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Unnatural Monopoly: Transneft Eliminates Competition on the Market of Export Quotas

The new rules of non-discriminatory access to oil trunk pipelines have a hidden aspect. They do help honest oil producers but also make Transneft the uncontested master of managing export quotas. 

Discrimination? What Discrimination? 

Governmental Ordinance 218, issued on March 29, becomes effective in late April. It establishes a new version of ‘Rules of Securing Non-Discriminatory Access to Services of Natural Monopolies in Transportation of Oil (Oil Products) via Trunk Pipelines in the Russian Federation.’ Almost all previous ordinances that were regulating access to Transneft mains have been scrapped. 

The oil industry community refuses to see any revolutionary changes in the new rules. Transneft has never been especially fond of any ‘discrimination’ and even the smallest oil producers admit that they had not experienced grave problems with tie-ins. One of a very few cases of discrimination occurred, for example, in the first quarter of 2008 when Transneft rerouted small producers’ oil to the terminals, which at that moment offered the least attractive export margins as compared to the Druzhba pipeline. In the next quarter the independents got what they wanted—even without any complaints to the Federal Antimonopoly Service. 

According to Assoneft, an association of small and medium-sized oil producers, independents experience discrimination more frequently when they have to use access pipelines that lead to Transneft mains, and also when they have to access the Gazprom-controlled Unified Gas Supply System. Ordinance 218 does not address these issues. 

Quid Prodest? 

Still, the Rules contain significant novelties. The document puts an end to free trade of quotas for oil transportation and export between producers. It seems that this enhancement of Transneft’s monopoly status has been the real purpose of the new ordinance. 

Article 23 of the Rules says: ‘The transfer (reassignment) of the right to transportation of oil (oil products) shall be possible only between legal entities, which are engaged in production of oil (oil products) and belong to the same group with the consumer [of the service], provided the operator of the pipeline] is informed within the timeframe established by the contract.’ 

Earlier, the reassignment of export pipeline access was allowed in the form of either transfer or sale of this right by the company, which was on the official list of oil producers included in export throughput schedules, to any legal entity registered in the Russian Federation. Consequently, some companies were able to request an exaggerated quota for export transportation and then sell portions of that quota at their discretion.  

From now on, such reassignment is allowed only within the same group of producers. It means that integrated majors can manipulate with the export quotas by reassigning the access right to their subsidiaries, but independents have been barred from this opportunity. They cannot buy an export quota on the free market. 

Payment Pains 

To discourage oil companies from exaggerating their requests for quotas, the Rules introduce the ‘ship-or-pay’ clause. Before this moment it was applied only to oil shipments via the China spur of the ESPO pipeline. The model contract of Transneft says in Article 12.7 that, if the shipper (Rosneft in this case) fails to submit the contracted volume of oil to be transported to the Dzhalinda cross-border point, Transneft has the right to demand the payment of the transportation tariff for each tonne of oil that does not reach the destination. 

For other routes, Transneft had the right to charge a fine of 15 rubles (about $0.50) per tonne of non-submitted oil—and only if the monthly shortage exceeded 1.5% of the requested quota and if this shortage exceeded 1,000 t. 

In real life, oil companies paid in advance for the amount of oil they submitted to Transneft for transportation. The excess payment could be either returned to the company or used to cover part of the payment in the following month. 

The new Rules require the shipper to pay the full transportation tariff regardless of actual shipment, unless the oil could not been submitted on schedule and in contracted volume due to a force majeure. Transneft will now collect the up-front payment according to monthly scheduled quotas and forget about the need to return anything if oil is not actually submitted. 

The Rules actually restrict the shippers’ appetites in making exaggerated requests for room in the pipe. It will decrease the contracted, but unused, throughput capacity, boosting the maneuverability of oil flows—a very important asset for Transneft. 

Schedule Is the Word 

The ‘ship-or-pay’ principle and the ban on selling quotas make Transneft the single and indispensable manager of unused pipeline capacity. Oil companies have the right to correct their requests, upon consulting Transneft, and change the destination points and preferred routes, and they use this right frequently quoting technical factors, bad weather in a sea port, etc. 

When the throughput schedule is already in place, Transneft can alter the route of a specific shipment according to the shipper’s request, provided the overall volume of transported oil remains unchanged. An extra space in the pipes enables the pipeline operator to make such changes quicker and easier. 

The throughput schedules are prepared by Transneft and approved by the Ministry of Energy. Transneft bases it on requests of oil producers, actual capacity of various routes, and the principle of equal access to export outlets which is decreed by the Law on Natural Monopolies. This law distributes available pipeline capacity in proportion to shippers’ oil production. It currently enables them to export about 40% of oil they produce. For some routes, such as the ESPO pipeline, the capacity is still larger than local producers can use, and the companies’ actual quota may turn out to be larger than 40%, but only if the export throughput schedule is corrected accordingly. 

Before the new Rules came into effect, this correction was possible in the form of selling access rights from company to company. Now Transneft will manage the sales, and this new leverage will enhance the financial status of the pipeline operator and, probably, those managers that are going to control the distribution of incremental capacity.  

What the Law Says 

Federal Law 147-fz ‘On Natural Monopolies’ regulate access to the national system of pipelines. Article 6 of the law says: 

‘When oil is exported outside the customs territory of the Russian Federation, the right of access to the system of Russian trunk pipelines and terminals in seaports shall be granted to organizations that produce oil and are registered in the established procedure as well as to organizations that are parent companies in respect of organizations that produce oil, in proportion to the volumes of produced oil delivered to the trunk pipeline system, taking into account the 100 per cent throughput capacity of trunk pipelines (based on their technical capabilities).’ 

Following this principle, Transneft every quarter determines the proportion between the overall capacity of export pipelines and the summary volume of oil all pipelines transported in the previous quarter. This proportion is the base of quarterly schedules of export shipments. 

In the early 2000s it enabled Russian oil companies to export 33-35% of their production via Transneft mains, including hose that lead to tanker terminals. Today, it has approached 40% thanks to the expansion of pipeline capacity. In the future, when ESPO-2 and BPS-2 are commissioned, the proportion may increase. 


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