The spat began in anticipation of the June 2013 signing of a contract between Rosneft and the China National Petroleum Corporation (CNPC). That contract obliges Rosneft to deliver an additional 365 million tons of oil over the next 25 years. This is an increase over the previous contract Rosneft signed to supply 15 million tons annually for the next 20 years.
With negotiations underway for this landmark agreement, Rosneft's Sechin began lobbying for the expansion of the ESPO pipeline spur to China. Transneft's Tokarev would have none of it. In a rare public display of disagreement within Putin's siloviki, the Transneft chair identified the source of the conflict: money. "Who will pay to expand the pipeline spur to China?" he asked in May 2013. "Transneft isn't just a service company for Rosneft."
Despite Tokarev's objections, the contract was signed at the International Economic Forum in Saint Petersburg. With the question of pipeline financing unresolved, Transneft upped the ante by announcing they would stop pumping Rosneft oil on July 28 because at that point Transneft would have fulfilled its previous contract with the state-owned oil company. Sechin was unperturbed. "We are in contact and interact with Transneft's CEO Nikolai Tokarev. There was no conflict. Obviously, during commercial work the companies may have different positions. But this is not a conflict but a regular negotiations process."
Sechin's position was that Rosneft would pay an "economically justified tariff", but he did not believe he should finance the expansion of Transneft's network. Igor Demin, spokesman for Transneft, disagreed. He said that the pipeline project would be solely for the benefit of one oil company, Rosneft. If Transneft had to find financing for the project, the entire Russian oil industry would have to pay for it.
The Russian government remained neutral. Deputy Energy Minister Kirill Molodtsov basically said he didn't care who paid for the pipeline, as long as it remained profitable. "Profitability is the top priority. That applies both to Rosneft and Transneft. This is what we are looking at when we consider the investment projects proposed by Transneft and Rosneft."
In August, the two oligarchs tried to use their ultimate trump card, their connections with President Putin. Sechin began by writing an eight page letter accusing Transneft of charging too much to transport oil. "The current system of Transneft's transport tariff system is not transparent and does not suggest reduced tariffs for oil companies, which invest in this region and supply the Far East region with oil products." Tokarev responded with an analysis that Transneft tariff's had not contributed to a rise in gasoline prices.
Transneft then accused Rosneft of signing delivery contracts it could not fulfill. Speaking to a ministerial meeting in September 2013, Transneft vice president Alexei Sapsai warned that Rosneft was in danger of being short at least 3.9 tons for its eastern routes. If a planned Rosneft petrochemical complex (VNHK) comes on line, the shortage would stand at 15.9 million tons. Transneft even decided to withdraw their role in the refinery because of the disagreement on tariffs.
Despite the fireworks, the two sides reached an agreement on October 11, 2013. According to a statement on Rosneft's website, "Rosneft President and Chairman of the Management Board Igor Sechin and Transneft President Nikolai Tokarev have signed a number of agreements in fulfillment of the strategic plans on mutually beneficial terms and based on principles of co-financing to increase oil supplies volumes to China and to the Rosneft's Tuapse refinery in the Krasnodar region. The package of agreements on oil supplies increase to China envisages commitments by the Parties to finance and implement the activities aimed at the capacity expansion of the Skovorodino-Mohe oil pipeline, as well as to increase respectively the volumes of crude shipment in this direction. The pipeline capacity is expected to reach 20 million tons of crude per year beginning on 1 January 2015 and 30 million tons per year beginning 1 January 2018. It means that 15 million tons per year will be supplied to China from 2018 to 2037 in addition to existing volumes."
According to Vedomosti, Transneft will finance the expansion of the pipeline, while Rosneft will pay back the investment through a special long-term tariff to be determined by the Federal Tariff Service. This is a clear victory for Igor Sechin, who had made the same proposal in July. In addition, it appears that Rosneft will only have to pay for a small portion of the ESPO expansion. The Russian Ministry of Energy estimates that the total cost for the development of ESPO will be $1.46 billion (Transneft puts the figure around $2.29 billion), but Rosneft is only financing the Skovorodino-Mohe section, whose cost is an estimated $300 million.
The world's largest oil company has trumped Transneft, a company that is led by Putin's former KGB boss.