Only the most responsible and forward-looking will remain in the market

Sibirskaya Neft magazine

Interview with Gazpromneft Marine Bunker CEO Andrei Vasiliev

Sibirskaya Neft magazine Andrei Vasiliev

In its short history, Gazpromneft Marine Bunker has come from practically nowhere to become a leader in the Russian bunkering market. The company’s CEO, Andrei Vasiliev, spoke to Sibirskaya Neft about the main trends in the sector and the resulting challenges for bunker business operators.

“What are the main trends in the Russian bunkering market?”

“Over the past six years, the Russian bunkering market has been growing rapidly; it has at least doubled in size since 2008. The capacity of Russian ports is growing, the fleet is being renovated, and this, of course, is a positive trend as it means there is work for us. A good trend is the growth in the market share held by the specialized bunkering departments of vertically integrated oil companies, as this leads to the modernization of port infrastructure. These are all capital intensive projects which are usually beyond the reach of small companies. Furthermore, structuring is making the market more transparent, since large corporations are making product information and pricing mechanisms more openly available.”

“So, in the end, will vertically integrated oil companies be the only ones left in the market?”

“Of course not. It’s just that only the most responsible and forward-looking will remain. Independent operators will draw themselves up to the level of vertically integrated companies and this will result in a decent market hybrid, just as it has in the retail market for vehicle fuel. After all, there are quite a lot of filling stations owned by independent operators on the roads, and they are completely comparable to the large oil companies’ filling stations.”

“How can independent operators compete with vertically integrated companies? After all, they are the ones they buy their fuel from, aren’t they?”

“Not exactly. Fuel oil is produced in both large and small refineries. For the small ones, working with bunkering companies gives them a distribution channel that makes it possible to carry out small, regular deliveries. Meanwhile, for independent bunkering companies that own port infrastructure, it is these sources of fuel that allow them to survive.”

“There has been much discussion lately about the problem of developing the global market for bunker fuel, due to the imminent tightening of environmental legislation. How do you envisage the situation developing?”

“In the Baltic Sea and North Sea basins and around the US — in the so-called emission control areas (ECA) — strict regulations on the sulphur content of fuel (up to 0.1%) are coming into force on 1 January 2015. Ship owners will therefore have to convert to low-sulphur fuel, use various scrubber technologies to clean emissions, and in the longer term, convert to an alternative fuel — liquefied natural gas (LNG). This market is forecast to take off by 2020–2025. If restrictions on nitrous oxide emissions come into force in 2016, this will be another major factor in the development of the market for LNG as a bunker fuel, since replacing fuel oil with diesel, even if it does have a low sulphur content, will not solve the problem.

Our national standards and technical regulations for fuel quality lag behind international standards, but the gap is gradually closing. I think that by 2025 the trends will be the same.”

“Is this somehow built into the company’s strategy?”

“Of course. Currently, the company is developing a new fuel based on distillates with a sulphur content that is permitted in ECA areas, but which is cheaper than diesel. This type of alternative is a question of competitiveness. Furthermore, as part of the Gazprom Neft project we are working on bunker gas, developing a specialized LNG bunker barge together with specialists from the Krylov State Research Centre, and holding negotiations with ship owners for long-term contracts.

“Recently, Gazpromneft Marine Bunker’s most active development has been in the Black Sea region. Why is that?”

“We have had a presence in this region for a long time, but progress was held up by the capabilities of the terminals. In purchasing the coastal facilities we are making a leap forward, and now the coastal infrastructure and our bunkering fleet complement each other to increase our market share, especially as we have factories which are comparable with competitors’ factories in terms of logistics.”

“You are beginning to offer bunkering services abroad after acquiring the infrastructure. That was the case in Tallinn and in Constanta. Is it at all possible to work abroad in the same way as you can in Russia, when you have only a fleet of ships or even rented vessels?”

“A distinguishing factor in acquiring a business abroad is that we are not just purchasing the infrastructure, we are also buying shares in key players in local markets. We choose strong players with valid licences, coastal infrastructure, fleets, and client bases. We update the client base of an acquired company and integrate it into our own. That was the case, for example, when we acquired the assets in Tallinn.”

“Can you tell me something about your assets in Constanta? Has the project been a success?”

"This was our first experience of an overseas project. It was not a simple matter, since it is much further afield than Tallinn, which is within reach of our domestic resources. As we were implementing this project, we discovered that it was not enough to simply set up a new infrastructure and establish a new logistics system. We also had to deal with cross-cultural idiosyncrasies and the language barrier. The Romanian project is linked to our Serbian asset; fuel is supplied from Serbia by tanker along the River Danube, crossing the territories of several countries. We basically had to start from scratch, establish river transport logistics, put together a fleet that could transport fuel oil heated to pour point (45—50°C), and house the cargo in the port of Constanta, in our own terminal and another rented one. Where necessary, we have had to ensure that the ship fuel complies with ISO 8270.

Unlike the Baltic project, where the local staff soon integrated into the company’s broader corporate environment, things were more complex in Romania due to cultural differences and the low level of proficiency in English among our Romanian colleagues. We had to make significant changes to the team, and there is now an international group of staff in Constanta: Romanians, people from the Baltic States, Russians, and Moldovans. I would also like to point out that while the project was being pitched and approved in line with corporate procedures, the market underwent a substantial change and we were forced to make alterations to the project’s implementation plan.

We have now reached a steady bunkering level of around 10,000 tonnes per month, which accounts for over 50% of the Constanta market. This is a level of sales which allows us to optimize logistics, establish a suitable trading policy, and enter into long-term contracts. The start-up stage is now complete and we are entering the working operational cycle. We are still very dependent on supplies of fuel from Serbia and price competition with neighbouring ports.“

“Are you planning further development in the Balkans or anywhere else abroad?”

“We named the company Gazpromneft Marine Bunker with our eyes on the future. Now that we have practical experience of bunkering in Romania and have established a transport channel along the Danube, we can follow it upstream to Bulgaria, Croatia, and even Austria. We don’t plan to bunker fuel only in Serbia itself, where the shareholders of the petroleum company NIS have taken the decision that their company will bunker fuel independently. In the Baltic region, we plan to have a presence at almost all ports, from Kaliningrad to St. Petersburg, including those in the Baltic countries. Furthermore, one of our clients in Tallinn has asked us to look into the possibility of arranging bunkering for them in Stockholm, and we are currently giving this serious consideration.”

“How do you build up a client base in the bunker business? Are clients frequently passed from one fuel supplier to another?”

“No one has abolished free market competition. The basic factors exist: price, reliability, fuel quality, and service quality. Some clients have been with us for five years now; some tried to leave but returned; some turn to us when they are dissatisfied with the competition. Overall, in all these years, it has been very unusual for us to lose a client.”

“How do you plan to develop the fleet?”

“Today we have eight vessels in Russia and three abroad. This is half the number stated in the company’s strategy. But along the perimeter of Russia’s sea ports, the fleet can already be said to be nearing completion. We plan to have acquired another large-tonnage vessel for the Black Sea by the end of this year, and we may need another marine bunker barge for moving into northern regions in Arctic conditions. Furthermore, we are planning to build a gas bunker barge. There is a lot of work ahead in the inland bunker barge segment. We are currently working on the design, since the inland bunker barge project is due for development in the next 3–5 years.”

“Why have you postponed the river project?”

“It’s a question of scale. This is an important and promising market. Russia already has in place a strategy for developing the inland fleet, approved by the Ministry of Transport, and there is a map that outlines the future development of river ports and infrastructure, which will allow owners of river-going ships to plan how to enlarge and upgrade their fleets. There is now a river infrastructure which ensures demand for bunkering, and we are currently using our authorized logistics partners on the rivers. But these are all standard bunker barges, traditional vessels based on a template inherited from the once dominant Volgotankers. What we want to do is create a new type of river bunker barge: fuel refilling complexes which could supply ships with all required types of fuel and which would comprise an uninterrupted fuel supply system along the entire river. This network effect will give us the necessary competitive edge to acquire at least a 30% share of the river bunkering market. But this requires significant investment, and in the near future Gazprom Neft is planning to implement capital intensive projects in oil extraction and processing. Our task, therefore, is to spend these three years creating a serious, in-depth programme; sourcing contractors; and finding compositional, organizational, and design solutions so that the programme can be launched in the shortest time possible once funds become available.”

“What is the staffing situation, both for current activities and for prospective projects?”

“The staffing question is a very serious matter as we use the very latest equipment and the fleet is the most advanced in Russia. Therefore the crews must be qualified. And though they exist, good specialists want to get onto foreign ships, on international lines, which offer serious financial incentives. This is why it has taken us five years to find and select the 200 people that make up the crews of our ships. We are currently developing an internal reserve staff programme: promoting navigation officers to captains, junior mechanics to senior ones, and expanding the company’s crew numbers. Last year, we adopted a strategy which sees us take a comprehensive approach: we have started training students. We have begun sponsoring a class at the Admiral Makarov State University of Maritime and Inland Shipping, so that its students are able to complete practical work experience with us. We plan to select navigational officers from among these students on graduation. Moreover, we have gone even further: we have begun sponsoring the Central Yacht Club’s sailing school, and equipped a classroom in the school for young sailors. In this way, we are working to popularize the profession. In addition to sailors, we also need a cadre of traders who can match their foreign counterparts, so this year we are opening a company school for traders, where specialists can master all levels and climb the career ladder.”

“How does Gazpromneft Marine Bunker compare with the leaders on the global market?”

“Have a look at our website and the websites of Shell’s and BP’s bunkering subsidiaries. We have almost the same set of services and similar capabilities. Our level of automation may lag behind a little, but in a year or two, when we have completed our main IT projects, I think we will be able to safely say that we have caught up to the leaders in everything. The quality of Gazprom Neft’s bunkering already matches the standards of global holding companies. Our ship-owner clients have noticed this. Furthermore, in December 2012, the company received a certificate of compliance with ISO 9001:2008 for the trading of oil products on the bunkering market; the company has also introduced and certified a management system in the field of occupational safety, workplace health and safety, and environmental management in compliance with the International Safety Management Code for the Safe Operation of Ships, ISO 9001:2008, ISO 14001:2004, and ОHSAS 18001:2007.”