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Economic Development Ministry Supports Reduction of Transneft Tariffs

Date of publication: 17 July 2020

Earlier, the FAS and Energy Ministry objected. Transneft interprets the idea of making the tariffs dependent on profitability as a return to the USSR.

The Ministry for Economic Development has hailed the idea to lower the tariffs for crude oil pumping over the Transneft pipelines. The department’s chief Maksim Reshetnikov expressed his support to the given initiative in his letter to FAS Head Igor Artemyev, RBC holding a copy of this letter. Kommersant was the first to highlight this initiative.

Some time earlier, Head of Rosneft Igor Sechin suggested that the oil and petroleum products transportation tariffs of Transneft, as well as those of Russian Railways, should be cut. During his meeting with President Vladimir Putin on 12 May, he pointed out that the tariffs would need to be brought in line with the oil prices which had fallen to the level of 2008 in roubles. “We do not ask for any preferential treatment, but dovetailing their prices with actual oil prices would of course be important for us,” Mr. Sechin then argued.  According to him, now the transportation outlay amounts to 32% of the crude oil’s ultimate price. Following that meeting, President Putin instructed the government to address the issue of cutting the special tariffs of Russian Railways and Transneft. The Energy Ministry and the FAS expressed a negative opinion about Rosneft’s proposal: they believe that cutting the tariffs might deal a blow on the investment programmes of the state-owned companies.

In his letter, Mr. Reshetnikov argues that the profitability of Transneft in 2019 came to 22.6%, the revenues from oil sales to China exclusive. Should the tariff indexation principle persist, the natural monopoly’s profitability may reach 25% by 2024. In the Minister’s opinion, this profitability cannot be explained by high risks which are way lower in the case of Transneft because of its monopolistic advantages on the market.

The Ministry for Economic Development therefore concludes that the Company’s profitability is too high, and so the pumping tariffs could be reduced. The Ministry thinks it possible to bring the profitability down to 5%, which must be reflected in the amount of dividends.

Transneft disagrees with Mr. Reshetnikov’s rationale. Its spokesman Igor Demin told RBC that the Company disagrees, in particular, with the method of profitability assessment made by the Ministry for all business activities of Transneft, rather than just for crude oil and petroleum products pumping. “Hence this figure of 22%, while in reality the profitability is way lower and does not exceed 10% if we proceed from regulated activities,” he explained. The target profitability of 5% proposed by the Ministry for Economic Development is seen as unfair at the Company. “This actually means that state-owned assets (oil trunk pipelines) are to be provided for private companies at cost. Besides, the profitability would not cover the costs of building new infrastructure,” argues the spokesman of Transneft.

In the opinion of Mr. Demin, the proposal to set tariffs depending on profitability levels appears to be a denial of market economy and transition to state regulation. “The Ministry for Economic Development is turning into a ministry for economic stagnation, with command economy proposed in place of effective economy, and current profitability assumed to be a reference point for calculations. A manager no longer has to look for efficient solutions or try to lower the cost and to seek energy savings. This demotivates the steward. Instead of staking on efficient owners, support to the main national lobbyists is coming to the fore. They may well hang up the notorious slogan formulated by Leonid Brezhnev at the XXV Congress of CPSU, Economy has to be thrifty,” stated the spokesman of Transneft.

 

 

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