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Russia’s Oil Giants Butt Heads Over Pipeline Fees

Russia’s largest oil producer Rosneft and the state-owned oil pipeline monopoly Transneft added another page to their long-running confrontation when Rosneft’s CEO, Igor Sechin, complained to President Vladimir Putin, on May 12, about the high transportation fees being charged by the pipeline operator (Kremlin.ru, May 12). Transneft rebuked the allegations immediately, although that did not stop the Russian president from ordering an interim reassessment of the government’s tariffs.

Rosneft and Transneft have been at loggerheads for decades. The confrontation has primarily stemmed from Sechin’s aspiration to have Rosneft absorb the rival oil-sector giant. Unlike Gazprom, which owns the natural gas pipeline system in the country, Rosneft has to rely on Transneft’s 68,000-kilometer pipeline network to transport and export its oil (Transneft.ru, accessed June 2). But although Sechin has repeatedly tried to “correct” the situation, his Transneft counterpart, Nikolay Tokarev, time and again succeeded in preventing the takeover of his company by Rosneft.

Both Sechin and Tokarev represent the so-called “siloviki” (security services personnel) group of the sitting Russian president’s close inner circle. Tokarev had worked alongside Putin at the Soviet mission in Dresden, while Sechin began his security service career during Putin’s tenure in St. Petersburgh. The two men worked together under Putin when the latter was deputy director of the Presidential Property Management Department in the mid-1990s. But after that, both shifted their careers by entering the oil industry. Tokarev became the CEO of Zarubezhneft before being named to the helm of Transneft, while Sechin took over as Rosneft CEO after occupying several high-level positions in the Ministry of Energy.

Related: Bulls Beware: A Dark Cloud Is Forming Over Oil Markets

Although Rosneft, under Igor Sechin’s leadership, has failed to absorb Transneft to date, its head did manage to inflict damage to a number of Transneft’s partners. For instance, in March 2018, apparently under Sechin’s pressure, Russian law enforcement bodies arrested Ziyavudin and Magomed Magomedov, well-known Dagestani-born billionaires and owners of the construction and logistics conglomerate Summa Group. The two brothers were indicted on racketeering and embezzlement charges. The Magomedovs had sided with Nikolay Tokarev when they sold their share in Novorossiysk port to Transneft for $750 million. The Rosneft CEO also sought to acquire the port, but was left empty-handed (Vedomosti, April 3, 2018; Osw.waw.pl, April 11, 2018).

More recently, in 2019, Rosneft and Transneft clashed again over the contamination of the Druzhba export pipeline (see EDM, April 26, 2019 and October 2, 2019). The disastrous incident not only damaged the oil-sector infrastructure of close neighbor Belarus and other downstream customers but also seriously harmed Russia’s reputation as a dependable supplier. In the wake of this episode, both companies engaged in finger-pointing to avoid the Kremlin’s wrath: Rosneft accused Transneft of failure to ensure proper quality control of transported oil, while Transneft blamed Rosneft for pumping the contaminated fuel into the system and of seeking to turn the Druzhba pipeline into additional storage for its oil (Forbes.ru, July 8, 2019). The firms did not mince words, with Rosneft’s spokesperson Mikhail Leontiev and Transneft CEO’s advisor Igor Demin openly exchanging vulgarities. Sechin tried to seize the opportunity created by the contaminated oil debacle to take over Transneft’s quality-control points; but this again proved futile. Both Russian oil-sector giants are still quarreling over the compensation for the non-delivered oil, even though Transneft has paid off all of its suppliers with the conspicuous exception of Rosneft (RBC, March 31).

Related: Oil Infrastructure Operators Grapple With A New Energy Reality

The conflict between the two companies and their CEOs resurfaced again this year, when Transneft refused to provide its pipeline infrastructure to Rosneft as temporary storage for excess oil. In response, Sechin complained of the situation to Putin in a one-on-one meeting to discuss high transportation costs. Interestingly, in this exchange with the Kremlin leader, Sechin deliberately referred to Transneft as a “monopoly,” whose high transit tariffs accounted for 32 percent of the costs of Rosneft’s oil. Transneft fired back immediately, asserting that the tariffs constitute only around 16 percent of the total cost borne by Rosneft (Argusmedia, May 13). Nevertheless, President Putin issued an order two weeks later, on May 23, instructing his government to develop “special tariffs” for the transportation of oil during the crisis period (RIA Novosti, May 23). Interestingly, Putin’s order came a few days before he received Tokarev in his office, a privilege assigned to only his close circle. Neither the president nor his visitor mentioned the tariffs during their meeting (Kremlin.ru, May 28).

The overtly public confrontation between Rosneft and Transneft is indicative of the distress in which Russia’s domestic oil and gas industry has found itself. These confrontations reach their pinnacle during times of crisis, as is the case now. Vladimir Putin prefers to stay above the conflicts, seeking to position himself as a purportedly impartial arbiter in these intra-elite battles. Both Igor Sechin and Nikolay Tokarev enjoy nearly unrivaled access to the Kremlin leader, which has allowed them to successfully exploit this relationship in order to bolster their respective businesses. The confrontation can be expected to continue for the foreseeable future, as the government has extended both Sechin’s and Tokarev’s tenures at the heads of the state-controlled firms for another five years.

The implications of this situation are detrimental not only to the Russian state itself—with the reversal of needed revenue-generating reforms at the request of corporate magnates—but also to the competitiveness of the domestic energy sector. Recently, Moscow adopted a new energy-sector planning document, “Energy Strategy 2035,” which is notable in part for its regressive attitude toward dealing with all potential foreign competition and systemic market shifts—treating them as inherent threats that must be defended against rather than as incentives/opportunities for improving the competitiveness or efficiency of domestic firms (see EDM, June 2). The enduring spat between Rosneft and Transneft, as well as their respective CEOs’ close personal relationships with the head of state (who is so prone to positively respond to their lobbying efforts), will only exacerbate this trend: making Russia’s energy giants increasingly reliant on state largesse and thus less economically competitive abroad.

By Jamestown.org

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