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Russian Railways income goes down the pipe

Date of publication: 16 March 2018 Printable version

The monopoly has estimated its losses caused by expansion of oil pipelines.

In the next two years, Russian Railways will be losing RUB 24.5 billion or 2% of its income annually due to transportation of oil and petroleum products via Transneft’s pipelines, The Institute of Natural Monopolies Research (IPEM) experts estimate. They believe pipelines were chosen not solely due to Transneft’s low rates, but also owing to the monopoly offering more flexible logistic solutions (by involving motor vehicles). Other industry players hope a transport balance of oil cargoes will help railways and inland water transport, although all attempts to develop one have been failing for the past several years.

In 2018-2019, Russian Railway may lose at least RUB 24.5 billion due to shifting the flow of oil and petroleum products from railways to pipelines, according to estimates by the experts of the Institute of Natural Monopolies Research (IPEM). The monopoly may lose some 2% of its annual income, and railway operators will fall short of at least RUB 1.8 billion.

In 2018–2019, moving of oil cargoes from railway to pipeline transportation mode will be influenced by   hooking up three refineries — Komsomolsk Refinery (it will reduce the railway shipments by 5.1 million tons), Afipsky and Ilsky refineries (the railway will lose 1.5 million tons) — to the oil trunk pipeline system. Apart from that, it is planned to construct the Volgograd – Tikhoretsk petroleum product pipeline and hook it up to Volgograd Refinery which will reduce the railway shipment volumes by 2.6 million tons.  Plus, Russian Railways will lose another 1 million tons due to conversion of the Ryazan – Moscow petroleum product pipeline to pumping of clean petroleum products.

Shifting the oil cargoes towards the pipe is caused by both the tariff policy of Transneft and the low costs of constructing and maintaining pipeline infrastructure, as compared to railways, IPEM states. Besides, Transneft and Russian Railways cannot make door-to-door deliveries, but the pipeline monopoly has been actively implementing a programme of comprehensive logistics services by engaging road transportation, IPEM notes.

It is not the first year that railway operators complain about losses caused by cargo being transported via pipelines rather than tank cars they have invested into. In late 2016, they asked the government to develop a transport balance stating shipment volume plans. The discussion was reopened by inland water transport operators in late 2017, the reason for that being Russian Railways offering discounts on transporting petroleum products via routes that compete with river transport — from Samara, Saratov and Ufa refineries. The maritime transport entities declared they might lose 4.3 million tons or 55% of the freight base in 2018 and demanded that the discounts be cancelled. The industry players view the Russian Railways policy as contradicting both the president’s commissions and the state transportation policy. Deteriorated financial standing of tanker owners and their likely bankruptcy will also have a negative impact on banks and leasing companies. As a result, Mintrans (the Ministry of Transport of the Russian Federation) proposed developing the balance by distributing the cargo flows among railways, road and pipeline transportation (see Kommersant issue dated 16 February). The terms of reference and the contractor will be defined soon, a Kommersant source says.

Transneft has reminded Kommersant that petroleum products transportation is a competitive market, the monopoly receiving some 20% of the hauled volumes, and that “the pipe would never replace the capabilities of the wheels.” Transneft reminds this is not the first year that Mintrans proposes developing a transport and economic balance for oil and petroleum products and adds that the Company is ready to help. “Until now, instead of joining efforts with us and inland water transport operators, Russian Railways has been trying to compete for the market using an unclear and non-transparent scheme of discounts for shippers. We believe this is self-defeating,” Transneft concludes.

Russian Railways has repeatedly stressed that it disagrees with the accusations of unfair competition and pointed out it may vary the tariff within the ‘tariff corridor’ approved by Federal Antimonopoly Service (FAS) of Russia. Earlier, FAS stated they saw no signs of unfair competition either. Last Thursday Russian Railways said that while forecasting the railway freight base they considered both the partial shift of oil and petroleum products shipments to the pipe and the gain in shipments of coal and ore which is linked to the development of new fields in the Eastern Siberia and the Far East and which compensates the losses. The shipment structure losses that stem from a decrease in the share of oil and petroleum products transportation in 2018-2019 were estimated at RUB 14 billion, a Kommersant source close to Russian Railways said (the monopoly’s profit margin for the haulage of oil is higher than that for transportation of cheap coal).

Vladimir Savchuk, Deputy Director General of IPEM, believes that companies from all sectors must be involved in the creation of integrated products, otherwise railway and inland water transport will only be able to compete with the pipe until investment in the pipeline projects begins. From the viewpoint of construction and pumping, the pipe is cheaper than other modes of transport, but those are more flexible in terms of routes and volumes, Andrey Polishchuk of Raiffeisen Bank mentions. However, according to Mr. Polishchuk, the transport balance will be helpful in avoiding insufficient loading or shortage of capacities in the longer term, rather than in supporting individual players.

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