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By John Helmer, Moscow

Former Federation Council Senator and the Kremlin’s troubleshooter for Africa and maritime piracy, Mikhail Margelov (image left) has been appointed a vice president of Transneft, the state oil pipeline company. The October 29 announcement says Margelov “will be responsible for supervision of foreign economic activity and public relations.” Igor Dyomin, the press spokesman for Transneft’s chief executive, Nikolai Tokarev (right), said there will be no other personnel changes. “Why ? If everyone works efficiently? There is no plan of major reforms after Margelov has come into the company.”

Margelov, who will turn 50 next month, served for almost fourteen years as a senator for the Pskov region; he was also chairman of the chamber’s Foreign Affairs Committee. Before that, he was head of publicity for the opposition Yabloko party, switching ahead of the 1996 presidential election to President Boris Yelstin, for whose re-election campaign he managed advertising. He then ran PR for the Kremlin until he moved to a state news agency. When Vladimir Putin was making his first run for president in 2000, Margelov was in charge of foreign media during the election campaign.

Margelov is one of at least two Russian senators to be refused entry to Canada. In Margelov’s case, the refusal appears to have been related to his early career involvement as an Arabic linguist at the KGB. Vitaly Malkin was the other senator refused by the Canadians. Malkin, who owned a real estate development company in Toronto, was accused by the Canadians of criminal activities, but was allowed to visit the US. Last year, it was reported that Margelov part-owns two apartments in Florida and a share in a California home.

One of Margelov’s subordinates on the Foreign Affairs Committee, deputy chairman Vladimir Dzhabarov, is on the US sanctions list, together with 7 other senators. Margelov is not. He is sanctioned only by Canada.

When Margelov was replaced in July as the United Russia party’s candidate for the Pskov seat, and he announced his resignation, he said: “Do you keep going almost to the end of the life of your course, or can you try something new. I feel the strength to start anew: for new businesses, new directions, and new challenges. About what exactly I intend to do, I will tell in the autumn .”

Margelov’s return to media handling is his old career. But that isn’t what he is doing at Transneft, according to Dyomin.

sechinDyomin took the press job at Transneft when Tokarev succeeded Semyon Vainshtok as chief executive in September 2007. Tokarev (rear) became one of the new decision-makers in Russia’s oil trade in alliance with Igor Sechin (front), then at the Kremlin; Gennady Timchenko, owner of offshore oil trader Gunvor; and Sergei Frank, who had taken over oil shipping at Sovcomflot in October 2004. In time, Tokarev expanded Transneft’s assets to include the takeover of the oil ports, Primorsk on the Gulf of Finland, and Novorossiysk on the Black Sea. Timchenko took railway transportation of oil, and built a new oil port at Ust-Luga. Transneft built a new pipeline to feed his terminal.

In parallel, a rival oil transportation empire was assembled by Ziyavudin Magomedov, who started out as a Vainshtok protégé and then a backer of President Dmitry Medvedev’s re-election campaign. His oil ambitions have been trounced by Sechin and Tokarev, like this. The Transneft partnership with the Magomedov vehicle Summa then collapsed; the oil terminal assets are to be assigned to Transneft while the dry-cargo terminals will go to Magomedov. Since the September 2010 transaction, the infighting has dropped the share price of London-listed Novorossiysk from $3.9 billion to $693.3 million today.

The trajectory of the partially privatized share price of Transneft over the same period has been steadily upward. Its current market capitalization is $15.8 billion, though Uralsib Bank is forecasting a 15% decline and is advising a HOLD.

TRAJECTORY OF TRANSNEFT SHARE PRICE OVER FIVE YEARS

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Source: http://www.bloomberg.com/quote/TRNFP:RM/chart

Tokarev, a former Soviet intelligence officer, had begun to fall out with Timchenko and Sechin before the start of this year’s Ukraine conflict, the start of the US war against Putin, and the collapse of the oil price. Rosneft under Sechin had begun shutting Gunvor out of its oil trades before Timchenko’s exit from Gunvor; and that has led to the sale of the Ust-Luga oil terminal. Timchenko hangs on in the oil railway business, along with a pipeline construction company, through his daughter Ksenia and son-in-law Gleb Frank.

PST

Public infighting between Tokarev and Sechin has also broken out, as the latter tries to oblige the former to play second-fiddle and subsidiary to Rosneft’s interests. According to Moscow press leaks last month, Rosneft is welching on a contractual obligation to fill the expensive new Zapolyarye – Purpe pipeline Transneft is completing in western Siberia. Launch of the first stage of the 488-km pipeline with capacity of 45 million tonnes a year (900,000 barrels per day) had been planned for late this year or early 2015. When construction started in 2012, the cost to Transneft was estimated at $3.8 billion.

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Click for closer look.
Source: http://www.en.transneft.ru/pipelines/

Transneft has acknowledged it is struggling with the direct and indirect pressures which US and European Union sanctions have placed on the company. The direct pressure is from the cutoff of pumping equipment. Dyomin said in September that sanctions were likely to delay Zapolyarye – Purpe for two years. Tokarev said in October the pipeline will be operational in 2016.

It is unclear how Transneft is impacted by the sanctions introduced to date. According to the US Treasury version of September 12 the prohibition covers “goods, services (except for financial services), or technology by U.S. persons or from the United States in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory, and that involve five listed Russian energy companies: Gazprom, Gazprom Neft, Lukoil, Surgutneftegas, and Rosneft… these sanctions do not target or interfere with the current supply of energy from Russia or prevent Russian companies from selling oil and gas to any country.”

Planned to transport oil from onshore fields developed by Rosneft, Gazpromneft, LUKoil and Novatek in the Yamalo-Nenets and Krasnoyarsk regions — amounting to almost 10% of existing Russian crude production — the Zapolyarye-Purpe pipeline doesn’t fall within this scope.

The oil technology sanctions announced by the European Union (EU) appear to be more extensive, but they include a loophole. The EU export restriction covers service contracts for drilling, testing, and well completion, along with the supply of specialized floating vessels. However, there is a grandfather provision to allow continuation of exports for service contracts executed before September 12, 2014.

Transneft only appears on the proscription lists which restrict its international borrowings. The US Treasury has cut the maturity period for new debt issues to 90 days; the EU has virtually imposed a ban bv reducing the term to 30 days.

First Vice President Yury Lisin has announced a plan to form “a joint venture with foreign partners… to build a factory manufacturing equipment in Russia, which can be used both in oil transportation and production.” He claims Transneft’s dependence on imported foreign pumps and other equipment will be cut from 10% at present to 3% by 2010.

yuriy lisinLisin (right) implied that Transneft is negotiating with European partners. He was also asked to clarify the effect of sanctions on the technology required for Zapolyarye-Purpe. His office said he will be absent from headquarters for the next two to three weeks. Lisin, who continued in the company after Vainshtok’s departure, has had other accountability problems.

Moscow newspapers have reported Tokarev as accusing Sechin of “dishonesty”, and of using the sanctions as a smokescreen. “This is an excuse. Because long before the Ukrainian events, we were made aware that the dates will be shifted and the delivered volumes of oil will be less than promised. These talks began in 2013,” Tokarev told Interfax last month. Tokarev didn’t say what he thinks Sechin’s motive is. Others suspect Sechin is trying to delay Zapolyarye-Purpe so as to curtail competition in the market from Lukoil and other producers and refiners intending to use the pipeline.

A press release from Dyomin, issued on October 17, cites Tokarev as confirming the dispute with Sechin, but denying that Transneft is going to take Rosneft to court. “The President of Transneft, JSC, underlined that those actions were causing the Company a serious financial damage. Nikolay Tokarev stated that the Company had every reason to settle the issue by using the existing instruments, including a judicial procedure, and Transneft, JSC, intended to exercise this right. However, the statement regarding the intention and reasons to use the legal framework does not mean the adoption of the final decision on prejudicial actions, filing a suit or using any other instrument the law enforcement practice can offer.”

“In their publications, Russian mass media, for example, the Vedomosti newspaper, and a number of new[s] agencies interpreted the words of the Company’s President as the fact of adoption of the final decision of Transneft, JSC, regarding the filing of a suit against Rosneft Oil Company, OJSC. Transneft, JSC, deems the wording in the above mentioned publications as inappropriate and points out that the statement regarding application of the framework in the existing situation does not mean that the right to start court proceedings will be exercised.”

Margelov, who is bound to improve on Dyomin’s English, was asked to clarify what he will be doing in his new post. He has not replied.

A source close to Transneft and Surgutneftegaz said Margelov’s appointment is “his reward for his multi-year contribution to the state. I cannot imagine how he will be lobbying the interests of Transneft beyond Russia’s borders because they do not simply exist.” Another source suspects Margelov will work the back-channels with the US and the EU governments.

Transneft’s financial reports identify several foreign countries which may become Margelov’s new beat. The company and its subsidiaries, says the 2013 report, “operate the oil pipeline system in the Russian Federation totalling 53,606 km at 31 December 2013 and the oil products pipeline system in the Russian Federation and in the Republics of Belarus and Ukraine totalling 19,146 km as at 31 December 2013. Its associate OOO LatRosTrans operates an interconnected system in the Latvian Republic.”

Note 19 of the report refers to Belarus, Ukraine and Kazakhstan as export or foreign trade partners. The Druzhba (“Friendship”) pipeline, a Soviet-era pipeline delivering crude oil westwards to Germany, Poland, the Czech Republic and Slovakia, is also mentioned. As Transneft’s financial interest has grown in Primorsk and Ust-Luga ports, it has cut the Druzhba exports. Druzhba doesn’t rate a mention in the 2013 report.

Note 27 identifies Transneft’s export of oil to China, which goes overland by pipeline. This is a separate item of revenue amounting to Rb153 billion ($4.8 billion), or 21% of sales. By contrast, trade with “other countries” amounted to just Rb29.6 billion ($925 million) or 4%. Explaining the numbers, the report says that “revenue from external customers in other countries mainly includes revenue from services provided to customers in Kazakhstan, Belarus and Ukraine.”

In Transneft’s latest report for the first half of this year, prepared at the start of September, the company says its export volumes are falling. To the three former Soviet countries, the tonnage dropped 24.8% to 10.3 million tonnes. Exports to the rest of the world totalled 98 million tonnes, shrinking by 3.4%. Shipments to the domestic refining market were up almost 6%. Overall, Transneft’s sales this year are up 2.3% to Rb378 billion; earnings are flat at Rb177.7 billion; and profit is up 2.9% to Rb92 billion.

Margelov was asked to say what plans for Transneft’s foreign sales strategy he is contemplating. He declines to answer.

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