Russia: Transneft President Vaynshtok Comments on New Oil Pipeline Projects
Text of report by Russian newspaper Kommersant on 13 March; subheadings as published.
[Interview with Semen Mikhaylovich Vaynshtok, president of Transneft, conducted by Denis Rebrov; date and place not given; headlined "Semen Vaynshtok: Practically nothing depends on us"; published under the rubric "Business News"]
The head of Transneft on new Russian oil pipelines
The Russian-Bulgarian-Greek summit meeting will begin tomorrow within the framework of Russian President Vladimir Putin’s visit to Athens, which is scheduled for Thursday [15 March]. An intergovernmental agreement among the three countries on cooperation in building and operating an oil pipeline from Burgas in Bulgaria to Alexandroupolis in Greece is to be signed at this time. Transneft will be the operator of the oil pipeline. Transneft president Semen Vaynshtok told Kommersant about the conditions that the project will be realized under and of the situation with other Russian pipeline projects.
[Rebrov] Recently the Ministry of Industry and Energy announced that Burgas-Alexandroupolis would essentially become part of the Russian pipeline system – the companies will receive access to this oil pipeline under the very same principle as in Russia. So what volume might be pumped by the foreign companies that are now conducting talks on joining the project but intend to transport oil extracted outside Russia’s borders? Have they ever discussed this question with you?
[Vaynshtok] At this point we have only a general understanding of how this project should be managed. We must form the planning company and announce a tender to do the work on planning and preparing the TEO [technical-economic substantiation]. After that, the decision on starting construction and financing is made in the established manner. We know how to do this, and we can do it quickly. I think that we will need about 18 months for construction. Actually we see Burgas-Alexandroupolis as part of our oil pipeline system. But at this point foreigners are not holding talks with us. Perhaps with our Bulgarian or Greek colleagues. We have 51 per cent, and we are not proposing to divide up our share with anyone else, so what sense is it for them to hold talks with us?
[Rebrov] Have the tariffs for the pipeline been agreed upon?
[Vaynshtok] How can we talk about the tariff when there is still no project documentation?
[Rebrov] And are talks under way on access to the pipeline?
[Vaynshtok] First, we are interested, as are they, in the Burgas- Alexandroupolis taking workload off the Bosporus. And we will reach an understanding with them that Transneft will be the operator of the project and access will be granted under a definite formula of how much the Caspian Pipeline Consortium (CPC – Kommersant) should receive and how much the Russian side will receive.
[Rebrov] In what proportions will Russian oil and CPC oil be transported?
[Vaynshtok] It is still too early to talk about that. I am not going to name an amount that has not been agreed upon. But we have a method for resolving this issue.
[Rebrov] And when will a share in CPC be transferred to Transneft?
[Vaynshtok] That is not our problem. It is true, however, that it would be a lie to say that we do not know what is going on. We know that as of the end of last year, the enterprise’s losses came to 5.5bn dollars. We know that the documents used as the basis to manage CPC discriminate against Russia. We understand that the upper limit of the tariff that the CPC stockholders are naming is altogether unacceptable to the Russian side and it must be much, much higher. You must understand that as a transit company and a stockholder in the project, Russia in the process must certainly obtain dividends from it. There is a potentially highly profitable enterprise operating on our territory, and we must not permit it to suffer losses. There are also other points of concern: we would like to change the management structure of the enterprise and subordinate it to the laws of Russia, notably the Law “On Joint-Stock Companies”.
[Rebrov] And what laws is the CPC now managed under?
[Vaynshtok] Actually, at this point, it is altogether outside the law both formally and in reality. A natural management scheme looks like this: a governing board, a board of directors, and the stockholders meeting. In the case of CPC, we have a board of directors and a stockholders meeting, but in addition to those, there is also a higher-ranking body – the committee of extracting companies, whose decision is carried out by the stockholders meeting without question. Russia is not a member of the committee of extracting companies, so although this pipeline passes through our territory, we have absolutely no rights. Moreover, the major CPC stockholders – ExxonMobil and Chevron – issued loans to CPC at 14 per cent interest. Whereas Transneft, for example, recently attracted a loan at 5.6 per cent interest on the market to implement its own projects. We believe that the CPC stockholders could change the loan interest rate at least to 7 per cent. As a possibility.
[Rebrov] Talk about the possible transfer to Transneft of a block of stock in CPC began long ago. Why hasn’t that happened yet?
[Vaynshtok] I do not care why it has not happened. We were not the ones who were the initiators of this process. But we will implement the government’s decision if it is adopted.
[Rebrov] And when will the functions of confirming the export schedules, which now belong to the Ministry of Industry and Energy, be transferred to Transneft? What do you think of that idea?
[Vaynshtok] Imagine that you are an accordion player and are playing a waltz. And then you go up to a woman with your accordion, playing the waltz, and ask her to dance. Wouldn’t that seem foolish to you? Well, the very same thing will happen with Transneft too. We provide the carrying capacities, we do the pumping, we issue the schedules, and we monitor them – it turns out that we are the accordion player dancing the waltz. That seems absurd, to say the least.
[Rebrov] But essentially what oil will be transported in what direction depends specifically on Transneft.
[Vaynshtok] In reality, practically nothing depends on us. We simply offer our technical capabilities in all areas and then we receive the pumping assignments from the Ministry of Industry and Energy for LUKOIL, Rosneft, TNK-BP, and others – we have about 160 contractors. And I really don’t care which of them goes to Primorsk, which to Novorossiysk, and which to Odessa. But after Transneft receives the export schedules, it can be accused of being biased. That cannot be permitted. When I came to Transneft in 1999, the first thing I did was drive out corrupt people and make certain that we did not have anything to do with the schedules. It seems to me that it was absolutely justifiable and correct of me to do that. So why bring back what we abandoned, and altogether deliberately? I do not understand.
[Rebrov] But certainly if some changes occur in the schedule, Transneft is the one to decide in what direction to redirect the volumes, as it happened in August of last year when the operation of the pipeline in the Lithuanian sector was suspended.
[Vaynshtok] In reality, in such cases we simply carry out the Ministry’s directive.
[Rebrov] At the beginning of last year, officials began to discuss the possibility of merging Transneft and Transnefteprodukt, and it is common knowledge that they obtained the support of President Vladimir Putin last autumn. What do you think of the prospect of the merger of the companies?
[Vaynshtok] I believe that such a decision will be made, but so far we have not received documents on that score, and I would not want to discuss this topic. But when we are given such an instruction, we will follow it.
[Rebrov] It turns out that Transneft will have to implement several major projects at the same time. Recently there has been vigorous discussion of the possibility of building a pipeline with a capacity of 50 million tonnes of oil a year from Unecha, which is in Bryansk Region on the border with Belarus, to Primorsk. Who came out with this proposal?
[Vaynshtok] Transneft. It happened on 3 January.
[Rebrov] In an interview for Kommersant recently, Deputy Industry and Energy Minister Andrey Dementyev said that this question has been under examination since November of last year.
[Vaynshtok] Not at Transneft. We came out with that proposal in order to ensure guaranteed deliveries of oil to our Western European partners.
[Rebrov] Why was it decided to build a pipeline with a capacity of 50 million tonnes of oil? After all, about 80 million tonnes of oil a year transit through Belarus.
[Vaynshtok] That is the minimum that we could go with in implementing the project in order to ensure the security of our European partners. But in principle Transneft can even do a project for 80 million tonnes of oil a year.
[Rebrov] So, then the oil producers can redirect all the flows that now go through Belarus?
[Vaynshtok] Whichever direction is more advantageous for the oil producers is the direction that they will in fact take. If it is more advantageous to export the oil through Belarus to the West, they will go through Belarus, but if it is more advantageous through Primorsk, they will go through Primorsk. People who work in the companies are extremely practical, and they always calculate savings.
[Rebrov] But aren’t you afraid that you will spend money on the project and the oil producers will not go for this pipe?
[Vaynshtok] They will. We have already built the BTS [Baltic Pipeline System], and as soon as we finished the project, we immediately set the tariff lower than for pumping to the Latvian port of Ventspils, and substantially lower. So when I say that the oil producers will go in the direction of Primorsk, I am certain of it. In order to understand that, you must take a pair of compasses and calculate the distance from Unecha to the border with Poland and from Unecha to the border with Germany, and then use these same compasses to turn to Primorsk.
[Rebrov] Was the problem of passing through the Danish straits discussed?
[Vaynshtok] Of course, we did not just make our proposal, after all; we supported it with arguments. We held talks with Sovkomflot and are now examining the possibility of in Primorsk using tankers with a deadweight of 160,000 tonnes but with a draft that permits them to pass through the straits. So we are in effect not increasing the number of ship calls; we are increasing the carrying capacity. There are already two such tankers, and another two are under construction.
[Rebrov] And with an increase in the capacity of the pipeline to 80 million tonnes a year?
[Vaynshtok] At this point such a possibility has not yet been examined in detail. We say that a pipeline for 50 million tonnes of oil a year will help us diversify exports. And of those summary 100 million tonnes that are exported in the Belarus sector, we believe that half must be redirected to Primorsk. At the very least, we must give oil producers the opportunity to diversify.
[Rebrov] But certainly Transneft already has surplus capacities. Isn’t that enough?
[Vaynshtok] We used to name a surplus of 20 million tonnes (about 4.25 per cent – Kommersant). And formerly we had no surplus at all. But overall Transneft operates at the limits of technological loads. So the desired surplus for us is 20 per cent of free capacities.
[Rebrov] When might it be reached?
[Vaynshtok] By 2010. While about 250 million tonnes today go for export, 20 per cent of that is 50 million. We will deliver another 30 million tonnes to the East. Actually, all this can occur even in 2008. I say 2010 for a safety margin.
[Rebrov] When will the decision on starting construction of the pipeline bypassing Belarus be made?
[Vaynshtok] I think within a week or two.
[Rebrov] When might construction begin?
[Vaynshtok] It is not impossible that it would be as early as April. You know how much time passed between the adoption on the decision on the VSTO [East Siberian - Pacific Ocean Pipeline System] and the start of construction? Fifteen days.
[Rebrov] So then technically you are ready?
[Vaynshtok] Yes.
[Rebrov] You are talking of the need to diversify, meanwhile one of the export directions – the branch to Latvia – has been idle since 2003. Will it start operating again?
[Vaynshtok] I do not believe so. The volumes that were formerly delivered to Ventspils are now going to Primorsk, and Russian oil producers are not even asking about connecting up the branch to Latvia.
[Rebrov] And what about the section of the Druzhba [Friendship] oil pipeline to Lithuania that was shut down for repair last year?
[Vaynshtok] I do not rule that out. But to do that we need to obtain the recommendations from Gosgortekhnadzor [RF Federal Mining and Industrial Oversight]. They are now studying that question. It is a very serious one associated with ecological security. They are not taking risks and are in no hurry.
[Rebrov] And is the plan for building the Kharyaga-Indiga oil pipeline still being examined?
[Vaynshtok] Yes, but it is not a priority for us.
[Rebrov] Transneft has already laid about one-quarter of the VSTO pipeline route. Has the company determined the tariff for pumping the oil?
[Vaynshtok] We cannot name the tariff now – all the necessary project documentation is not yet completed and we have not received the findings of the state expert study panel. We will be able to talk of the tariff only after these documents are ready.
[Rebrov] When will that happen?
[Vaynshtok] We hope in mid-April.
[Rebrov] Transneft has already named the sum that will have to be spent on building the second section of the VSTO – 11bn dollars. Can you perhaps make some prediction on the tariff based on that price?
[Vaynshtok] I cannot, since we believe that the grid tariff that will be introduced will actually change Transneft’s entire tariff policy. It will duplicate the mechanism of tariff-setting that the railroad industry has: the farther the freight is hauled, the cheaper its transporting will be. So in the end it will make no difference to the oil producer whether the oil is exported from Novorossiysk, Skovorodino, or Kozmino. Western Siberia is considered the base region; and it must be advantageous for the company to haul either to Europe or to the Pacific Ocean. But so far we have not officially made this proposal; it is still being carefully studied, so it is too early to talk about it.
[Rebrov] Are you in some way preparing for the realization of the second stage of the VSTO – from Skovorodino to the shores of the Pacific Ocean?
[Vaynshtok] We are not making preparations yet, because the decision on this will be made only after Eastern Siberia manages to develop oil extraction to the level needed to fill the second stage – 80 million tonnes of oil a year.
[Rebrov] Recently Vladimir Yakunin, the head of the OAO [open- type joint-stock company] RZhD [Russian Railways], as a co-author with other experts, published a book where he tries to show the advantage of shipping oil to Eastern Siberia by rail and believes that in present conditions the VSTO project will be unprofitable. Are you familiar with his conclusions?
[Vaynshtok] Yes, I know about his book. And I take an altogether sober view of this: each person has the right to his opinion, even if it is in error. If the OAO RZhD is able to make the railroad tariff cheaper than it would be to go by pipe, taking into account payment for services to transship the oil to the port, undoubtedly railroad transport would become prevalent. At the present time, as soon as a pipeline appears, all oil producers immediately move there from the railroad. But most likely that is not such a graphic lesson that Vladimir Ivanovich has learned it.
[Rebrov] But will the VSTO project pay for itself?
[Vaynshtok] Undoubtedly.
[Rebrov] And what time period are you figuring on?
[Vaynshtok] It is difficult to say now with certainty, but we believe that the estimated time period for the first stage of the VSTO is around 16 years. It is simply useless to talk about the second stage now: when we began to calculate the cost of the pipeline from Tayshet to Skovorodino, the pipes were half the price. Even after the start of construction, the tariff for transporting along the Lena River almost doubled. So you must understand: we cannot predict factors that are not being calculated now.
[Rebrov] How much did it cost to move the route to bypass Lake Baikal?
[Vaynshtok] The extension of the route comes to 500 kilometres. We cannot name the exact figure in terms of money, since at this point there is no finished expert study of the project.
[Rebrov] It was planned that the project would begin operations even before the end of construction – the oil will come from the Talakanskiy and the closest fields in Tayshet in a reverse mode. When will that happen?
[Vaynshtok] I hope at the start of next year.
[Rebrov] And has the tariff for this section been calculated? Even approximately?
[Vaynshtok] Let us have an understanding: everything that is approximate is not up to Transneft.
[Rebrov] And the particular tariff?
[Vaynshtok] No.
[Rebrov] Aren’t you having doubts about filling a 30 million tonne pipeline? Will it be profitable for the oil producers to ship the oil in this direction from Western Siberia?
[Vaynshtok] We do not drag anyone by force. But we have no doubts about the first 30 million tonnes.
[Rebrov] And is there a technical possibility of redirecting the flows from Western Siberia?
[Vaynshtok] Yes, we have already expanded all the sections where that was necessary. We did a very great deal of work and put our technological capabilities for transporting oil to Tayshet in order, and all the problems have been resolved.
[Rebrov] And when will the branch to China start operating?
[Vaynshtok] At the same time as Skovorodino.
[Rebrov] Where will the oil go, in your opinion, to Kozmino or to China?
[Vaynshtok] In principle it is of no importance to us, but we believe that half of the volumes will go to China, and half to Skovorodino.
[Rebrov] Have you still not abandoned the idea of a through- tariff when transporting oil to Kozmino that would include a tariff on railway shipments?
[Vaynshtok] We worked with the railway people and got a letter from them where they set their tariff: 25 dollars per tonne for shipping from Skovorodino to Kozmino. That is included in our plans.
[Rebrov] Has the question been definitely resolved?
[Vaynshtok] Yes, we have that confirmation from the railway people.
[Rebrov] The State Duma is now examining a law on pipeline transport. First a point limiting the participation of private capital in these projects was included in it: at least 75 per cent of a mainline pipeline must belong to the state. Then it was reported that these restrictions had been lifted. What is your attitude towards the prospects of cooperation with private companies in realizing the projects for building the new pipelines?
[Vaynshtok] As yet we have no successful examples. The private CPC project is taking billions in losses. There is also the Kharyaga- Usa 150-kilometre section which belongs to LUKOIL in Komi and where the tariffs are 15 times higher than Transneft’s. So I would say this: it is not advantageous for anyone. For example, in Komi the oil producers that are compelled to use the LUKOIL pipe groan from this diktat. On the other hand, what problems do our companies have now with access to the main pipelines?
[Rebrov] Recently, discounting its subsidiary companies, Transneft profits have gone virtually unchanged from year to year. Will such a situation continue?
[Vaynshtok] I believe that our profits will remain stable.
[Rebrov] In September your contract for the office of president of Transneft ends. Do you intend to remain in this office?
[Vaynshtok] I am not the one to make that decision, and I would not want to discuss it.
Semen Mikhaylovich Vaynshtok [biographical details]
He was born on 5 October 1947 in Moldova. He graduated from the Kiev Construction Engineering Institute with the specialization of construction engineer, and then the graduate school at the Tyumen Oil and Gas University. In 1988 he was appointed deputy general director of the PO [production association] Kogalymneftegaz of the USSR Ministry of Oil Industry Glavtyumenneftegaz. Starting in 1988 he was deputy general director, and then starting in 1993 general director of the AOOT [open-type joint-stock company] LUKOIL- Kogalymneftegaz. In 1995-1999 he was vice president of the NK [oil company] LUKOIL and general director of the OOO [limited liability company] LUKOIL-Zapadnaya Sibir [LUKOIL-Western Siberia]. In September 1999 he was elected president of the OAO Transneft. He is a doctor of sociological sciences and a professor. He was awarded the order “For Services to the Fatherland,” fourth grade, and the order of Saint Sergiy of Radonezh. He is an honoured worker of the RF Ministry of Fuel and Energy. He is married and has a daughter.
The OAO Transneft
Transneft is the Russian monopolist in the area of transporting oil by main pipelines. It has the largest system in the world, consisting of 47,900 kilometres of oil pipelines. During the first nine months of 2006, the company accepted 340 million tonnes of oil into the system, and it was transported to domestic and foreign markets. Seventy-five per cent of Transneft charter capital (100 per cent of the voting stock) belongs to the state, and 25 per cent of the charter capital is preferential stock that private investors manage. In the first nine months of 2006, Transneft earnings according to IFRS [International Financial Reporting Standards] came to R147 billion, and profit was R50.89 billion. Earnings according to RSBU [Russian accounting standards] for the same period came to R147 billion, and net profit was R3.9 billion.
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