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Permian Bottlenecks Come At The Worst Moment

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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest.

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Who Gets Hold Of Russia’s Key Oil Hub?

Oil

One of Russia’s most important oil ports, the sunlit Novorossiysk, has become a battleground for the country’ state-owned companies. Located in the ice-free Tsemesskaya Bay, Novorossiysk is used to stormy springs (because of the northeasterm wind blowing powerfully, sometimes to the point that port operations have to stop for a few days), yet this spring turned out to be stormier than usual. One of Novorossiysk’s main owners, the privately owned Summa Group of brothers Ziyavudin and Magomed Magomedov, will be forced to sell their stake in the company in light of their arrest and impending punishment.

The ascent of the Summa Group was as swift as will be, judging by the ongoing process, its downfall. The company jointly bought 50.1 percent of the Novorossiysk Port with the state-owned Transneft for $2.5 billion (roughly 80 percent higher than its market price at that time), palpably backed by then-President Medvedev, whose government chief of staff at that time was Arkadiy Dvorkovich, former university classmate and close friend of Ziyavudin Magomedov. The connection does not end there – Dvorkovich’s wife is of Dagestani descent, just as the Magomedovs. All in all, such a beneficial state of affairs allowed Summa Group to build up a sprawling portfolio and become a leading voice on the Russian port infrastructure market.

Following the March 30 arrest of the Magomedovs – Ziyavudin was arrested for having set up a crime network, as well as on embezzlement and fraud charges, his brother was allegedly responsible for the coercive cover-up of their dealings. It is very unlikely that Magomedov, ? 63 on the Russian Forbes list, will be freed from charges; high-profile arrests in Russia are chaotic yet the authorities would not risk fabricating charges given the already difficult situation business works in Russia. Moreover, one of the main charges consists in the illegal appropriation of money allocated for the construction of the Kaliningrad football arena, where several World Cup 2018 matches will be held, the public at large will rather side by the federal authorities than the businessmen.

Related: The Oil Giant That Saw Its Cash Reserves Plunge 90%

Thus, 25 percent of the Novorossiysk Commercial Sea Port (NCSP) is up for grabs. Summa’s partner in the 50.1 percent majority owner, Novoport Holding, is the state-owned pipeline transportation monopoly Transneft, which owns another 10.5 percent of the asset via its Transneft Service subsidiary. The remaining shares belong to the Federal Property Management Agency (20 percent), Russian Railways (5 percent) and are flee-floating on the Moscow and London stock exchanges (14.4 percent). If Transneft were to scoop up this stake, it would establish itself as a dominant player in the Black Sea infrastructure, controlling 60.6 percent of the dominant port in the region. Most observers thought this was inevitable – Transneft has declared interest in the asset, moreover, it has consolidated its footing in the NCSP after Summa representatives were ousted from the executive board and were replaced by Transneft people.

Transneft’s takeover of Novorossiysk would make sense from the point of view of Russian authorities – for them, a state-owned oil transportation giant is easier to control than a private entity. Yet, as has become (sadly) traditional in Russia, a sudden twist has complicated matters for all – rumours have started circulating that Rosneft is willing to buy Summa’s shares. Although the company itself has warned against any “provocations” and disinformation in regard to Rosneft and partly denied having interest in the port (the phrasing was peculiar, as the press statement said Rosneft is not interested from buying an asset from someone under investigation – if the state nationalized the 25 percent, would it become interested?), oddly enough federal public servants have been keeping the Rosneft claim alive.

The head of the Federal Anti-Monopoly Office Igor Artemiev claimed Rosneft might move to get its share of the port because it “needs its infrastructure to avoid being plundered”. Perhaps it is just a way to play it safe – after Rosneft swallowed up Bashneft in late 2016 and carried out a rather quaint partial privatization (involving CEFC, the Chinese conglomerate that is now on the brink of going bust), it became an omnipresent actor on the Russian oil market. Yet a potential coexistence of Rosneft and Transneft within one holding company is ripe with controversies – just in the past few years, there were several judicial proceedings between the two. Most notably, in late 2016 Rosneft refused to sign up to Transneft’s annual transportation contract, accusing it of excessive pipeline transportation process losses (allegedly up to 0.7 mtpa) – the conflict was solved only after Minister of Energy A. Novak intervened mid-February 2017.

Related: OPEC’s Second Biggest Producer Faces Instability

Even though this year brought no large-scale scandals, it has still been replete with tension-packed rows. Late February, Transneft accused the Novorossiysk port master of prioritizing Rosneft’s shipping interests, because of which several vessels with fixtures before that of Rosneft were forced to stand idle for days outside of Novorossiysk. If the NCSP’s ownership structure were to become another battlefield between the two, things would most certainly get nastier than this. The vector of Russian political power has largely boiled down to keeping close confidants equidistant and satisfied with their status (all the while avoiding nasty infighting), yet if one is to look at the interests of Novorossiysk itself, it is very likely that its consolidation under a Transneft umbrella might do a lot of good to it.

(Click to enlarge)

Graph 1. Black Sea Crude Export Outlets 2007-2018.

Since 2014, Novorossiysk is no longer the leading crude export outlet in the Black Sea, having been overtaken by the Caspian Pipeline Consortium, whose throughput will skyrocket to 67 mtpa this year. In the last 15 years Novorossiysk crude exports have fallen by 37 percent, even though other commodities such as grain have demonstrated robust growth. Therefore, although it seems counterintuitive for a private company to be bought up by a federal one, in today’s Russia it might help by easing financial constraints on the development of the port due to a steady influx of money from the mother company’s pipeline transportation business and bringing sudden direction switches to a minimum. It seems certainly better than a protracted limbo of conflict.

By Viktor Katona for Oilprice.com

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