Counting on operators

Interview with Vadim Simdyakin, head of Gazprom Neft Logistics and Transportation Department

Argus Neftetransport

Vadim Simdyakin Shipments of petroleum products from Gazprom Neft oil refineries increased by 2.8 percent to 37 million tons last year. Approximately 67 percent of these products were shipped by rail. In an interview with Argus, Vadim Simdyakin, head of the Gazprom Neft Logistics and Transportation Department, spoke about the situation in the railway transportation industry and about Gazprom Neft’s plans.

— We are seeing too many railway tank cars on the market, which has led to a drop in rental rates. What’s your assessment of this situation?

— We did quite well last winter thanks to the railway fleet surplus. The fleet surplus was brought about by several factors.

First of all, the number of railway shipments within the framework of the East Siberia-Pacific Ocean project reduced substantially. This freed up about 7000 tank cars.

Second, the overall reduction in shipment volumes by the Russian Railways in December-March enabled us to increase the throughput of the infrastructure and accelerate tank car turnover.

As for rental rates, we’ve observed a drop in the cost of shipping petroleum cargoes since the beginning of this year. It’s obvious that we now have a buyer’s market. I think that the beginning of the river shipment season and the reduction in production volumes at oil refineries due to modernization work will lead to increasing competition for customers. The price offers that we’re getting from expeditors show that they’re willing to work with a profit rate on the level of 1000-1100 rubles per day.

— How much of Gazprom Neft’s shipping gets done via railway?

— The distribution of shipments among transportation types varies and depends on the refinery.

At the Moscow Oil Refinery, the structure of shipments is well-balanced. Railway, pipeline, and truck transportation account for about one third each. Omsk Oil Refinery prefers rail, but its relative weight drops during the navigation period on the Irtysh River, during which up to 50,000 tons of petroleum products are shipped on the river.

Overall, for the company’s three refineries, last year about 67 percent of petroleum product supplies were shipped by rail, 24 percent via pipeline, and 9 percent by truck.

— Are there any changes to the shipping structure planned for this year?

— At the end of last year and the beginning of this year, new facilities for the production of Euro 4 and Euro 5 grade diesel fuel were commissioned at Gazprom Neft refineries. That fuel will replace marine fuel and heating fuel.

Beginning the production of diesel fuel with a sulfur content of 10 parts per million at the Omsk Oil Refinery has opened up a new export route for that enterprise: via pipeline to Primorsk in Leningrad Oblast.

The first quantities of low-sulfur diesel fuel began entering the Transnefteprodukt system in late 2012. In late April, we sent the first shipment in the amount of 20,000 tons of the product from Primorsk. And we expect to increase monthly volumes substantially in the future. But the final decisions will depend on the market situation.

— Did pipeline shipments to Primorsk lead to the freeing-up of railway tank cars?

— I don’t think so. We’re seeing growth in consumption of petroleum products on the domestic market. Tank cars are required for shipping those products.

— What are the basic types of products shipped via railway, and what are the basic shipping routes?

— In general, it’s diesel fuel, automotive gasoline, and heavy fuel oil. As a rule, diesel fuel is delivered to the Russian market and our sales subdivisions in Kazakhstan, Kyrgyzstan, and Tajikistan. The excess products get exported mainly in the winter months, when there’s a downturn on the domestic market.

Automotive gasoline is shipped mainly to our subsidiaries for sale through the gas station network, both in Russia and in the CIS countries.

Heavy fuel oil from the Omsk Oil Refinery usually gets exported via the Kommandit Service terminal in Murmansk. It gets shipped from the Moscow Oil Refinery via Ust-Luga Port, and it gets shipped from the Yaroslavl Oil Refinery mainly via Estonia.

Shipment of heavy fuel oil from the Yaroslavl Refinery to Estonia is the most high-tech shipping operation for us. The short transportation distance and railway operator BaltTransServis’s use of its own locomotives makes it possible to export large quantities at minimum cost.

— This year, several new terminals will open in Ust-Luga for transshipment of naphtha. Are you interested in those facilities?

— We intend to stop producing commercial naphtha in the long term and convert fully to production of automotive gasoline.

We’re planning to stop shipping naphtha from the Moscow Oil Refinery this year. So, we have no major need for export shipments of straight-run gasoline.

— What are the company’s main partners for railway shipments? How do you choose them?

— They’re the biggest players on the oil shipping market: Transoil at the Omsk Oil Refinery, BaltTransServis at the Yaroslavl Oil Refinery, and Gazpromtrans at the Moscow Oil Refinery.

The basic principles of selections are, first of all, reliability of operations, since shipping volumes are quite large—about 25 million tons per year from the three refineries.

Second, the quality of service. The expeditor must optimize transportation processes and possess a primarily modern rolling stock.

And, of course, the cost of the services. We want to have a discount below market prices, since our company is one of the biggest shippers of oil cargoes on the Russian Railways network. The average daily shipping volume in Omsk is 600 cars, in Yaroslavl (not counting the share of TNK-BP) it’s 250, and in Moscow it’s 220.

We don’t operate tank cars independently. We have a fleet of about 500 special tank cars for aromatic petroleum products, sulfuric acid, etc.

We believe that we certainly can get by without our own fleet without harm to operations. We have considered the possibility of acquiring a fleet and operating it independently, and we compared those costs with the rates that operators were offering us.

It turned out that for now, it makes better sense for us to hire the services of operators.

— What’s your criteria for the age of the fleet?

— We don’t have any strict criteria. But you’re unlikely to find cars more than fifteen years old at our sites.

— How long are your contracts with operators effective?

— Five years.

— Rental rates on the spot market are currently falling. Do your contracts allow for costs to be reconsidered?

— Yes, they do allow for that, but spot rates are spot rates. Now they’re going down, and in three or four months the surplus of tank cars may be overcome through regulatory measures, which will cause rates to grow.

We are interested in having those fluctuations leveled out, and we want to build long-term relations that will allow us to be confident that all the products we produce will be shipped in modern tank cars. This will also allow our partners to plan their work ahead, at least in the mid term.

Working under long-term contracts makes it possible for them to put together investment programs to upgrade their fleet.

— Gazprom Neft does not have its own port assets. Don’t you see a need for them?

— Gazprom Neft is implementing a large-scale investment program for the development of its oil-refining assets. It is aimed at increasing the oil conversion ratio and increasing production of high-margin petroleum products.

We expect production of export-oriented petroleum products—heavy fuel oil and straight-run gasoline—to drop in stages and significantly.

The Russian market is the priority for Gazprom Neft. In the mid to long term, steady growth in consumption of petroleum products on the domestic market is being predicted.

A surplus transshipment capacity is expected in the Baltic Sea Basin.

In this light, the feasibility of major investment in port projects is ambiguous. But the company is not ruling out the possibility of investing in the port business.

I need to add that the operator of the company’s bunkering business, Gazpromneft Marine Bunker, has undertaken to create by 2025 a network of seven bunkering bases that will be located at ports in the main bunkering regions.