Transneft energy giant
The Transneft oil transportation company plays a special role in the Russian fuel and energy complex. According to Russian legislation, only one company – Transneft – is authorized to transport all Russian crude and petroleum products along trunk lines. Transneft President and CEO Nikolai Tokarev told VIP-Premier about the current state and prospects of the joint-stock company.
Nikolai P. Tokarev has been president and CEO of Transneft since October 2007. Born in 1950 he graduated from the Karaganda Polytechnic Institute as an expert in power supplies and automation of mining works. He worked in mining geological prospecting teams and then in the property-managing department of the Russian president. In 1999 he was appointed vice-president of Transneft. In 2000-2007 he was director general of the state-run Zarubezhneft foreign economic amalgamation. He was awarded with the Orders For the Merits to the Motherland III and IV degree, the Sign of Honor, Order of Friendship, as well as the titles of Honorary Oil Producer of Russia and Honorary Worker of the Fuel and Energy Complex.
– Mr. Tokarev, as we know, the first oil pipeline built in Russia in mid-1940s that linked Tuimazy and Ufa was less than 200 kilometers long. How does the pipeline network look today?
– Transneft is the biggest oil pipeline company in the world. It runs 50 thousand kilometers of crude pipelines and a 20 thousand kilometer long network for petroleum products. The company occupies a very important section of the Russian economy as it transports all the crude produced in the country, excluding oil shipped by road and water transport. 98-99 percent of produced crude is transported by pipelines. For example, last year Russia produced 494 million tons of crude. Nearly a half was domestically consumed and the rest was exported.
Crude transportation proceeds comprise a major source of budget revenues. They also determine the financial state of our company. With such an “economic safety bag” Transneft can accomplish major investment projects. Transneft rating is often higher than the sovereign rating of the country. Only two or three enterprises are equal to Transneft in that. The high rating shows that Transneft fulfills its loan obligations and provides very favorable credit terms, if necessary.
The dynamic development of the company allows to transport major crude volumes and at the same time diversify export routes. Until recently we have been exporting crude mostly through one port – Novorossiisk, but later we received a possibility to transport it through the Baltic Pipeline System and the port of Primorsk on the Baltic Sea, and now also in the Far East. That provides flexibility in crude distribution and encourages new field development, including in the oil and gas-rich Vankor province.
The construction of pipelines provides access to natural wealth. Thus, several oil majors have launched intensive geological prospecting along the route of our East Siberia– Pacific Ocean (ESPO) pipeline.
The first stage of ESPO construction has been completed and comprises 2700 kilometers from Taishet in Irkutsk region to Skovorodino in Amur region. We have immediately launched the construction of the 2100-kilometer long second stage, which links Skovorodino with Kozmino on the Pacific coast. So far the second stage has not been completed and crude is delivered from Skovorodino to Kozmino by rail. That is 15 million tons of crude a year. Simultaneously an oil branch from Skovorodino to the Amur River has been built. Our Chinese partners are building an underwater pipeline across the Amur, as well as their section from the Amur to Daqing. Next year we shall start pumping oil to China by a pipeline.
MAJOR CUSTOMER FOR THE INDUSTRY
– Does the TranSiberian railway cope with the growing load? Do you believe growing crude transportation volumes make it necessary to complete the construction of the Baikal-Amur Railway (BAM)?
– The TranSiberian rail copes with our cargo flow, although with strain. We set up a joint venture with Uralvagonzavod to produce heavy-duty railway tank-cars with a 76-ton capacity instead of previous 60 tons. The new tank-cars of modern design increase the efficiency of crude transportation and decrease costs. As a result, the available carrying capacity of the railway is capable of coping with our cargo without engaging BAM.
Other projects are being implemented. The construction of a railway to Yakutsk is nearing completion. There are lot of coal, copper and other fields along the railway. The effort will naturally promote BAM development. In general our cargoes added arguments in favor of transportation network development in the east of the country. Yakutia, Irkutsk and Amur regions have enormous natural wealth. The faster transport facilities promote the engagement of natural resources in commercial turnover, the better will East Siberia and the Far East develop.
– How does Transneft cooperate with domestic pipe and pump producers?
–We rapidly reacted to government recommendations to pipe makers, metallurgical and pipeline companies about pipe production for us and Gazprom. We perceived the recommendations as an instruction to use domestically produced metals and pipes. Before the crisis we were importing a small number of tubes with specific thickness and steel quality for underwater pipeline construction as they were not produced in Russia at the time. In 2009 the country began to produce the whole range of pipes. New rolling mills were launched. Today Russia produces all the pipes we need. We are importing only 5 percent of material and technical resources: hard and software, as well as heavy construction vehicles, which are not produced in the country. I believe 95 percent of domestic products in the total needs of our company are a very high indicator.
It is also important that our major purchasing expenses multiply the effect as we give orders to pipe makers and they extend them to metallurgists and further to coal producers and power engineers. Transneft consumes two percent of total Russian electricity. As a result, the orders provide for stable operation of many companies and make numerous people confident in their future.
– Would you explain how crude transportation costs are calculated? Are there an international formula or a fixed tariff and do you take the geographic factor into account?
– The Federal Service for Tariffs establishes the price. The agency considers all our costs. We substantiate our price proposals and include all costs into it. As a rule, everything we succeed to substantiate and explain is included into the crude transportation tariff. The price differs for domestic supplies and export shipments. In future we plan to implement a network schedule model and calculate an arithmetic mean tariff to make it common for everyone. We are likely to do it next year and so far we are testing the network schedule model on export supplies.
I would not say our crude transportation tariff is excessively high. It is comparable to world tariffs. Similar prices exist in the United States and Canada, which have the same long transportation distances. Our tariffs are slightly more expensive as they include an investment component and the complicated geography of the country. The network tariff will create favorable conditions for long-distance crude transportation.
– Do crude qualities, sulfur content, and viscosity affect the tariff?
– Crude qualities mostly affect the price of export oil. Our Urals crude is cheaper than western Brent. But that is very conditional. Our oil produced in East Siberia has very high characteristics. However speculatively it is cheaper on the world market than crude produced outside Russia. Unfortunately, such is the situation today.
– Can Transneft produce and sell crude?
– No, it can’t. Transneft has no right to produce and export crude. The legislation does not give priority to our interests against others. The only exception was made for crude sales to China where our company acts as a supplier. In general Transneft is not a market participant. Oil producers have the right to export or refine crude.
– Crude prices tend to grow of late. Can they affect your performance indicators?
– Our indicators depend not so much on the crude price but on transported volumes and the general economic situation in the country. If the economic situation in Russia improves, we shall hope for increased ratings of the country and the company which, in its turn, will help borrow cheaper money.
As for international contacts, in the past three years Transneft has considerably increased its foreign trade potential, as we are now operating with the Chinese and the Caspian Pipeline Consortium. We were entrusted to manage state-owned stock in the CPC. At present a pipeline construction is planned in Venezuela jointly with its national companies, which is a segment of our international activities.
“OWN POCKET” INVESTMENTS
– You earlier said you focus on own funds for planned construction projects. Does Transneft act as a self-financed entity or does it borrow investments? Does the state budget earmark funds for its projects?
– The state budget does not finance our projects. Our investment program is fully based on long-term infrastructure bonds and direct borrowings. We have our own credit line in Sberbank and we resort to it when necessary. These sources of financing fully cover the investment program.
– Did you take loans at an averaged rate or was the rate higher than average in the country?
– Much depends on the situation. Before the 2008 crisis we actively used the credit line in Sberbank. It offered a 7-percent ruble rate, but jumped high to 25 percent later. It became completely unaffordable for us and we rejected the credit line. The credit rates we agreed with the Chinese partners are below the market rates and completely suit us. So far we succeeded to borrow money at acceptable terms.
– May I ask an ignorant question? You said 7 percent were affordable while a higher rate was not. Inflation exceeded 12 percent in this country. If the loan rate is lower than inflation does it mean the creditor loses money…
– No. Firstly, the creditor participated in the tender and knows how to count too. Besides, it had to calculate prospects and consequences of the loan if it planned to win. In this connection calculation adjustment was envisaged for the credit line. However it cannot be initiated by the creditor, but depends on the refinancing rate of the Central Bank. If the Central Bank ups the rate, the bank can raise the loan terms for us one-two percent, and thus the rate went up as high as 25 percent.
– Does such a major company have a special social policy to attract personnel?
– Personnel hiring is a major issue for us, as Transneft is a state monopoly. In contrast to many other enterprises that can offer higher wages, we do not possess such a possibility. At the same time crude transportation workers are mostly employed by Transneft. Only a small part of experts work in other companies. The labor market for such specific industry as pipeline transportation is very limited in Russia. We have to train specialists ourselves. We have our own colleges and we concluded agreements with other higher educational establishments and granted scholarships. We hold Best Professional contests among young staff. We encourage specialists and finance their training in higher schools.
Here is an example. We have just launched the construction of the pipeline from Skovorodino to Kozmino which will last at least three years and we have already discussed the necessity to train pipeline operators for the project. First and foremost, we have to hire local young people and train them at already operating facilities. We know how to do that and we have the necessary programs. Young personnel were properly trained at our units in Irkutsk and Amur regions and in Yakutia. It is important they are all local residents who do not want to resettle. However, we have to create favorable conditions for them and all others. Therefore, we have our own sanatoria and rest homes in Siberia, Anapa and Gelendzhik on the Black Sea, and along the Volga River.
We run our own three-year housing program as well. It envisages housing construction, reconstruction of existing houses, and transfer of apartments into private property depending on the labor record. If you work for 15 years and live in a Transneft-provided apartment, you can buy it out at residual value, if any, or get it for free.
We operate our own insurance company, which is among the best in Russia. Our pension fund occupies the fourth-fifth place in national ratings. We offer voluntary medical insurance to our staff, which is free medical treatment in Russia and abroad depending on the type of the disease. People shall be encouraged both by work and welfare. When massive reductions were everywhere for two years our company reformed and launched a new unit – the scientific research institute, created new jobs and indexed wages. We pay good wages. All that allows to keep personnel.
– You carry out an innovative policy. What does the modernization course proclaimed by the Russian leadership mean for you?
– We fully support the modernization course. Transneft has its own energy efficient and energy-saving programs. We respond to all the challenges of the time. Transneft finances modernization plans itself and we order new equipment ourselves. We resolve emerging technical tasks with our own potential. The company has a major program of technical re-equipment, reconstruction and capital repairs. This year the program is estimated at some 70 billion rubles. In particular, it has replaced and continues to replace the pool of pumps by economical devices. The dispatching service is upgraded and we widely use diagnostic equipment which is often unprecedented in the world. A special center has been set up for that in Lykhovitsy. Due to the use of five or six control options – X-ray, ultrasound, and magnetic-frequency – we get a full picture of the technical state of pipelines and expose defects. We pay much attention to energy saving as we consume a lot of electricity.
– Security issues have been high on the agenda of late. How do you cope with them?
– Our security service employs 10 thousand people. All subsidiaries and Transneftprodukt have their own services. Such a major force to guard pipelines creates a reliable security system. However despite all measures illegal pipeline hookups were reported in some places to steal oil, as well as oil withdrawal and production of falsified petroleum products at self-made installations. Major problems in this respect exist in Samara and Irkutsk regions, in Dagestan and in Krasnodar Territory. Stolen crude is refined at small illegal facilities for sale. The government is currently dealing with the problem. Existing legislative norms are being revised to comply with reality. We created mobile patrols and installed electronic monitoring system to detect illegal hookups. Each mobile team is responsible for a concrete section. They regularly inspect it and permanently monitor the pipelines. The dispatcher service controls the technical state and registers even the slightest pressure drop and exposes other signs of interference. We plan to uproot the criminal activities. And we shall cope with the task. All sea terminals have their own emergency rescue services to clean up possible oil spills. Modernization of emergency units helped make corresponding activities automatic.
OIL AND POLITICS
– Plans to build a pipeline close to Lake Baikal triggered public concerns. Vladimir Putin had to interfere. Are there any environmental safety problems today?
– It is a timely question as your magazine has an international audience. I want to stress that oil and politics go close together. Big oil is accompanied by big politics. When Russia had only one export exit on the Black Sea, they did not take us into account. When the second one appeared in Primorsk on the Baltic Sea, it became more difficult for them to ignore us. Now that we build a pipeline to the Pacific Ocean that will open a third door to the world market, unvoiced opposition to the ESPO project is mounting. Many international oil producing companies view us as a new competitor with good crude that competes with Arab oil. It is more convenient for the Japanese and South Koreans to buy our crude as its transportation is cheaper. Tankers sail from Saudi Arabia for 14 days. As a rule, they are big displacement vessels that cannot enter a port and have to be unloaded anchored at the roads. Arab crude sellers are dissatisfied with it. Politics immediately enter with a huge propaganda machine. As environmental safety is a very sensitive problem, the propaganda pays increased attention to it. We follow the developments and work to decrease the number of reasons for complaints.
We are developing our transportation network not only in the east. In the west we are completing the second stage of the Baltic Pipeline System to Ust-Luga and plan to start it up next year. The branch departs from the Druzhba oil pipeline to bypass Ukraine and Belarus. It also provides room for maneuver with crude resources, which irritated many people in the west. Hence are numerous speculations and invented conflicts. Western diplomacy is actively working with environmental movements in the Far East, in Yakutia. Representatives of various pseudo public and pseudo environmental foundations and movements arrived to hold meetings and seminars and offer grants and blame Transneft by claiming “Tigers fled, there is no salmon in rivers, marmots do not sleep, and forests were all dug up.” It was s simple secret: the websites of several environmental movements in Yakutia did not conceal western sources of financing and sponsorship. Many of them were directly linked to the U.S. Department of State. Problems definitely exist as we implement gigantic projects. Nothing of the kind was built in Russia in the past 20 years. Thousands kilometers of pipes are laid across taiga, roadless terrain, and mountains with no energy infrastructure. 15 thousand people and 7 thousand units of heavy hardware were engaged in construction. Environmental problems were taken into account yet at the stage of projecting. If problems were exposed, they were resolved like it happened with the northern bank of Baikal. We recultivated all land after construction was completed. Vladimir Putin visited our terminal in Kozmino and saw lawns, flowers, asphalt. Everything was very modern and picturesque. We work to keep the high level.
So far God has been merciful to us. Our business has two sides of the coin. On the one hand, it provides a major impulse to regional development: roads are built along the pipeline, as well as power transmission lines and sea ports, and new jobs are created. The spiritual life is also on the rise. We helped restore the main Orthodox cathedral in Yakutsk and jointly with the administration and the government of Yakutia built a spiritual school and financed the translation of the Bible into the Yakutian language. Each project brings a lot of benefits – social perspectives, jobs, good wages. On the other hand, old lifestyle is affected and some people fear that. Numerous problems emerge which we resolve jointly with local authorities and mostly at the preliminary stage.
BUSINESS AND AUTHORITIES
– In the Far East you have coinciding routes with Gazprom. Does it make construction cheaper?
– We have practically the same corridor with Gazprom from Khabarovsk towards Vladivostok. 400 kilometers of the pipeline comprise a common site where our and Gazprom’s pipelines will run close to each other. Definitely, we prudently used the situation. Contractors building Gazprom’s pipeline are also laying Transneft pipes.
– Do you maintain close contacts with Gazprom, which produces major crude volumes? Who transports them?
– The Russian legislation stipulates that Transneft is the only company authorized to transport crude by pipelines. Trunk lines belong to the state. Oil majors run their field pipelines connected to trunk lines. There is a small section of a trunk line built by LUKOIL for technological needs and it is used for export as there are no other facilities in the area. Legislative exceptions are envisaged only for the Caspian pipeline complex, which is to deliver crude from Kazakhstan to Novorossiisk. Energy Minister Sergei Shmatko chairs our board of directors and the national leadership pays major attention to our industry.
Vladimir Putin initiated the construction of numerous oil pipelines, including BPS1 and BPS2. The Baikal problem was also resolved with his participation. Today we are building a pipeline to China. That is also a result of government efforts. It is an old idea that is being implemented now. The prime minister initiated the implementation and supervises it, provides support and participates in the discussion of numerous projects. Due to his primary authority he starts up the projects when they are ready.
GOOD WORD INSPIRES
– Transneft’s contribution to the national economy is immense. That is clear. Your company also helps to politically tie up the country. The work is likely to bring satisfaction as results are evident. Do you have any time and strength for private life?
– We were under time pressure in the past two years when we were completing the first stage of ESPO construction. The network schedule strictly defined commissioning dates for the objects. The government controlled everything. I often had to report to the president and the prime minister on construction progress and emerging problems. We lived in such an emergency regime for two years. It was a major load. Today the situation is easier, as we organized the work in a more efficient manner. As for satisfaction, we are doing a major job and when you complete and launch a great project any self-respecting person gets a good stimulus for further work.
– Media sometimes call the heads of major companies and state monopolies as oligarchs. Is the definition correct?
– Transneft is a state monopoly, a state-run enterprise and I have been hired to work there. It is not my property. How can they call me oligarch? It has absolutely nothing to do with the classical definition of the notion.
– Do you believe the media properly cover activities of such important companies for the country?
– It depends. I believe they can pay more attention to performance results and the significance of the projects for national economy. However some media thugs only look for seamy sides or dubious sensations. They publish provocative reports claiming there is no oil to fill the pipe and alleging construction should not be launched at all as Russia has no money for it. In reality we do have oil and money. I would like them to show more positive developments instead of keeping silent on Russian accomplishment of major projects. TV companies give only 10-15 seconds of air time to the achievements of major workforces and interpret them through clenched teeth. But luckily, not all the media are looking only at sunset and underestimate our labor effort. We are grateful to such media as good word inspires.
– VIP-Premier will bring your point of view to the readers and present Transneft’s activities in proper light.
By Yevgeny KOSOV, Valentin ALEXANDROV