Friday, December 3, 2010

What is Happening at Transneft?

Russian oil pipeline monopoly "Transneft" has had some rocky moments over the last few months, despite some impressive feats. The company that pumps 93 percent of Russia's crude oil and controls 60,000 kilometers of pipeline is 78% owned by the Russian government--who owns 100% of voting shares. ("Putin Orders Transparency at Transneft," The St. Petersburg Times, 26 October 2010)

In early September, Transneft President Nikolay Tokarev complained that Turkey was trying to attain unilateral dominance of the Trans-Anatolian pipeline, a planned 555 kilometer pipeline being developed with the partial participation of Transneft. Tokarev said that Turkey was proposing "inefficient conditions" to Russia that would push that country into a "strict and economically unacceptable frame." This caused Prime Minister Putin to jump into the fray, defending the project as both economically rational and profitable. While Putin's close ally Tokarev said that he would not accept Turkish conditions, Putin rebuked him and said that Russia had given its promise to Turkey and that Russian companies would continue working throughout all phases of the project. ("Putin stands by promises on pipeline project," Hurriyet Daily News, 8 September 2010).

In mid September Tokarev announced that Transneft and Summa Capital were purchasing controlling interest in the Novorossilisk Commercial Sea Port (NCSB), with plans to merge it with the port they already own, Primorsk. According to an analyst at VTB Capital, this will give the NCSP and its owners a monopoly on crude exports to Europe. NCSP will buy 100% of the Primorsk Oil Terminal, and then Transneft and Summa will purchase 50.1% in the newly-expanded NCSP. Each partner will control half of the the shares. Once the purchases are complete, Transneft will be able to set its own rates for loading crude at the terminals ("Transneft, Summa Capital to Buy Novorossiisk," The Moscow Times, 16 September 2010).

Oil companies, however, have been unhappy with Transneft's pricing policies. The company has borrowed heavily to fund new projects, and there is considerable uncertainty as to how the money will be repaid. Fears are that Transneft will raise tariffs on Russian oil to make the payments. ("Putin Orders Transparency at Transneft," The St. Petersburg Times, October 26, 2010)

The company is also spending time responding to complaints from minority shareholder Alexei Navalny. In May 2010, he won a court order forcing police to investigate Transneft's charitable contributions over the years 2005 and 2008. The amount paid out was almost a half billion dollars, and the recipients are unknown. ("Putin Orders Transparency...") In fact, in 2007 Transneft chief Semyon Vainshtok was removed from his post after it was revealed he paid more in charity than he paid to shareholders. ("Transneft Accused of $4 Bln Theft," The Moscow Times, 18 November 2010).

Then, Navalny released an official report stating the Russian Audit Chamber was investigating the loss of $4 billion in the construction of the East Siberian-Pacific Ocean pipeline. "They stole. They overstated prices. They connived with contractors to cheat. Then they destroyed the documents," said Navalny. Transneft confirmed that the report was an initiative of the company's leadership. ("Transneft Accused...") Whether this report is approved by Transneft chief Tokarev as a way of distancing his leadership from that of Vainshtok is unknown; what is certain, however, is that there is a fair amount of discord among the allies of the Prime Minister.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at