Deputy Head of Transneft Maksim Grishanin on Rosneft’s idea to reduce pumping tariffs
Photo: Anvar Galeev/TASS
According to Kommersant’s information, on June 26, Deputy Prime Minister Yury Borisov held a meeting on Transneft’s tariffs, which Head of Rosneft Igor Sechin has asked to reduce by half, to the level of 2008. No final decisions have been made. First Vice President of the Company Maksim Grishanin has told Kommersant what consequences the oil company’s idea bears for Transneft and why it is strongly against making the transport tariffs dependent on oil prices.
Last week, a meeting with Deputy Prime Minister Yury Borisov was held, where the proposal of Head of Rosneft Igor Sechin to reduce Transneft’s tariffs to the level of 2008 was discussed. Have decisions been made on this matter?
Firstly, the data announced by Rosneft [that the share of transport costs is 32% of the oil price — Kommersant] is out of tune with reality. For this particular company, the average share of transportation through our system in the oil price was 5.8% in January, and in June, after all the spring tribulations, it reached 8.2%. And if we consider not only export routes, but also supplies to refineries within the country, this share will become significantly less. The maximum indicator for export routes is 18.7%, and it was recorded in April, when the oil price plummeted.
At the same time, during the meeting with Yury Borisov we presented calculations which showed that if the cost of oil pumping through the Transneft system was reduced to the level of 2008, emergency measures would be needed to support the Company, since the funds deficiency would amount to RUB 130 billion for 2020, RUB 227 billion for 2021 and RUB 304 billion for 2022. In this regard, we will not be able to meet any obligations: neither repay the debt, nor maintain our infrastructure in proper operational condition, as we will lose over 40% of all revenue.
What is the Government’s position now?
It believes that the tariffs should not be reduced, and we are supported by the Federal Antimonopoly Service. On Yury Borisov’s orders, the Ministry of Economy will develop various options for changing Transneft tariffs.
Is it possible that the Inflation Minus principle will change?
At present, the tariff setting framework is being discussed, and it is already obvious that the Government will stick to this principle for at least the next ten years. The principle that the FAS has been observing since 2015 ensures, above all, predictability of the tariff policy for both Transneft and our consumers. Any of them can forecast the cost of transportation for five years ahead and find the most profitable long-term supply chains. If, as per the proposal, the formula of indexing tariffs for oil transportation depending on the oil price is established, it becomes unclear how to plan the share of transportation in the costs for the next month, not to mention for a longer term.
But even if we omit this part, and an oil price-dependent tariff is set, what happens when the price starts to grow, for example, to USD 50 by the end of the year, that is, 25% more than the current level? Will the tariff need to be raised by this value? For sure, we don’t mind, but are the oil companies ready for that? It is not clear how to calculate tariffs – in rubles or dollars. Now all tariffs are in rubles. How often will we revise them taking into account exchange fluctuations?
When oil cost USD 100 per barrel, we were not offered to have a share in the extra profit enjoyed by the oil companies. Such a principle can be imagined, but it is impossible to implement it. In fact, the only thing Rosneft offers to share with us is risks of the unfavourable market situation. When the market goes up, the oil companies will resist any increase in tariffs.
According to Kommersant’s data, an analysis of Transneft’s work prepared by the Institute of Economic Forecasting of the Russian Academy of Sciences (IEF RAS), which described the position of the Company as a much better one than that of oil companies, was also discussed at the meeting. Do you agree with this?
In the presentations and analytics of IEF RAS, there is a statement that Transneft is a subject of the oil market, so it should share the losses from lower oil prices. But this is fundamentally wrong, because the Company does not produce, process or sell oil. Transneft is an infrastructure company that provides transportation services. This can be compared to a situation when money is spent on building a road and maintaining it in working condition, and later it doesn’t matter how much the car that drives along this road costs and what the price of its cargo is. At the same time, infrastructure facilities have a much longer payback period and much lower profitability than consumers of their services. Therefore, it is economically incorrect to include them in the market relations of companies that use the infrastructure.
The largest companies producing most of Russian oil are vertically integrated structures. The analysis of IEF RAS does not take into account the effect of production and sale of petroleum products. It is incorrect to build the arguments solely on the effect of lower oil prices and returns for export. The calculation of the so-called economic rent does not take into account tax exemptions provided to the companies. According to the Ministry of Finance, in 2019 their volume amounted to RUB 1.6 trillion.
Another argument of the institute is that our income has grown significantly; however, from January 2016 to the end of 2019, the Company's net profit according to IFRS actually decreased by 23% due to the tariff increase restriction, while it grew by 100 % for GazpromNeft, 210% for LUKOIL and 307% for Rosneft. That is, the Inflation Minus tariff policy, which the Government has been systematically pursuing over the past five years, leads to a situation where our pumping prices grow slower than the cost index, so the profit is steadily decreasing.
And one must remember that 78% of our income belongs to the state. It takes dividends regardless of the free cash flow level. At oil companies, most of the payments go to private owners. In 2014-2016, we had a negative cash flow, but we paid the dividends all the same. In 2017, the amount of dividends exceeded the free cash flow four times. In Q1 of 2020, we had profits, but if we exclude the paper-bound revenues arising from exchange rate differences, our bottom line nears zero.
Still, Transneft is less affected by the lower oil prices than producing companies.
The authors of the IEF RAS analysis deliberately ignore the impact of the OPEC+ deal on Transneft's performance. The amount of services rendered in 2020–2022 will decrease by 17%. A sharp, more than double, decrease in free cash flow is expected.
Moreover, unlike oil companies, we cannot reduce the capacity of our transport infrastructure. They are flexible and adapt to changes in the market environment: reduce product output and abandon part of the capacities, which is impossible for Transneft. We cannot shut down part of the oil and petroleum product pipelines due to a decrease in transportation volumes. Thus, the potential for reducing operating costs if pumping volumes decrease, excluding electrical energy costs, is significantly lower than that of our customers. The decrease in transportation volumes is not reimbursed by tariff sources.
Your opponents refer to the fact that you have completed the main activities of the investment programme, so the costs will be significantly lower. How much do you plan to spend this year and on what?
Firstly, about 80% of the funds spent on the construction of new pipeline transport facilities over the past 15 years are borrowed. These are long-term loans, and they must be repaid. The only source of funds to repay them is the tariff revenue. In the next ten years, our loan service obligations, including the interest, will amount to RUB 80–100 billion per year. We already understand that if the tariff policy and the projected throughput volumes preserve, most of the loans will require refinancing. Due to the tariff increase restriction and the decreased volumes accepted into the system, the debt/EBITDA ratio will grow above the planned level. Our task is to keep it at acceptable values. We consider the current level of 1.4 [debt/EBITDA – Kommersant] comfortable, a growth to 2.5 or above will be critical.
Secondly, Transneft spends huge funds on maintaining its infrastructure – RUB 230–250 billion per year. This is the required minimum. It is determined based on inspection results. Due to the service life of pipes, we annually replace about 1.5 thousand km of pipelines. About 40% of oil and petroleum products pipelines and half of the available tanks are older than 30 years. A lack of infrastructure financing will lead to equipment failures, oil and petroleum product spills, large-scale environmental disasters.
So you do not consider the option of using loans to implement the revamping programme?
We do consider it and take loans. Under the current tariff policy, financing of the revamping programme requires partial borrowing. However, if both the revamping and the dividends are constantly financed from borrowings and the transportation tariff is further reduced against the background of decreasing throughput volumes, in three years the debt burden will become unbearable. Some companies do this, and then ask for state support. However, the task of Transneft’s management is to ensure financial stability of the Company without state assistance.
If Transneft’s tariffs do fall, what investments will have to be abandoned in 2020?
The final volume of our investments will depend on how many dividends will have to be paid for the whole of 2019. We are ready to pay 50% of our normalised profit – about RUB 81 billion – but we ask to do so by installments within three years. If the state agrees, we will keep the capital investment programme almost unchanged. Otherwise, we will have to postpone part of it to later periods. As far as I understand, in the near future the Government will consider this issue.