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Pipeline symphony

Date of publication: 3 September 2018 Printable version

The early 1990s proved to be a period of fateful decisions for Russian politics, economy and society. The wind of change also affected the domestic oil and gas sector. Those very years, the choice was made in favour of the industry’s further development and most of the major players emerged. No wonder that now, a quarter of a century later, the companies set up in those days do not only evaluate their decisions but also celebrate anniversaries. A quarter of a century is a milestone. Few companies that were started those days managed to stay extant, for a variety of reasons. But let’s face it, those that are still around have become a noticeable and crucial part of Russia’s economy. Twenty-five years ago, in 1993, Transneft was established – a transportation monopoly operating Russian oil trunk pipelines.

It makes no sense to set out the Company’s history in detail – it was in full public view: constructing new pipelines, maintaining operability and upgrading the old ones and, beyond doubt, heated debates with oil producers regarding transportation rates. Those news flashed both on TV screens and front pages. So now, it is wise to focus on the Company’s present and future, the challenges it faces and its further development outlook, as well as search the past for the reasons that led to the establishment of the monopoly in its present form, given that the gas industry treaded a different path.

For a good reason


14 August 1993 stands as the official birthday of Transneft, when Russian Government signed the corresponding resolution. The Company succeeded Chief Operational Directorate for Oil Transportation and Supply (Glavtransneft) of the Soviet Ministry of Oil Industry (Minnefteprom). Transneft was registered as a joint stock company by the Moscow Registration Chamber on 26 August 1993. Nowadays, the Company manages more than 68,000 km of oil trunk pipelines, over 500 pumping stations and some 24 million m3 of storage capacity. The Transneft system is used to transport about 84% of all the crude produced in Russia. Unlike the gas sector, where Gazprom is engaged in both gas transportation and production, Transneft was set up and remains an enterprise that solely deals in oil and petroleum products transportation, without any production capacities owned. So much was written about the causes of such division, mainly due to the role of Viktor Chernomyrdin who would not let the gas industry be broken up between private companies, leaving Gazprom in charge of both the gas and the pipe. The Chairman of Russian Government (from 1993 to 1998) surely had tremendous impact on the decisions made in the gas sector in 1993, and it would be wrong to downplay his importance, but those decisions relied on natural economic, geographical, social and political causes. The main merit of Viktor Chernomyrdin it that he managed to discern them at the time.


As explained by Evgeny Gavrilenkov, a Partner at Matrix Capital and Professor of HSE, “the idea of creating competitive markets in various segments of the economy was prevalent from the onset of market reforms in 1992. It penetrated the oil industry as well. A few oil majors were set up as a result, and those were gradually privatised (at loans-for-shares auctions as well). Afterwards, companies dominated by public ownership regained control over some of oil assets. The state stayed in control of oil pipelines, just as it did with other strategically important infrastructural facilities (for instance, railways). No similar reforms affected the gas industry – Mr Chernomyrdin, who was appointed the nation’s prime minister in 1992 after resignation of Yegor Gaidar’s cabinet, was their fierce opponent. Gazprom retained both production assets and transportation infrastructure. The fact that Gazprom stayed undivided is, beyond all, largely due to the fact that there are fewer big gas fields in Russia than oil fields, and therefore saving Gazprom’s monopoly was easier”.

In opinion of Konstantin Simonov, Director of the National Energy Security Fund (NESF), “it was about a crucial difference between gas and oil industry for the national economy. Oil initially costs more than gas, and it was primarily exported, pumping up the budget. Gas, on the contrary, was mainly intended for domestic consumption. This division has remained to date, although gas exports have been on a rise in recent years. There’s a good reason why a “gas industry man” became the prime minister of the country in 1993. Against the backdrop of the collapsed economic ties and recession, the gas industry to some extent turned into a binding agent for the economy that was falling asunder, and transfer of the blue fuel production and transportation to a handful of private companies could just make it worse. Please also mind that gas is a seasonal good, with its consumption rising in winter and dropping in summer, so it would by quite risky to shift responsibility for gas deliveries during the heating season to private companies. Oil came to be our main export item, so to make the budget full, the first task was to stop production from falling and to ramp it up afterwards, for which private companies could be the best option. However, since the industry needed control, establishing a separate state-owned company for transportation of oil and petroleum products was quite logical”.

It should be added that production and export data confirm the verity of the above. Even during the ultimate collapse in oil production in the first half of the 1990s, with it hitting the lowest point in 1996, oil export showed minimum reduction by 1993, but increased slightly as quickly as by the next year. It is noteworthy that crude oil export has remained roughly the same since 2004, although export of petroleum products rose almost threefold. Oil and gas sector still accounts for more than a half of Russian export, with 42.2% falling on oil and petroleum products and only 10.6% on gas. Please also mind the fact that this share reduced by more than 10% as a result of the 2015–2016 oil price slump. In 2014, the share of oil and gas in Russian export stood at 65.2%, including 54.2% for oil and petroleum products and 11% for natural gas.

In the last decade of the past century and at the start of this century’s first decade, it was Transneft that helped the state successfully control export flows of Russian oil. The situation began changing in 2005, and the major part of “black gold” production gradually came under control of state-owned business from private companies. To some extent, this changed the position of Transneft in the industrial hierarchy. The Company’s economic efficiency and significance for the industry were incessantly growing, owing to construction of new oil pipelines, but its administrative influence decreased. This caused multiple conflicts with oil producers, due to tariffs for pumping oil via the Transneft system.

Manual tariffs

As it is widely known, Transneft had its main tensions with Rosneft, the biggest national oil producer, whose majority interest is also state-owned. The conflict between the two oil sector titans has lasted for years, regularly subsiding and heating up again. Each time, there’s a new trigger for a dispute, with a new round of discrepancies initiated by one or another company. Every time each of the parties uses quite solid arguments to advocate its position, taking the matter to the court or referring to the Government or the president of Russia, or else to all the possible authorities at once. It’s sufficient to recall the companies’ disputes regarding oil transit to China via Kazakhstan, construction of a new refinery in Nakhodka, the disagreements related to the method of calculating oil and petroleum products residue in pipelines as well as legal guarantees of oil producers for pumping agreed volumes via Transneft’s pipelines.

Despite that wide range of controversial issues, the primary cause is the absence of clear-cut tariff policy of the state. Tariff uncertainty spawns similar uncertainty accompanying planning investment programmes, affecting implementation of projects by the companies. This is relevant both to Transneft and oil producers, although to a lesser degree for the latter. As a matter of fact, the Federal Antimonopoly Service (FAS) is now in charge of tariffs (not only in oil transportation), setting then manually in each case, and Transneft is not the only party dissatisfied by that.


This June, Transneft’s President Nikolay Tokarev sent a letter to Russia’s Prime Minister Dmitry Medvedev, which was also signed by Leonid Mikhelson, head of NOVATEK, and Vladimir Lisin, Chairman of the Board of Directors at NLMK. It proposed that the tariff regulation powers be taken from FAS and handed over to the Ministry of Economic Development.

As Igor Demin, Advisor to the President of Transneft, maintains, “tariff policy is out of the question now, the tariffs are set manually. FAS often makes decisions without regard to arguments of the parties, logic or economic factors, merely by calculating the arithmetic mean value from what the parties demand, which is totally wrong. Such solutions hold investment programme hostage, we (Transneft – Editor’s note) have to suspend it, since nowadays we are virtually subsidising oil pumping via Kazakhstan and need to pay fixed dividends to the state (about 28% of net profit under IFRS instead of 50% - Editor’s note), and the set tariffs do not cover those costs”.

Transneft’s investment programme has been indeed curtailed. In 2016, the Company allocated some RUB 154 billion to new projects, and in 2018 this amount fell to RUB 56 billion. It should be added that the matter concerns absolutely new projects, whereas the overwhelming majority of the biggest oil and petroleum products trunk pipeline projects have been completed by the Company or are is at least being implemented. The Company’s plans for this year include phase 2 of the Sever Project and completion of the Yug Project, and the ESPO PS – Komsomolsk Refinery leg. The plans for 2019 – 2020 envisage implementation of ESPO PS extensions at the Skovorodino PS – Kozmino SSOP section up to 50 MTPA and ESPO PS extension at the Tayshet IPS – Skovorodino PS section up to 80 MTPA. However, successful completion of the majority of projects does not negate the disinvestment, which is a negative factor for any business structure.


According to Konstantin Simonov, “the situation with oil pumping tariffs requires a decision from the government. Tariffs are non-transparent, the calculations behind transportation charges remain unknown. It appears, these are pulled out of thin air. The tariff policy is absent as such. This should not be done in the manner FAS is doing it. Everybody is addicted to planning now – businesses, ministries and the government. But how can one plan anything, if one cannot forecast future costs and income, and the regulatory authority’s position may vary, subject to the external pressure?”

In late July this year, the Federal Antimonopoly Service submitted to the government a bill On the Basics of State Regulation of Prices (Tariffs) along with a table of discrepancies with five ministries: the Ministry of Economic Development, the Ministry of Energy, the Ministry of Construction, the Ministry of Transportation and the Ministry of Digital Development, Communications and Mass Media of the Russian Federation. Even by FAS’s most hopeful estimates, the problem will not be solved by 2020, and tariffs will continue to be regulated manually. Until then, Transneft will remain a hostage to FAS’s decisions and budget’s appetites for dividends, which could be reduced (like in 2017) or left unchanged. Until the law is passed, Transneft’s conflicts with oil producers are likely to continue, since the possibility of influencing the rates has become a method of cutting costs or even getting additional profit for both sides.

Crime on the Move

Another serious problem Transneft is facing nowadays is oil and petroleum products theft from the Company’s system. This spring, an organised crime group that stole more than 7,000 tonnes of oil from an oil trunk pipeline was eliminated in Kuban. Using specialty vehicles, the criminals connected to the Malgobek – Tikhoretsk oil trunk pipeline and laid an underground pipeline of their own, running for 8 km with booster stations – underground bunkers disguised as private amenity structures and residential houses. It should be mentioned that the criminals used dedicated remote-control devices to pump oil from the trunk line without any noticeable pressure drops. The underground oil consortium lasted for nearly five months; the stolen oil was processed into fuel and sold. As estimated by the law enforcement agencies, the criminals seized RUB 114 million worth of oil from the pipe. This is not a record! A similar OCG in Samara Region, likewise eliminated in 2017, is estimated to have inflicted RUB 400 million of damage.


These are not just one-off occurrences. Overall, 289 illegal tappings were found at oil and petroleum products trunk pipelines of Transneft in 2017. As indicated by the statistics, their number is decreasing; unfortunately, the criminals’ technical facilities are improving every year. The worst situation with tappings has now emerged in Moscow Region, where their number increased 59 times over the past decade.

Altogether, 289 illegal tappings were registered at Transneft’s oil and petroleum products trunk pipelines in 2017. As mentioned by Igor Demin, “if Republic of Daghestan, Irkutsk, Samara and Chelyabinsk regions used to lead by the number of tappings, Moscow and Leningrad regions are the leaders nowadays. There people steal petroleum products, rather than oil. Diesel is particularly popular. What’s deplorable, the stealing often prospers under the cover of law enforcement agencies. A criminal group masterminded by head of the police station for Kirishi District was exposed in Leningrad Region last year. What’s the scariest is that jet fuel is stolen too, and evidently not to fuel kerosene lamps, but for commercial aviation. The share of fuel pipeline deliveries to Moscow airports has drastically increased over the recent years. The more is supplied, the more can be stolen relatively unnoticeably. Jet fuel theft is immediately related to flight safety! That is, our safety! We have appealed to various authorities — from the FSB and the prosecutor’s office to airport security divisions, but no specific actions followed. More likely, they were glad to shift responsibility to one another or to Transneft”.

Statistics corroborates Igor Demin’s words. From 2013 on, the number of tappings into oil pipelines has been much lower, as compared to petroleum products pipelines. In 2017, the ratio was 62 vs. 227, respectively. This tendency can be easily explained: ready-made fuel needs no refining and can be sold right away. And we are in luck if such fuel avoids manipulations to boost profit. As stated above, an increase in the pipeline pumping of petroleum products is only playing into the hands of the criminals. In 2016, Rosstat checked 1,536 fuel stations and found breaches at 18% of them. The rate of breaches at oil depots stood at 21.5%. As estimated by Evgeny Arkusha, President of the Russian Fuel Union, in 2017, the figures are seriously underestimated, and the volume of fake diesel is 30 – 40% at a minimum. Sure, not all of the fuel was tapped from Transneft pipelines, but a portion of it was derived that way.

Oil and petroleum products spills are also linked to the problem of tappings. As proven by statistics, each 10th tapping leads a spill. The most notorious case of late occurred in Podolsk District of Moscow Region in 2016, when 12 tonnes of diesel spilled from an illegal tapping. The contaminated area exceeded 41,000 sq. m, and personnel of the EMERCOM (the Emergencies Ministry) of Russia had to remove all the vegetation from the area. Some amount of petroleum products leaked into a local river, and around 500 m3 of water were pumped out to clean it.

What's next?

Transneft’s problems naturally go beyond those stated above. The rise of sulphur content in Urals grade has stirred up dissatisfaction of European consumers. There are problems related to reduced oil pumping volumes under the OPEC+ transaction and problems related to filling recently launched pipelines – the Zapolyarye – Purpe and the Kuyumba – Tayshet, and, consequently, tremendous financial losses resulting from reduced volume of oil pumped into the pipeline. According to Maksim Grishanin, First Vice President of Transneft, in 2015 – 2020 the losses shall amount to RUB 38 billion at the Kuyumba – Tayshet route alone, plus RUB 183 billion at the Zapolyarye – Purpe route. The figures were calculated based on capacity requests oil producers made in October 2017. As for requests made in 2012, the losses total RUB 119 billion and RUB 389 billion, respectively. However, the latter calculations belong to the field of alternative history and science fiction. Those are highly influenced by external economic factors, which are beyond Transneft’s control, and it makes no particular sense to mention the Company’s losses that resulted from oil price crisis and reduced output. The popular take-or-pay approach, or rather ‘pump-or-pay’ in our case, is hardly applicable to domestic oil producers.

The problem of pipeline tappings gives rise to frequent oil and petroleum products spills.

By now, Transneft has achieved a milestone in its development. “The major oil trunk pipelines have already been built,” Igor Demin said.

ESPO-1 is expected to be extended to 80 MTPA and ESPO-2 is to be extended to 50 MTPA by 2020, which will enable domestic companies to drastically boost exports into Asia and the Pacific. The Company’s further prospects are related to development of a petroleum products pipeline network, to the Yug and Sever Projects in the most immediate future.

By 2020, the Company plans to bring the volume of light petroleum products transportation to 56 MTPA. This year’s implementation of phase 2 of the Sever Project envisages export of light petroleum products from Russian refineries via ports of the Baltic Sea in the volume of up to 25 MTPA. Completion of the Yug Project will enable to export similar goods via the port of Novorossiysk in the volume of up to 11 MTPA by 2025. Its existing throughput capacity stands at 6 MTPA. Moreover, this year the Company has planned to revamp the trunk pipeline system in Moscow Region to boost volumes of petroleum products transportation.

By 2020, the Company plans to bring the volume of light petroleum products transportation to 56 MTPA.

It is noteworthy that in spite of all the above problems, costs, losses and troubles, Transneft remains a most successful and efficient Russian company. The amount of dividends it pays to the shareholders is just another proof of that. It should be noted that Transneft is among the industry leaders by import substitution: 93% of equipment currently operated by the Company is manufactured in Russia. Quite possible, achieving this result was easier for Transneft than for companies producing oil, the latter having more complicated process needs, especially in the field of geological surveys and exploration and extraction of hard-to-recover oil reserves, but the fact remains. Likewise, indicative is the fact that despite the mediocre external conditions on the oil market the Company has implemented the majority of outlined projects and plans to complete the rest in the near future. Transneft’s disputes and tensions with oil producers are unlikely to vanish in the years to come, but the art of compromising is among the virtues of the business; the Company’s management has proved to be quite skilful at it. At least skilful enough for Transneft to remain a leader of Russian economy.

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