signed a contract in May, and the letter was sent in February. I’m not one of those people that you can push around and quickly agrees.

- But your relationship with Summa Capital became more complicated?

- Unfortunately, there were other moments. For example, Summa Capital offered us participation in the creation of a Russian oil hub in Rotterdam. We discussed it repeatedly. Transneft, JSC was supposed to provide a shoulder for oil from Primorsk to Rotterdam, and sea logistics was to be at a minimum freight rate. It turned out that, according to Summa Capital, our work was worth zero cents! It’s not good business for a state enterprise to work with such a business model. There’s another point - participation in this project means contributing to the creation of Russian oil pricing beyond the borders of our country. But, we should do this on our own sites, and not on our uncle’s, no matter how much he would like it. Well, in general, we had some contentious moments with Summa Capital. This also led to our recently initiating a change of collegial bodies for the NCSP.

- What bothers you?

- First of all, the fact that the interests of Transneft, JSC are ignored. In particular, Summa Capital’s attempts to increase representation in the subsidiaries of the NCSP, which creates a risk of losing control. We are equal partners, so all work should be undertaken on the basis of mutual interests. We’re not just going to be plain observers in this situation.

- Summa Capital’s building structures used to be your biggest contractors. Will everything change now?

- We now have a completely different business program from when we started building the ESPO. We created our own large building trust – Transneftstroy, which focuses on all the modernization programs, major repairs and reconstruction, which will be carried out by Transneft, JSC. We attract outside contractors only for certain types of technologically sophisticated works.

- Transneft, JSC management still does not support the privatization of its small package?

- Privatization of 3% implies coordinating all questions with the owners of such small packages. The fate of all our projects will be resolved by people who are not interested in investing money in long-term projects or contributing to the development of our system; they’ll be interested only in money - dividends. This issue is still being worked out; we have explained our point of view.

- In recent years, the industry has been talking about your conflict with Igor Sechin. In particular, you were unable to retain the position of General Director of Zarubezhneft after Nikolai Brunich. His position was taken by Sergei Kudryashov.

- You know, our conflict with Igor Ivanovich isn’t new. I’ve known him for almost 20 years, since he came to work at the office of the president. All this time, not only did we have a working relationship, but also an informal one. I know his family very well; we’ve been neighbors for a very long time. These circumstances suggest that our relationship cannot be overshadowed by serious conflicts. But now, Igor is the director of an oil company, while I’m the director of a pipeline company. We each have our own interests. Moreover, we look at the issues in different ways. For example, Rosneft is interested in the construction of a southern oil pipeline to Tuapse, where it has a refinery, but our export facilities are in a slightly different place - in Novorossiysk. So, we need guarantees from Rosneft, and then we can consider their proposal. We’ve received guarantees from Lukoil, that’s all. Or, for example, Rosneft plans to build the Eastern Petrochemical Company, but oil supplied through the ESPO has long been allocated. So, why such sudden plans? They can destroy everything that has been achieved. Igor Ivanovich and I may argue, we may disagree with each other, for example, on the same issue of increasing oil supplies to China. If Sechin remained in the management position, such issues wouldn’t even exist. Rumors about our conflict are just attempts to break us apart, and it’s not the first time. There’s no serious basis for them.

- Do you run into corruption in Transneft, JSC? On the market, they’re trying to link the Aurora Company, involved in supplying oil to Europe, with the former Vice President, and your current advisor, Mikhail Arustamov.

- Corruption is a painful subject. When multi-billion lots are proposed in tenders, there will always be people who want to take the opportunity to line their pockets. We heard different stories, but managed to stop them. There was even a case when one of our managers was caught accepting money right at the company entrance, before the cameras. Our security team has already worked out all the necessary techniques to deal with such cases.

As to Aurora, it’s a plain fabrication. As soon as I received the inquiry, I immediately summoned Arustamov in the presence of several witnesses; he stated that it was the first time he’d heard of such a thing. In general, I can say with complete authority that it’s all nonsense and attempts to throw mud at Mikhail Arustamov.

Of course, as dictated by tradition, a team of traders has emerged on the market; they are intermediaries between buyers and sellers. As a rule, they have dug themselves in on the border line, and that was the rule to the very last minute. Lukoil fought them for almost a year, and didn’t give up their oil volumes. There was a new victory last week - Rosneft signed direct contracts on oil supplies with PKN Orlen oil supplies, and no structures remain. It’s also very convenient for us. The final victory over this fraternity will happen in the near future.

- It is believed that Aurora, through Transneft, JSC, has informal control over scheduling, which also extends to the Ministry of Energy.

- Previously, working out export schedules was the prerogative of Transneft, JSC. This is a very thankless job; the company had to explain itself to the other oil companies and seek consensus, so Transneft, JSC management decided to coordinate scheduling with the Ministry of Energy. Today, we can only confirm that it’s technically possible to supply certain volumes to a particular direction. Previously, all the oil companies asked us to give them a more open planning schedule, not for a quarter, but for a year. Therefore, the previous government decided that operational scheduling would be transferred from the Ministry to Transneft, JSC, while annual scheduling would be left to the Ministry of Energy. Of course, this option doesn’t make anyone happy. I emphasize again – Aurora or any other company has absolutely nothing to do with Transneft, JSC or actual scheduling.

- Transneft, JSC still owns the remnants of oil in the pipelines? Do you know the Roza Mira Company, which is a trader in these operations?

- I know the company with such a name, but it offers us sales on the market. These prices are controlled by our security team. If we talk about the whole situation, then, whether we like it or not, excess oil appears due to the use of additives. Whose oil is it? As this oil is considered to be processed, it turns that it’s owned by Transneft, JSC. We can’t sell it for export, but we can use it in the domestic market and provide more income for ourselves. Our subsidiaries are involved in this matter. We get good money, which is then used for useful purposes.

- For example, for the Kremlin-9 Fund, which brings together FPS veterans (Federal Protective Service)?

- Funds were allocated to Kremlin-9 long before my arrival. I know where they were spent; I suppose we can talk about such things now. Considerable sums were allocated to building housing in the North Caucasus and improving the state border with Georgia. Not everything can be funded by the budget, so Transneft, JSC had the opportunity to help out. In addition, we’re involved in many other charitable projects – for many years, we’ve been providing monthly financial assistance to more than 30 children's homes, buying medical equipment, allocating money to institutions of higher education on a regular basis across the country, funding research papers, museum exhibitions, publishing books on Russian history… One of our latest projects is to create a system of mobile clinics in Moscow.

Nikolai Petrovich Tokarev

Born December 20, 1950 in Karaganda (Kazakhstan). In 1973, he graduated from the Karaganda Polytechnic Institute, specializing in electrification and automation of mining operations. He worked at various posts, including management, in the geological exploration section of the mining industry. According to several information sources, in the 1980s he served in the First Chief Directorate of the KGB (foreign intelligence) and the FSB; he was stationed in East Germany, where he worked for some time with Vladimir Putin. In 1993, he was appointed Head of the Foreign Relations Department of the Russian-German Leasing Company CJSC (a subsidiary of Sberbank). In 1996, he became Deputy General Director of the unitary state-owned company for foreign property management of the President of the Russian Federation (in the same year, Vladimir Putin was appointed deputy business manager of the president). He was named Vice-President of Transneft, JSC in 1999. From 2000 to 2007, he headed the state company Zarubezhneft. He has been President of Transneft, JSC since October, 2007. He was awarded the Order of Honor and the Order for Merit III and IV categories. Married, one daughter.

Transneft, JSC

Transneft, JSC is a state transport monopolist of trunk oil pipelines. It was established by a government decree dated August 14, 1993. 100% of the voting shares are owned by the state; preferred shares are traded on stock exchanges (21.9% of the authorized capital, capitalization as of February 8 - 108.6 billion rubles). It is the world’s largest pipeline company. It operates more than 53 thousand km of trunk pipelines, and more than 19 thousand km of oil-products pipelines. It transports more than 90% of the country’s oil and 20% of the country’s oil products. In 2011, its oil transport volume reached 471.7 million tons, oil products - 29.3 million tons. Major trunk pipelines – Druzhba, Eastern Siberia-Pacific Ocean (ESPO), Purpe-Samotlor and the Baltic Pipeline System. The Kozmino Port in the Far East and the Primorsk Port in the Baltic Sea are controlled by the holding. On equal footing with Summa Capital, Transneft, JSC controls 50.1% of the Novorossiysk Commercial Sea Port. Revenues for 2011 - 632.8 billion rubles; net profit - 11.1 billion rubles. For the first nine months of 2012, these figures amounted to 514.3 billion rubles and 7.8 billion rubles, respectively.


Kirill Melnikov and Anna Solodovnikova


11.02.2013 Kommersant

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