A new fuel strategy

Gazprom magazine

Andrei Vasiliev, CEO, Gazpromneft Marine Bunker LLC, answers our questions.

Gazprom magazine No. 1–2, January—February 2018

— Andrei Petrovich, how has the company changed over the 10 years it’s been in existence?

— We’ve grown from a medium-sized enterprise to Russia’s market-leading bunkering business. We started out with 18 people in 2007, and there are now about 800 people working in the company. Today Gazpromneft Marine Bunker is a major company, providing year-round supplies of marine fuels and lubricants for sea and river transport throughout the entire country, and abroad.

Over a period of 10 years we have, step by step, built a new area of retailing for Gazprom Neft, with Gazpromneft Shipping, operator of our bunkering fleet, appearing in December 2008. After some months, in March 2009, Gazpromneft Terminal SPB was established, the operational responsibilities of which include the day-to-day management of bunkering in the port of St Petersburg. The acquisition of a terminal on the Black Sea was finalised In December 2013. The transhipment and storage of marine fuels in the Black Sea region is now undertaken by the Novorosneftservis harbour (dockside) terminal and the Novorossiysk Oil Transshipment Complex. Last year, in the interests of efficiency improvements, it was decided to combine all of our Russian terminal assets into a single management unit within the St Petersburg office of Gazpromneft Terminal SPB.

Gazpromneft Marine Bunker is represented in all of Russia’s main sea ports, from Kaliningrad to Sakhalin, as well as river and estuary ports. In 2013–2014 the company’s portfolio expanded to include foreign assets Gazpromneft Marine Bunker Balkan in Constanta, Romania, and Baltic Marine Bunker in the port of Tallinn.

Our bunkering fleet comprises nine vessels with a total cargo capacity of more than 36,500 tonnes. The company’s assets also include three Arctic tankers, working for the company’s Arctic Gates project in Yamal.

In summarising the results of our first 10 years, we can say that the main job — of becoming an effective retailing (sales) enterprise, offering bunkering services for everything and everyone — has now been done. Gazpromneft Marine Bunker has become an important link in the country’s transport infrastructure. Our company is one of the market-leading companies in Russia, with a market share of 18 percent.

— And if you look at the company’s development in the context of the market’s development — well these last 10 years have seen two crises, competition in the usage of different fuels has intensified, and ports have been modernised.

— Indeed, some major events have happened in the last few years, which have, without a doubt, impacted our business. Both crises affected the industry quite strongly. By no means everybody survived the last one — everybody was shaken up by it, both bunkering companies and ship owners.

The bunkering market shrank by a third in two years. In 2014 it stood at 16 million tonnes; at the end of 2016 it was about 11 million. This reduction was impacted both by the global crisis, which, of course, didn’t bypass the shipping companies, and by our government’s tax policy — which, against a background of a collapsing oil price, reduced the price competitiveness of our ports.

In addition to these developments, the introduction of the excise duty on middle distillates from 1 January 2016 proved yet another. Not all producers fell within the definition of “middle distillates” — which our low-viscosity marine fuel, however, does fall under. More importantly, counterfeit goods — with counterfeit quality certificates — began to appear on the market.

There was, initially, some uncertainty regarding shipowners’ and bunkering companies’ reimbursement of the excise tax, concurrently with untaxed fuel coming onto the market. All of which changed the market landscape.

In early 2016 quoted oil prices fell so far that market prices didn’t cover the costs of transporting fuel from refineries. Refining volumes had to be cut in order to minimise losses.

— And you didn’t put your prices up.

— We live within the paradigm of the global market. When refuelling, a shipowner compares prices at the Port of Rotterdam with ours. On that basis, market conditions were such that there were no viable returns for the entire first quarter of 2016. The situation settled down in the summer, with the rise in the oil price. The second half year was so auspicious that we closed the year in the black. Although it was tough.

— And what happened in 2017?

— It began with some small growth and market recovery. Data for 2017 show the Russian market grew to reach 11.2 million tonnes. That’s two percent more than in 2016. Oil indices rose, and there was no price distortion.

— How were the figures for your company’s year-end, last year — given the challenging market?

— As you will remember, in 2017 the oil price remained at around $50 or above. This impacted the price of marine fuels — prices were high enough for us to cover the business’s costs, and to make a profit. We also able to get on top of overheads, and reduce administrative and operational costs. Having implemented a programme to optimise production, we managed to increase capacity at the St Petersburg transhipment terminal, which delivered a further benefit and meant we could sell more. In terms of major events, I would also add the launch of a new fuel, produced at the Omsk Refinery — ultra-low sulphur TSU-80 fuel oil (with a sulphur content of less than 0.1 percent).

In addition to this, we launched bunkering services for Arctic fleet vessels transporting oil from the Novoportovskoye and Prirazlomnoye fields, from the Nord harbourside complex, in Murmansk.

As regards physical data for 2017, sales exceeded 2.6 million tonnes of marine fuels — which had a positive impact on the company’s financial performance data.

— What investment projects had to be revised?

— We delayed construction of a bunkering complex in Murmansk, using services from third-party terminals instead. Our LNG bunkering project is also postponed, pending better times.

On the other hand, we are actively developing in the Arctic — that is, Murmansk, directly, as well as new oilfields. Our company is involved in bunkering in the Barents Sea and the Laptev Sea, during the summer season. We have contacts among upstream specialists (geological prospecting specialists) investigating the Russian Arctic Shelf, within the Gazprom Group and Rosgeologia.

We’ve signed contracts for bunkering vessels for Gazprom’s offshore projects not just in the Arctic, but also offshore from Sakhalin Island, and in the Black Sea. Thanks to that partnership we are not only securing new sales channels, but are also making a considerable contribution to delivering the strategic objectives of the Gazprom Group.

— Am I right in that development in the Arctic is being largely driven by the Northern Sea Route and the Novoportovskoye field?

— The Novoportovskoye field, undoubtedly. Seven tankers are in operation here, year-round, transporting the oil produced. And let’s not forget about the Prirazlomnoye field — two tankers and one support vessel. Refuelling of all of these vessels lies with us. Added to which, there are additional projects. For example, supplying NOVATEK’s Yamal LNG.

Bunkering in the Arctic is up 30 percent in 2017. Capacity at the port of Murmansk has increased 50 percent, reaching 450,000 tonnes.

Gazpromneft Shipping has begun using the latest Arctic tankers — the Shturman Shkuratov, the Shturman Scherbinin, and the Shturman Koshelev — built to order for Gazprom Neft, to transport oil from the Novoportovskoye field. The total freight capacity of these three tankers is more than 114,000 tonnes.

— And the Northern Sea Route?

— The Northern Sea Route’s impact, thus far, isn’t that great. This route operates for three months a year. There are relatively few vessels on it, so far. Nonetheless, this area is very promising. Two support vessels are expected to be commissioned in 2018 to work the Northern Sea Route — the Aleksandr Sannikov and the Andrey Vilkitsky icebreakers. These will be used to ensure the year-round operation of the Arctic Gates oil shipment terminal. In addition to providing tankers with direct icebreaker support, they will also be responsible for providing assistance in mooring and loading, rescue operations, towing, fire fighting, and oil-spill response.

— In terms of your plans, what impact will the Northern Sea Route have on the company’s activities, in the medium term?

— Obviously, this route’s development has been taken into account in our strategy. We expect market demand for northern shipments to increase from 450,000 tonnes to 680–700,000 per year by 2030.

The International Convention for the Prevention of Pollution from Ships (MARPOL) is having a considerable impact on our activities — changing the fuel landscape, insofar as it’s tightening demand for marine fuels.

At the moment, we have small local emissions control zones and limits on sulphur content, while the new provisions of the MARPOL Convention, which come into force in 2020, will impact the whole world. Fuel’s sulphur content must not exceed 0.5 percent. There isn’t enough fuel oil of that quality for everyone.

We are at a fork in the road, insofar as the fuel of the future is being chosen. We, like all our colleagues, are considering several options in liquefied natural gas (LNG), diesel fuels, and the installation of pollution control (treatment) facilities onboard. The company has taken all trends into account in developing its strategy. One way or another, all options will be utilised. We are placing our bets on LNG, in particular, but we plan to use distillates too. We’re not really looking at fuel oil for bunkering, beyond the next 10 years. We won’t produce it, and buying it on the market makes no sense.

Our company is currently studying Gazprom’s plans to develop mid-tonnage LNG production in the Far East. We’ll be developing bunkering and diesel fuels in the Baltic, as well as LNG. Diesel fuels will also be used in the Arctic. The development of the company’s Serbian refinery will strengthen the position of the Balkan subsidiary.

— And how has your fuel mix changed, so far, in view of the fact that you still operate in the Baltic, where strict environmental restrictions are, already, in operation?

— We have new kinds of fuels now. The Moscow Refinery is exclusively oriented to producing environmentally friendly low-viscosity marine fuels. And, as I’ve already said, in 2017 we’ll be launching TSU-80 fuel oil, a new environmentally friendly product from the Omsk Refinery.

Before the introduction of restrictions in the Baltic, 80 percent of our fuel mix was fuel oil, and 20 percent diesel. Now, in the north—west market, for example, 50 percent is fuel oil, 25 percent diesel and 25 percent environmentally friendly hybrid fuel, part fuel oil, part diesel. Fuel oil still dominates in the Black Sea, at 70 percent. In the Far East market, it’s 90-percent fuel oil. Diesel fuels dominate on the rivers (distillates, to be precise).

— How do you see the development of your fuel mix, in view of refinery modernisations, increasing output of light oil products, and the termination of fuel oil production?

— There won’t be any fuel oil in our fuel mix from 2025, just diesel fuels and LNG. We’re in negotiations regarding LNG procurement, and are also placing our bets on this energy source, which will be organised by Gazprom at the Portovaya compressor station.

— What’s your assessment of LNG market capacity for bunkering in the 2020s?

— From 2020 to 2020 — 100,000 tonnes, increasing thereafter to 300–400,000 tonnes by 2025. We expect the north—western market to dominate this market, up to that point.

We’re looking at the Far East market with some interest. There are some gigantic container ships in shipyards there, at the moment, which will need about 20,000 tonnes of LNG for every journey. It would make sense to develop our own LNG production in time for these being launched, in order to go to market with a competitive product in this region. If the average LNG refuelling volume in the Baltic is expected to be in the order of 300–500 tonnes, a one-off refuelling operation in the Far East could amount to 15,000 tonnes. This is a market worth fighting for. We’re relying on “Vladivostok LNG”.

We believe there will also be customers for gas fuels on inland waters. But it will be important to draft legislation here, as well as arranging production of gas engines for river vessels. It’s vital that environmental standards are tightened and, at the same time, that the transition to more environmentally friendly types of fuel is promoted. But that issue is decades into the future.

— What are your plans for 2018?

— We’re aiming to maintain retail sales volumes and keep our operating profit — as well as specific operating costs — at 2017 levels. There’ll be no stop on developing sustainable formulations and technologies to produce branded petroleum products, confirming to the highest environmental standards. We’ll continue replacing obsolete equipment and bringing infrastructure into line with today’s requirements and those of Russian legislation, as well as improving efficiency in production and in our business processes. We’ll be commissioning two icebreakers for the Novoportovskoye field in 2018–2019. We’ll be beginning construction of an LNG bunkering vessel. We plan to implement this project in cooperation with Gazprom throughout 2018–2020, at Russian shipyards.

Interview by Alexander Frolov