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THE GREAT EXAGGERATOR – CAN ZIYAVUDIN MAGOMEDOV DELIVER THE CRUDE OIL HE HAS PROMISED FOR HIS NEW ROTTERDAM PORT TERMINAL? IF HE CAN’T, WILL PRIME MINISTER MEDVEDEV ORDER IT?

By John Helmer, Moscow

You don’t have to be a commercial rival of Ziyavudin Magomedov to notice that the billion-dollar business ventures he promises to deliver often fail to materialize. There was his claim [1], for example, that with his control stake of the United Grain Company (OZK is the Russian acronym), he intended to bid for control of an Australian grain company GrainCorp. There was the promise of coal and grain terminals on Russia’s fareastern coast. Then there was the fleet of tankers to carry oil between Russia’s northern ports and Rotterdam, powered [2] by the latest liquefied natural gas technology. Not one of those claims has materialized.

What then of Magomedov’s promise to the Rotterdam port authority, reported by Dutch sources, that if he was granted permission to build a new oil terminal, he would fill it with an extra 30,000 tonnes per year (600,000 barrels per day)? The port authority has done what it said it would do – Magomedov has his terminal permit and a deadline of two years in which to start stocking and transhipping oil. But can he deliver? Where will the extra Russian crude supplies come from, especially since the Russian oil majors, like Rosneft, LUKoil, Surgutneftegaz, Gazpromneft, and Bashneft, have their own Rotterdam plans, and no interest in sharing their profit with Magomedov? A leading European oil shipment expert says: “In my understanding, Mr Magomedov is a bubble blower.”

There are recent signs that Magomedov’s promises for Rotterdam are evaporating. One was an inspection and violation notice late last year from Russia’s environmental regulator, Rosprirodnadzor (RPN), charging that vapour emission control and air quality equipment were lacking at the Primorsk oil terminal, in which Magomedov’s Summa Group holds a 25% stake, and is looking to control. The RPN action, which Summa is now contesting in a St. Petersburg court, will count against Magomedov in Rotterdam over the coming weeks, because the Dutch authorities will review the new port terminal plan’s environmental compliance before they will allow construction to start.

The second sign is the sudden loss of cargoes this month for Magomedov’s oil trading unit, Souz Petrolium (the Geneva company register confirms this spelling of the name). The third is the elimination of Magomedov’s bid to buy the state’s 20% shareholding and thereby the control stake in Primorsk, and its sister port Novorossiysk, in the Novorossiysk Commercial Seaport Company (NCSC is the English acronym, NMTP the Russian). Scratch volumes of oil to trade, and scratch a port from which to ship them to Rotterdam, and you don’t have a runner.

There is also a fourth sign: not a single executive of Magomedov’s holding, Moscow-based Summa Group, will answer questions about what has been happening.

The new terminal in Rotterdam is called Tank Terminal Europoort West (TEW), and it is to sit on an area of 55 hectares. The berths will be long enough, and the water underneath deep enough, to allow loading and unloading of supertankers. In 2010 Magomedov won his Rotterdam bid with a joint venture company called Shtandart TT B.V. Summa’s website claims [3] that Magomedov controls 75% of this company, and 25% is held by VTTI, a combination of Vitol, the powerful international oil trader already operating independently of Magomedov in Russia; along with a Malaysian partner, MISC Berhad.

The terminal plan calls for storage capacity of 3 million cubic metres of crude oil; that represents about 19 million barrels. Estimates of how much the terminal will cost to build range between $300 million and $350 million. But there are also estimates [4] from both Summa and Vitol which run the total investment up to a billion dollars. It is likely that Magomedov, who has been borrowing heavily for last year’s share purchases at the United Grain Company and also for his takeover of Far Eastern Shipping Company (Fesco), lacks reserve borrowing capacity to finance his full three-quarter stake in the Rotterdam project; that would be between $260 million and $750 million.

Summa does not issue financial reports, and so its revenues, earnings, and leverage are unknown. Magomedov has claimed [5] Summa’s annual revenues amount to $10 billion but the assets listed on the Summa website produce a fraction of that. The group was obliged [6] to pay Rb5.95 billion ($192 million) for United Grain, and between $1 billion and $1.4 billion for Fesco. To spend at Rotterdam, its creditworthiness outside the state banking system of Russia is already limited. So Vitol may be financing the terminal, and taking in turn full control of its oil volumes. If Magomedov turns out to lack the wherewithal to deliver the oil he has promised, he may forfeit his equity in TEW to Vitol. Vitol isn’t saying, but it may be wagering it can operate the new terminal with, or without, Magomedov.

But without Vitol, TEW Rotterdam, and Primorsk, Magomedov isn’t really in the oil business.

Summa has reported that the new terminal will take Urals type crude oil loaded at Primorsk. But an Interfax poll [7] of Russian oil companies and their traders has already reported industry-wide scepticism that the oil producers will want to consign their shipments to Magomedov. Gazpromneft declared explicitly: “We do not have anything to do with this project… We carry out shipments from Primorsk. But not many tankers go to Rotterdam. We make direct shipments to Finland, Sweden, and Germany. What is the point of going to Rotterdam to make trans-shipments there? The terminal will only be required by companies that supply the Asia-Pacific region countries and the United States, which Gazprom Neft does not supply to.”

LUKoil ships several varieties of its crude — Arctic light, supplied from its Varandey terminal, Urals from Primorsk, and heavy oil from the Yareg field – but it trades them through its own Geneva-based trader, Litasco, and plans to open its own blending centre in Rotterdam for direct deliveries to refineries in Europe.

Bashneft and control shareholder Vladimir Yevtushenkov have begun reorienting their oil export strategy, and will deliver to the Argos Group in Rotterdam, now owned by Yevtushenkov’s Sistema holding [8]. If as some industry sources claim, another Bashneft export outlet, Star Oil, an Emirati-based trader, is also connected to Magomedov, and is also being cut out of the new Bashneft sale and shipping scheme, the loss of oil volumes and revenues may be difficult to replace [9].

Russneft is another of Russia’s mid-size independent oil producers, but its crude is entirely committed for sale by its creditor, Glencore [10].

That leaves the super-major Rosneft, run by Igor Sechin, and Surgutneftegaz, both of which have been tendering their export cargoes to international traders, and dividing the westward-bound shipments between Primorsk and Ust-Luga. At Ust-Luga, the oil terminal is controlled by Gunvor, owned by Gennady Timchenko. There is direct competition between the two ports and thus between Timchenko and Magomedov, as well as between Gunvor and Vitol.

Before Sechin moved to Rosneft and was still the deputy prime minister in charge of the energy sector in the Putin prime ministry, he had taken sides against Magomedov’s attempt to buy the state’s 20% stake in Novorossiysk Commercial Seaport Company, and take effective control with at least 45% of the shareholding. At the time Sechin proposed instead that the stake should be sold to Rosneft. He recommended skipping a privatization auction or tender altogether, and use a simple administrative measure – a Kremlin decree [11] placing the the stake out of Magomedov’s reach.

Magomedov was able to rally his two Russian government allies, Dmitry Medvedev and Arkady Dvorkovich. They were marginally more powerful in February 2012, when Sechin made his move, and they were able to block the placement of the port company shares in the hands of the anti-Magomedov alliance of Rosneft, pipeline company Transneft (25%), and Russian Railways (5%). But now that Medvedev and Dvorkovich are no more than prime minister and deputy prime minister, they appear unable to muster the power required to block Vladimir Kogan from acquiring the state shareholding, again by administrative measure.

After serving as a St. Petersburg banker and friend to Putin, and for several years one of his senior ministerial appointees, Kogan is now the controlling shareholder of Neftegazindustriya (NGI); its principal business is the Afipskaya oil refinery in the Krasnodar region of southwest Russia, two hours inland from Novorossiysk port. The refinery, bought by Kogan in 2010 from Oleg Deripaska’s EN+ group, has current capacity to turn out 5.2 million tonnes of petroleum products per annum, most of which are sold in the local region. It is planning to expand output and commence exports through a new 11 million tonne per annum oil export terminal to be built at Novorossiysk, on an extension of the port zone.

Kogan’s candidacy to take the state’s 20% stake in the Novorossiysk port company has been widely reported in Moscow this month. “We need a single investor who could balance the already existing strong position of the NCSC shareholders”, a government official involved in the privatization decision is quoted as telling Vedomosti, a Moscow business newspaper. For the time being, the privatization agency at the federal ministry of economic development, will not say when or if the share transaction will be decided. The other stakeholders, as well as Kogan and Magomedov, are treating the deal with such sensitivity, they will not respond to requests for clarification.

If Magomedov’s rivals and competitors are relying on Putin for administrative measures to block his expansion into the oil business, and this threatens a shortfall in the oil supplies to fill TEW in Rotterdam, Magomedov’s counter is bound to be an administrative measure decreed by Medvedev and Dvorkovich, ordering crude oil into Primorsk through Magomedov’s trader, Souz Petrolium. But there’s the rub.

Early this month Reuters reported [12] that Souz had lost its regular January consignments of Urals crude for shipment through the Druzhba overland pipeline to eastern European buyers. Other trade sources have also reported that Souz has lost tanker-borne cargoes to Vitol. Contracts between Souz and the Polish refiner PKN Orlen are reportedly not being renewed.

Another Moscow oil trade source, requesting anonymity for his comments, claims this month’s trouble for Souz does not necessarily mean that Magomedov is running out of the oil needed to fill the Rotterdam terminal. “They said they will build such infrastructure with such capacities. But this doesn’t oblige someone for something. They always can find oil on the market, if necessary.” Vitol has the market reach outside Russia – does Magomedov have market reach inside Russia?

Magomedov’s pitch for administrative measures to save the TEW project has included the reminder to Putin that when president in 2005 he said he wanted to improve market acceptance of the Urals blend as an international benchmark for trading crude, and cut the discount in oil contracting between the Urals marker and the Brent marker. Putin had said the discount was “very unfair”.

Magomedov and his Summa associates have been claiming that building a large storage of Urals crude at their new terminal in Rotterdam will allow them to deliver what Putin wants, and not only what Medvedev and Dvorkovich would like. “A case could be made for it to be a benchmark,” Summa’s chief executive, Alexander Vinokurov said last October, adding the conditional: “if there was a stable supply in the heart of Europe.”

But Vinokurov and his deputy for strategy, James Simmons, won’t respond to requests for clarification of where their supply will come from, and how stable it can be if Souz and Star Oil can lose their allocations without warning. Also, Vinokurov failed to mention the Rotterdam project at all is his summary of Summa’s strategic priorities last June [13].