Triple growth

Andrey Vasiliev

Interview with Gazpromneft Marine Bunker CEO Andrey Vasiliev

Gazprom Magazine

Twice as fast

— Andrey Petrovich, what were your enterprise’s performance indicators on the eve of its fifth anniversary?

— The total volume of oil bunkered to ships more than tripled. In 2008, we sold 500,000 tons. In 2011, we sold 1.3 million tons. And in 2012, we sold about 1.8 million tons. And we now occupy 18.5 percent, nearly one fifth, of the Russian market. We sell heavy marine-grade residual fuel oil, distillates, and marine oils. Most of the products are coming from the Omsk and Moscow oil refineries.

In spite of the experts’ predictions, the market grew this year at more than twice the expected rate, by about 10 percent. While the aggregate market volume was estimated to be 7.15 million tons in 2011, it exceeded 7.8 million tons in just the first ten months of 2012. The Russian Far East is developing at a particularly impressive rate. Bunkering in the Far Eastern ports grew by nearly 50 percent (from 1.9 million tons in 2011 to 2.6 million tons over the first ten months of 2012).

Our customer base consists of over 200 marine transportation companies, 85 percent of which are foreign. At present, we have the broadest geographical scope of operations within Russia out of all the country’s bunkering companies. We have a presence in fifteen seaports and nine river ports in Russia. This includes Saint Petersburg, Murmansk, Kaliningrad, Novorossiysk, Tuapse, Vladivostok, and others.

— Who is your closest competitor in terms of your share of the Russian bunkering market?

— According to the leading consulting agencies, it’s Rosneft. Rosneft overtook Lukoil in 2012. It has to do with the growth of the Russian Far East. Rosneft has the greatest potential there.

— How is the enterprise’s structure developing?

—At present we have two subsidiaries, Gazpromneft Shipping, which runs our shipping fleet, and Gazpromneft Terminal SPb, which operates an oil delivery terminal for bunkering on site at the Kirov Plant in Saint Petersburg. We also have nine regional representative offices. Through coordinating our plans with Gazprom’s projects, we have opened a representative office in Arkhangelsk. And that office has been providing bunkering services at the Prirazlomnaya oil platform since summer 2012 under a contract with Sevmash. We are extending the contract through 2013. We hope that our enterprise will soon gain the status of operator of the Gazprom Group’s bunkering market.

Fleet

— We are continuing to put our own fleet together. In November we launched a new bunkering tanker in the Russian Far East that has been christened Gazpromneft Zuid-East. The ship with the largest capacity in our fleet has a deadweight tonnage of 6800 tons. We now have seven tankers of our own, and the total deadweight tonnage of our fleet has reached 27,000 tons. The age of our ships must not exceed 25 years. Therefore, we will replace four of our bunkering vessels by 2017.

— How many ships do you rent?

— The number of ships we rent varies. But the yearly average is up to four at seaports, and up to six on internal waterways.

— Don’t you plan to buy bunkering vessels for river ports?

— At present, it’s more profitable to rent them, but the situation is changing. We are currently analyzing the internal waterway market. So far, nobody has studied it in depth. We are studying our fleet, the condition of the infrastructure, bunkering capacities, and demand. We will complete the study by the end of 2013, and will prepare an investment feasibility report if necessary. Our strategic goal on this market is to build a modern, high-quality bunkering network of the same sort as the current Gazprom Aero network of fueling complexes—with high-quality fuel and service.

— Who are the main players on the river fleet bunkering market?

— Lukoil, Rosneft, and Gazprom Neft.

— In other words, you expect that the river shipping market will continue to develop, don’t you?

— Yes, I do. You see, it will continue to be more attractive economically for cargo shipment than railway transportation. Our fleet is constantly being upgraded. Note that Russian shipbuilders have enough orders to keep them busy for years to come. It’s impossible to put down an order now that will be completed within the next five years. And they ask us why we don’t buy ships from Russian producers.

0,1%

— What are your plans for the next few years?

— We are preparing for the new bunker fuel quality standards that will become effective on January 1, 2015. From that day on, sulfur content must be no more than 0.1 percent. This applies to Europe and North America. Gazprom Neft produces low-viscosity marine fuel with the required sulfur content. Other countries are planning to convert to fuel with a 0.5 percent sulfur content beginning in 2020. And that’s with the proviso that a final decision on the conversion will be made after a situation analysis is completed in 2018. So, residual fuel oil will be relevant for bunkering for a long time to come. Especially if you consider how quickly the Asian Pacific market is developing.

— We know there are plans to convert ships to liquefied natural gas (LNG).

— Yes, LNG may become the most interesting replacement for residual fuel oil. Using gas makes it possible to do away with most harmful emissions. It’s important that LNG costs about the same as residual fuel oil. But regulations for storage of the gas on ships have yet to be fully developed, and there is no global terminal infrastructure. That’s the key obstacle now that stands in the way of the LNG market development.

However, pioneer companies have already appeared in this area. In Norway, they have created bunkering infrastructure, and have launched several types of vessels that run on LNG in order to study how they work. The Germans are planning to build an LNG bunkering terminal in Hamburg by 2015. But as a whole, ship owners are not in a hurry to go this way. In order to incentivize a transition to liquefied natural gas, they demand hard and fast contracts with guaranteed prices. But producers are not prepared for such a scenario.

It is possible that many ship owners will not upgrade their ship engines. Instead, they will install a filter unit to reduce emissions. Then the task of replacing expended filter cartridges will fall on the bunkering vessels. We won’t have to do much to that end, just allocate a spot in our warehouses for the cartridges. We are prepared to include such a component in our business.

But from a technical point of view, the easiest way would be to convert engines that run on residual fuel oil to distillates, i.e. diesel and gasoil. And although on the yearly average diesel fuel costs about 40 percent more than residual fuel oil, the way things are going, diesel fuel is set to supplant residual fuel oil on the bunkering market during the first stage.

By the way, Russia is now producing about 70 million tons of residual fuel oil is each year. That figure will be down to 58 million tons in 2015, and 32 million tons by 2020. And it will continue to drop after that. At the same time, diesel fuel production will grow substantially. Diesel will be very exportable, since the domestic market won’t be able to consume all of the volume produced.

— How did that affect your strategy?

— We’re planning to increase the consumption of diesel fuel beginning in 2015. We intend to phase out residual fuel oil entirely by 2025. And we have added LNG initiatives to our strategy.

— What kind of initiatives are they?

— We are planning to launch bunkering operations with liquefied gas on the Baltic Sea and the Russian Far East after 2015. The Baltic is the most promising region. We will have to build a special bunkering vessel. There are suitable projects available on the market. And we already have proposals from producers, but for the time being these bunkering vessels are a bit overpriced.

— What about the source of the gas?

— Our plans are built around the future small scale production of LNG. The facilities already exist in Kaliningrad, Vyborg, Pskov, etc.

— What plans do you have for foreign projects?

— There’s the Tallinn in the Baltic, and Constanța in Romania. We have changed our business concept somewhat. Our enterprise no longer follows the ship owners. Instead, it follows Gazprom Neft’s export flows. That is to say, we’re using only our own resources. There are hardly any external purchases we’re making.

We will develop our presence on the Amsterdam-Rotterdam-Antwerp market. A significant part of the European marine shipping industry is concentrated there, and our resources are going there, too. Rotterdam has tremendous plans. Its cargo turnover will grow to 800 million tons by 2020. In comparison, the Russian Federation is planning to reach the 400 million ton mark at about the same time. The largest Russian port, Novorossiysk, currently has a cargo turnover of about 90 million tons.