Imports of Russian oil to European countries last year were down on 2017 levels, against a background of decreasing Urals crude deliveries to the west. Increasing production at the Arctic Novoportovskoye and Prirazlomnoye fields, meanwhile, has made it possible to offset the decline in shipments of standard Russian export crude, at least in part. Gazprom Neft, developer of these license blocks, also plans to increase shipment volumes in 2019. Vitaly Vyatkin, Managing Director, Gazprom Neft Trading GmbH (“GPNT”), talks about developing supplies of Arctic crude, demand for other blends shipped, and the specific issues relating to oil-product sales, in this interview with Argus.
— How do you see the current situation on the global oil market, in terms of the balance between supply and demand?
— The current market situation could be described as highly competitive. We’re seeing a change in the supply structure, as well as in trade flows, due to a reduction in volumes of heavy sour crude from Iran and Venezuela, in the face of increasing supplies of light, low-sulphur American crude. Increasing supply from the USA, however, is limited by logistical infrastructure capacity in the Gulf of Mexico. While refining volumes in Europe remain stable, demand for oil is continuing to grow in China, particularly from independent refineries in the province of Shandong. It’s important to note that China suspended oil imports from the USA in the summer, while the blends offered in North—West Europe and the Mediterranean enjoy high demand from Chinese consumers.
— What impact will tighter fuel-quality controls from 2020 have on the oil industry?
— New International Maritime Organisation (IMO) regulations coming into force in 2020 will impact both the oil industry and maritime transportation. Initially, following the tightening of environmental standards, ship owners will mainly comply with environmental standards by using low-sulphur bunkering fuel. As fleets are subsequently updated, greater use of alternative bunkering fuels, including LNG, together with the installation of scrubbers (air-pollution control devices), will reduce the current imbalance in the use of low-sulphur and high-sulphur fuel. Gazprom Neft, incidentally, began using LNG tankers in November 2018, to transport oil from the port of Murmansk.
Impending changes in IMO standards will start to have an impact as early as 2019, when many refiners will be taking steps to improve conversion ratio and increase desulphurisation capacity. These measures, however, will not be enough to completely offset the ban on using high-sulphur bunkering fuel without additional exhaust cleaning. In order to cut output of products in less demand, refiners will have to increase the proportion of lighter and lower-sulphur feedstocks. Demand for lighter, low-sulphur varieties is expected to persist for several years after 2020, while producers of heavy oil — the Middle East, mainly — will have to offer more competitive prices.
— What factors does GPNT take into account in developing its trading strategy on the oil market?
— European refinery operators are diversifying their ranges, because Middle Eastern producers, which Russia is displacing from their traditional Asian market, are increasing their expansion westwards. European refiners are also showing an active interest in American oil. At the same time, Asian companies are increasingly calling the shots in trading North Sea blends, and buying these for delivery by
One of the factors driving trading policy at GPNT at the moment is the intense growth in the production of Arctic blends. Increasing production volumes of our unique ARCO and Novy Port blends are allowing the company to consider the possibility of shipping to new markets, expanding our consumer base, developing new supply routes, and fine-tuning shipment logistics.
— In terms of Gazprom Neft’s total deliveries, the proportion of Urals is decreasing. How much of this blend was exported in 2018?
— The proportion of Urals in Gazprom Neft’s export structure has definitely decreased in recent years. Supplies of this blend via the Druzhba pipeline and via Russian ports totalled five million tonnes last year, while shipments of Novy Port oil exported by GPNT to the CIS exceeded the volume of Urals crude in 2018.
— Is GPNT interested in increasing supplies via the Druzhba pipeline?
— In line with company trading policy, the company’s contractual terms for pipeline shipments are reviewed every year. We keep a close eye on the viability of supplies via the Druzhba pipeline, but see the German market as strategically important, particularly in terms of cooperating with international companies, who are major purchasers of Arctic blends.
— What are your predictions as to deliveries of Novy Port and ARCO oil next year?
— Oil production at Gazprom Neft’s Arctic oilfields is increasing, and these blocks are driving the company’s production growth. The increase in Arctic shipments slowed somewhat in the second half of 2018 due to preventative maintenance on the Prirazlomnaya rig in September, while exports from the Novoportovskoye field increased at quite a rate. Total deliveries of Arctic blends to international markets were more than 10.5 million tonnes in 2018. This figure is expected to increase by up to 10 percent in 2019.
— Arctic blends are mainly shipped to major purchasers in north—west Europe, under annual contracts. What are the advantages of this sales model?
— Prices for Novy Port and ARCO blends depend on demand from refining companies on the international market, primarily in north—west Europe, which is geographically close to production locations. Accordingly, GPNT has identified developing guaranteed, efficient and stable sales channels for these blends, and developing long-term partnerships with Arctic oil customers, as a priority. At the same time, the proportion of Novy Port and ARCO spot consignments remains stable, making it possible to maintain commercial relations with a wide range of customers, enter new markets, and increase customer numbers. Spot-sales volumes will grow in line with increasing export volumes of Arctic oil.
— What impact will the new IMO standards have on interest in Novy Port and ARCO oil?
— The forthcoming changes are creating new challenges for refiners, which they will be responding to in various ways. Some are planning improvements to their refineries in order to reduce output of high-sulphur fuel oil, while others are focussed on buying lighter oil. ARCO oil, as previously mentioned, will be in high demand from those companies that are investing in modernising their plants. Novy Port, in turn, will be preferred by those refineries planning to adapt to tighter IMO standards by increasing the proportion of light oils in their feedstock selections.
— How do things look for Novy Port deliveries beyond north—west Europe?
— Consignments of this oil have been sent to the Mediterranean since the commissioning of the Umba VLCC transhipment complex in Murmansk in 2016, the launch of which paved the way for shipments by Aframax tankers. This oil is already being delivered to Lavera (a refinery in Marseille) and Trieste, with regular shipments to the Croatian port of Omišalj. We see considerable potential in shipments of Novy Port oil to the Balkan Peninsula but, due it its logistical remoteness from Murmansk, the economics of supplies to the Mediterranean are losing out somewhat to sales in north—west Europe.
— Gazprom Neft is also increasing exports of East Siberia Pacific Oil (ESPO) blend. Do you plan to sign supply contracts for this blend, or will this crude be offered exclusively on the spot market?
— Gazprom Neft’s supplies via the ESPO pipeline have been gradually increasing since 2016, and in the light of plans to develop projects in Eastern Siberia, the company is faced with the task of increasing exports to the east. The main purchasers of ESPO crude in recent years have been Chinese companies. Following import liberalisation, a secondary market has emerged in China in ESPO crude, which is in considerable demand from independent refiners in the province of Shandong. Buyers on the primary market remain unchanged — being major refineries in the Asia Pacific, Chinese and global oil companies, and international middlemen.
ESPO crude is, for Gazprom Neft, the main factor behind its presence in the strategically important Asia—Pacific region. Given the small volumes, our company prefers to sell oil on the spot market and work with multiple buyers. But in the event that EPSO crude volumes increase, we don’t rule out signing long-term contracts with leading regional players.
— How will the launch of a new oil futures market on the Shanghai International Energy Exchange (INE) impact trading in ESPO crude?
— We’re monitoring the development of the INE futures market, which is denominated in yuan. If this facility meets all the criteria for a market, and proves sufficiently popular in the Asia—Pacific region, then GPNT is prepared to consider the possibility of supplying oil to our customers, pegged to this market. The INE futures market has the opportunity to become a market for Chinese companies, but, far more important is whether it gains the status of a benchmark for the global market. To do this, the futures price needs to be determined by global trends, and not by the peculiarities of the local market; this could be achieved by a reasonable number of global players having a presence on the Shanghai Exchange, including international vertically integrated oil companies as well as traditional traders on other forums.
— In addition to Urals, Arctic and ESPO crude, GPNT also sells Iraqi oil. Where is this oil shipped to? Are there any limits on exports of Iraqi oil?
— Gazprom Neft obtains Iraqi oil by way of reimbursement for developing the Badra oilfield, of which it is operator. Producers are also able to supply this crude to various regions, and our company ships cost-recovery oil to all key markets.
—What volume of oil products did GPNT supply abroad in 2018?
— The range of oil products our company delivers in the CIS includes, primarily, diesel fuel, fuel oil and naphtha. Export volumes are determined on the basis of being surplus to domestic requirements, since the domestic market is the priority for Gazprom Neft. Gazprom Neft delivered about 7.8 million tonnes of oil products abroad in 2018, which is broadly in line with 2017 volumes. I would point out that we don’t export gasoline.
— Which European countries receive the greatest volume of Gazprom Neft oil products? Are trade flows changing?
— The main areas for deliveries remain unchanged, and consignments of oil products are shipped mainly to Germany, France, the Netherlands and Great Britain. GPNT has been successfully implementing a wholesale diesel sales and distribution programme in Europe, under which consignments from Primorsk are delivered to the regional market by vessels chartered by our company. This direct sales channel means GPNT can distribute Russian diesel fuel, export volumes of which are increasing, with that growth expected to continue following the completion of Gazprom Neft’s refinery modernisation programme.
— Are you anticipating an increase in supplies of diesel fuel from Russia to Europe in the light of high demand for imported gas oil (i.e., industrial and agricultural “red diesel”, forbidden from use on the road in the UK) in this region?
— Export volumes of diesel fuel from Russia are driven by demand on the domestic market, because shipments to Russian customers are of paramount importance to local producers. Our estimates suggest demand for middle distillates from European companies will remain at the same level over the next few years. New IMO standards entering into force will lead to stronger demand for diesel fuel, particularly during the transition period in the first few months of 2020. Added to which, there has been insufficient investment in refinery modernisation in Germany in recent years and, as we saw at the end of last year, in the event of technological incidents, reserves for meeting domestic demand are extremely low. Prices on the local market increased as a result, as did import volumes. Due to regular supplies from Middle Eastern countries and the United States, competition on the European diesel fuels market is increasing, but our company expects to maintain its position in the region. As well as the obvious logistical advantage, we have a stable client base, which includes local companies operating within the internal European market.
— Does GPNT sell third-party oil products?
— The European wholesale diesel sales and distribution project envisages proactive collaboration with other market players, including in swap contracts. Oil products for these transactions are procured in north—west Europe.
— Are you considering the possibility of supplying fuel oil and naphtha to the Asia—Pacific region directly? What’s stopping shipments of these products from starting, at the moment?
— Direct supplies of fuel oil to the Asia—Pacific region are tied up with the longer logistics chain and delayed payments. Added to which, the difference in product quotes on shipment, and once the vessel arrives at the port of destination, means there’s no additional economic benefit. Declining fuel oil consumption in Europe notwithstanding, this region remains a major centre for batching heavy petroleum products en route to end-users, particularly in the Asia—Pacific. Europe, and, first and foremost, the Amsterdam—Rotterdam—Antwerp area, is a key export zone for us, due to its geographic proximity, significant blending capacity, and developing market for Russian fuel oil. Naphtha shipments are also oriented towards the European market, the capacity of which is quite sufficient to accommodate the relatively small export volumes of this product.
Fuel oil supplies abroad are gradually declining as a result of the modernisation of Gazprom Neft’s refining capacity, and lower output of this product. Naphtha export volumes are insignificant, and shipments abroad, as a rule, occur during planned refinery repairs. I repeat, our company prioritises supplies to Russian customers and allocates export volumes only in order to improve sales performance.