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By John Helmer, Moscow

As a presidential assistant and a first deputy prime minister for many years, Igor Sechin grew accustomed to the illusion to which high officials in all states are prone – that the fault in efficient administration lies in the weakness of command-and-control systems, sociologically speaking. Or to speak psychologically of humankind, the reluctance of subordinates to do what they are told. As a government official Sechin tried to compensate for these sociological and psychological faults with the Russian combination of force and fear known as “administrative measures”. He’s also tried the old standby, money.

Now that he’s in charge of Rosneft, the publicly listed oil and gas company, Sechin is simultaneously accountable to the market and in the number-2 spot in Russian administration where only one accountability counts. Between the two, between the differently coloured telephones the chief executive can pick up on his desk, the rules aren’t quite the same. Indeed, paradoxical as this may seem to him, Sechin’s rules can be against the law. For a candidate to become the prime minister or more in Russia one day, such little paradoxes can have large and instructive consequences. Take, for example, the Rosneft business of putting fuel into ships’ tanks to drive their engines.

Called bunker fuel or just plain bunkers, from the time when ships were powered by coal, Russia produces about 10 million tonnes per annum; the Rosneft website is out of date on this point by two years. Bunkerworld, an independent industry publication, has reported that in 2011 Rosneft’s bunker sales were worth $1.3 billion. About half or more was earned by exports through Tuapse, on the Black Sea, and much of this was sold to BP. If Rosneft’s bunker sales value increased by the same 12% proportion as volume, the 2012 revenues from bunker sales came to about $1.6 billion. There is a one-line reference to bunker sales to end-users in this Rosneft report, indicating that relatively small in value though they are, bunker sales are fast-growing – up 60.9% between 2010 and 2011 (before Sechin took over), and up 35.1% between 2011 and 2012 (page 17). Price growth for Rosneft’s bunkers has been running at 16% per annum since the start of 2010; last year’s average price was Rb17,900 per tonne ($576).

Rosneft’s disclosures, press releases and required auditor’s notes and accounting barely mention bunkers. Comparing the 2012 figure for bunker sales (Rb50 billion) to Rosneft’s reported total sales revenues for the year (Rb3,028 billion), the bunker line of business is minuscule – it should be attracting just 1.6% of Sechin’s attention. According to a letter he wrote last month to Prime Minister Dmitry Medvedev, he wants more.

Altogether, the Russian bunker market is worth between $6 billion and $7 billion, according to independent Russian experts; they caution that figures are difficult to come by because the customs paperwork isn’t reliable. Rosneft produced 2.8 million tonnes in 2012, the company says, for a 23% market share Russia wide. At Russia’s fareastern ports, on the Sea of Japan, Rosneft’s market share, through subsidiary RN Bunker, is about 30%. Together with LUKoil and Gazprom Neft, the oil majors supply and trade about 70% of the market. At St. Petersburg port, Gazprom Neft has a 23% market share; LUKoil, 21%. At Novorossiysk port, on the Black Sea, the bunker business is dominated by the state pipeline company, Transneft. Baltic Oil Company is a significant independent bunkerer in the northwest; in the fareast, Transbunker.

The remaining 30% of the bunkers in the market come from up to 100 smaller fuel companies. Sechin’s idea, as he explained in a recent letter to Prime Minister Medvedev, is that the minnows are getting in the way of the big fish, and are a cause of fuel impurities, product fraud, tax evasion, and black smoke out the funnels of ships sailing within range of tender Russian lungs on the inland waters, harbours and high seas.

sechin_medvedevSechin’s letter, dated September 23, claims the independent bunker dealers and traders are buying their fuel from mini-refineries, “so-called samovars, producing products of dubious quality”. Sechin alleges that these bunkers are undercutting Rosneft, offering “dumping prices” and using “grey schemes”. Sechin also claims the federal government’s budget has been deprived of tax revenue.

Sechin’s spokesman, Oksana Gavshina, says Rosneft “could not comment on business correspondence”. Other sources confirm the authenticity of the letter.

Medvedev has reportedly referred the letter for study by the federal Ministry of Transportation and by the Russian Customs Service.

The customs agency is already under fire from the independent bunkerers for introducing administrative measures suspected of originating with Sechin. Starting with a teletype to ports and shippers on August 22, customs officials have ordered restrictions or outright bans on bunker deliveries to vessels calling at Ust-Luga, Novorossiysk, Tuapse and other ports unless the deliveries are made, not through bunker tankers operated by the independents, but through terminals controlled by Rosneft or by its allies; these include Gennady Timchenko’s Rosneftbunker terminal at Ust-Luga port.

Representing the independents, the Russian Association of Marine and River Bunker Suppliers (Rosmorrechbunker) has challenged the customs action as illegal. The association has asked for an investigation by the Prosecutor-General, by the Federal Antimonopoly Service (FAS), and by the courts. For more details, see the association’s website.

Tanker fleet operators have said the restrictions are also jacking up the price of fuel for their vessels; they are warning they will withdraw from the Russian ports altogether unless the restrictions are lifted.

“We believe that as a result of [the August 22 customs order] competition in this area will be severely limited , and in some ports , where, for example , there is only one specialized oil terminal , such competition will be eliminated altogether,” the bunker association said in its letter to FAS last month.

Last week the association filed its legal challenge to Customs in the Moscow Arbitrazh Court. The filing charges that “Customs are in clear contradiction to the provisions of the Convention on Facilitation of International Maritime Traffic , the International Convention ‘On the Simplification and Harmonization of Customs Procedures’, the Customs Code of the Customs Union and other legal provisions of the current customs legislation.”

Rosneft’s Gavshina confirms that “bunkering business is one of the priorities of the company and covers all major sea and river ports bunkering in Russia”. She denies there is a plan to squeeze out the independents. Gazprom Neft declined to comment on the squeeze-out proposal.

According to a LUKoil spokesman, “it is possible that there are gray schemes, there may be a sale of poor-quality, substandard fuel which does not fall under the technical regulations. On the other hand, I read a review today by the Association of Marine and River Bunker Suppliers. Indeed, they are also right [to oppose monopolization]. That is, we have a divided opinion. On the one hand, we know that we must contend with certain [product] liabilities. On the other hand, we do not quite understand the legal status of [Sechin’s] proposal. Is it intended here, for example, to concentrate [bunkering] in the hands of three or four players? What about the rest? On what basis is it possible to cancel or terminate the activities of other companies? If there will be evidence of their culpability in criminal activity, that’s one thing. But then the court decides this or arbitration. And it is not clear by what methods bunkering activities will be concentrated in the hands of large companies.”

Olga Bogacheva for the Association of Marine and River Bunker Suppliers, said the parameters of fuel quality are carefully checked for marine fuels, and that most of the fuel the independents supply to vessels at Russian ports comes from commodity exchange purchases originating from the oil refineries of majors like Rosneft. She said the mini-refineries, about which she acknowledges there may be quality concerns, account for “no more than 2%” of Russian bunker volumes.

She explained that the bunker fuels traded by her members “has more than 29 parameters that must be checked before use in ship propulsion systems (SPS). There are different types of SPS, which operate on different types of fuel. There are seven types of bunker fuel in total, plus four types of bunker fuel for use in sulfur emission control areas. Holding on shore or in bunkering ships all eleven types of fuel is very costly, and often impossible. In global practice, the final preparation of the fuel [ahead of delivery to vessels] takes place either at shore petroleum storage terminals, or on bunkering ships.”

Nadezhda Malysheva of PortNews says that Sechin’s proposal is likely to run afoul of the FAS’s competition regulations. “The [Sechin proposal] is not likely to be supported in terms of antitrust law. Plus, the argument which has been put forward of poor-quality fuel is not very true. Companies buy fuel on the stock exchange, and on the exchange the same vertically integrated oil companies sell fuel, so in principle they are the suppliers for the other companies.” She noted that the oil majors have their own preferred pricing, and exchange trading can be less profitable.

At the anti-trust agency, the head of FAS’s department for transport and communication Dmitry Rutenberg said his agency “is conducting a preliminary investigation of the bunker market.” What he said he is after, however, isn’t quite what the bunkerers insist is the new restriciveness of the Customs order. According to Rutenberg, “if signs will be shown of violation of the antimonopoly law, the FAS will also conduct additional checks and analysis of the market.”

NOTE: For readers too young or too unfamiliar with American capitalism to recognize, the slogan “Put a Tiger in your Tank” was coined by a Chicago advertising executive named Sandy Sulcer in 1959. It was based on psychological research commissioned by oil company Esso, now ExxonMobil, which at the time traded petroleum products under the name Humble. The research showed that drivers wanted power and play in their cars, so Sulcer conceived the idea of a tiger in the petrol tank to capitalize. The advertising tiger became so well-known more than one advertising man has claimed the credit for inventing it. In 1996 there was a lawsuit by the breakfast cereal company Kellogg against Exxon for allegedly infringing its Tony the Tiger trademark. That tiger has been used to put cereal in the tanks of little children. The case went to the US Supreme Court before it was settled.

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