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Cheap It Is Not: Politics Win over Economics at Transneft

Politically motivated pipeline projects cost a lot to Transneft. The company wants to alleviate this burden of by introduction of uniform tariffs for all destinations, be they eastward or westward bound. Oil companies will see their transportation costs grow. 

Uneasy Six Billion 

The Federal Service for Tariffs (FST) and Transneft are looking for a way to compensate enormous construction costs of two projects, ESPO-2 and BPS-2, by increasing the size of oil transportation tariffs but prevent a decline of the overall volume of transported oil. The planners also have to obey the prime minister who insists on keeping the annual growth of the state monopolies’ tariffs at five to six percent. 

Transneft published some information about its investment program in April, and it became clear that it would be impossible to unobtrusively include the investment compensation component in the regular tariff. This year alone, the company is going to spend almost $6 bln on pipeline construction (more than half of this sum will be invested in ESPO-2), plus another $2.6 bln on upgrades and repair of existing pipelines. 

Preliminarily estimated, the company’s operating revenues during the year are going to be slightly over $6 bln. This is hardly enough to cover the annual costs, to say nothing about new investments. The growth of the tariffs, however, will probably provoke angry reaction from oil companies: the tariffs were hiked three times last year. ‘Transneft would have been able to decrease the tariffs annually, had there been no ESPO,’ an official associated with the company told RusEnergy. 

Oil transportation costs and revenues in 2011 


thou rubles


Revenues from services rendered



Costs of services, incl.



Material costs






Amortization & depreciation



Capital repairs






Other expenses



Source: Transneft 

In an attempt to make the growth of the tariffs less steep, FST is considering a system of ‘network’ tariffs for oil transportation from Western Siberia to Europe. FST spokesperson Elena Zharova comments: ‘The main problem is the group of exporters who are located close to the state border. A network tariff would increase their costs, and they resent this measure.’ 

A Chinese Discount 

The ‘network’ tariff is already causing protests from eastern consumers of Russian oil. CNPC has recalculated the size of the tariff, which was agreed on in its contracts with Transneft and Rosneft, and in January, when it was expected to pay $555.3 mln for transportation of 1.25 mln t of Russian oil, paid just $516.9 mln. The Chinese have established their own rate of the tariff, equaling $30.70 per tonne. 

The Chinese company rejects the idea of the ‘network’ tariff, which is charged at a uniform rate for any distance oil passes if the ESPO pipeline is part of the route. CNPC does not want to subsidize the costs of oil transportation all the way to the Pacific coast and says that the transportation via the 70-kilometer Skovorodino branch to the Chinese border must be cheaper. The data Transneft disclosed at its website in April proves that CNPC is not entirely wrong. 

A rough estimate made by RusEnergy shows that a regular transportation tariff (charged, for example, by the local branch of Transneft, Vostoknefteprovod, at the Taishet-Meget segment of the route) would amount to 832 rubles per tonne for the distance from Taishet to the Chinese border. The difference with the ‘network’ tariff is 983 rubles, which equals $30.70 at the December currency rate. This is exactly what CNPC is underpaying to the Russian companies. 

Conditions of Rosneft 

This simple arithmetic can be mastered not only by the Chinese company. Russian exporters are also aware of the exaggerated tariff. 

In 2009 Rosneft refused to sign a credit-for-oil agreement with China because transportation costs from its Vankor group of fields to the Chinese border were expected to reach between $92 and $94 per tonne, which made it absolutely non-economical for the company.  In February of that year Rosneft made its planned contract with the Chinese contingent on the following terms: a ‘network’ transportation tariff and a zero rate of the export tax on East Siberian oil, including oil from Vankor. The company’s initial estimate of the ‘network’ tariff was in the range of $30 to $32 per tonne, quite an acceptable sum. 

In the final run, FST and Transneft fixed the rate of the ‘network’ tariff for the ESPO route at 1,598 rubles ($66.50) per tonne. For Rosneft, this sum has to be added to transportation costs from Vankor to the entrance of the ESPO pipeline at Taishet, another 853 rubles ($31.26) per tonne, and the sum total will amount to $98. 

An Adverse Effect 

The experimenting with ‘network’ tariffs is not over after its introduction at the ESPO route. Transneft advocated a system of such tariffs for oil exports in the western direction, starting this year, but FST decided to take a break. 

The boss of this federal service Sergei Novikov announced in early April that there would be no ‘network’ tariffs for the west in 2011 because governmental agencies could not come to terms about the method of calculating their rates. 

Transneft suggested splitting the access points to its mains into seven groups, or tariff zones, and the rates of the tariff would differ from zone to zone depending on the distance to the final destination. An alternative proposal was simpler: a uniform tariff for all zones. 

The consequences are easy to predict. Distant fields, operated mostly by large integrated companies, will get an advantage as compared to operators of projects in the European regions of Russia. They will pay the same transportation tariff regardless of the distance to the border. 

It will affect Transneft, too. Growing exports from distant areas will increase operating costs at long routes, but shorter routes may suffer from a shortage of clients who would be scared away by extra transportation costs. The new tariffs will enable the pipeline monopoly to fill large new pipelines with oil—and award pipeline construction contracts to friendly contractors—but the overall margins of the pipeline business will shrink. It will again provoke a growth of the tariffs and impede the development of the national oil industry in the final run. 

New pipeline projects of Transneft



Total cost, mln rubles

Costs in 2011,mln rubles ($ mln)

Upgrades and repairs of pipelines


72,287 ($2,647.87)

New projects, incl.

570,270 in 2011-2015

159,226 ($5,832)


326,850 in 2009-2014

83,937 ($3,074,6)

Expansion of Taishet-Skovorodino to 50 mln tpy

72,656 in 2010-2014

18,991 ($695)


100,089 in 2009-2012

20,652 ($756.5)



8,391 ($307.3)

Expansion of access to Tuapse refinery to 12 mln tpy

17,627 in 2010-2012

11,024 ($403.8)

Source: Transneft

Transneft Saves Money

 Maxim Grishanin, a recently appointed vice president of Transneft, told RusEnergy that within the next four years the company would have to repay almost $10 bln under a Eurobond scheme, with the peak of payments occurring in 2015. ‘We are to pay 40 billion rubles in 2012, 20 billion in 2013, 50 billion in 2014 and 150 billion in 2015,’ he said. 

Grishanin is not counting on a growth of the tariffs. ‘While the average tariff more than doubled between 2004 and 2010, it cannot be repeated in the next few years,’ he reiterated. It is cost control that he sees as the solution. In April, Transneft started drafting a budget for 2012 and hopes to make the ends meet. ‘In any case, the company does not want to borrow in order to restructure earlier debt,’ he said. 

Another vice president of Transneft Mikhail Barkov announced in April that the company would cut its costs by 10% by October 1, 2011 through energy-saving technologies, optimization of operations and schedules, and decreasing the scope of purchasing. Transneft has already asked its contractors ‘to consider cutting down the price of supplies by at least 10% under ongoing contracts.’ 

According to sources close to the company, Transneft has plenty of opportunities to save on costs. Huge sums are allocated to unidentified ‘charity’, irrelevant projects, maintenance of excessive offices, etc. The sources believe that the costs of major pipeline projects could also be cut down by half without affecting the quality of the jobs. 


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