Gazprom Neft has become the first of Russia’s oil companies to test the new “Exchange of Futures for Physicals (EFP)” mechanism (a transaction between two parties in which a futures contract on a commodity is exchanged for the actual physical good) on the St Petersburg International Mercantile Exchange (SPIMEX), with the company, in training, concluding a test EFP transaction on 500,000 barrels of Urals crude.
An EFP transaction involves exchanging a futures contract for an obligation to deliver a commodity under an OTC contract, with the contract price tied to the futures settlement price on the day of the transaction. The EFP mechanism is an important element in the various financial and physical oil markets, and is widely used on international exchanges. The EFP procedure is notable for its flexibility in exchange-traded contracts: it allows the pricing and delivery of physical commodities to be separated, and allows goods to be supplied not on standard exchange terms but tied to the futures exchange price.
Testing of the EFP mechanism is being undertaken as part of a government initiative on the management of the futures market in Russian export crude (benchmark). The launch of the EFP contract will allow market quotations for export crude to be set directly, without reference to other oil sources on the international market, eliminating the risk of price manipulations and ensuring the transparent and equitable pricing of Russian export crude by balancing supply and demand across a large number of participants, united within a single exchange trading platform. A range of initiatives essential to operating EFP contracts on Russian export crude were approved by the Government of the Russian Federation in May 2016. As part of the preparatory activities developed under this plan SPIMEX will be running training trades to test participants on exchange-trading procedures (trading mechanisms, oil supply, clearing settlements) and document flow.
Anatoly Cherner, Deputy CEO for Logistics, Processing and Sales, Gazprom Neft, commented: “Gazprom Neft is in constant dialogue with SPIMEX and specialist agencies in implementing this initiative for the creation of a new pricing mechanism for Russian export crude. Active participation in the project from an early stage — Gazprom Neft having been part of the working group in 2015 — allows us to develop approaches that take into account the views of oil companies, as well as undertaking a comprehensive analysis of the risks, and proposing a strategy for minimising these — which will, without a doubt, have a beneficial impact on the future development of the project.”