Situation in the Industry
Transneft’s strategic objective is to develop and upgrade the national trunk pipeline system in order to satisfy oil and petroleum products pipeline transportation demand on both domestic and foreign markets. The development is based on using state-of-the-art technologies ensuring the high level of reliability, industrial and environmental safety, as well as the optimal level of expenditures both for the Company and for its consumers.
In 2018, oil production in the Russian Federation amounted to 555.8 million tonnes. 257.5 million tonnes were exported, and 291.4 million tonnes were processed.
The share of Transneft’s system in the transportation of Russian oil stood at 83.1% of the total production.
Petroleum Products Transportation
In 2018, a total of 131 million tonnes of light petroleum products (diesel fuel, motor petrol, aviation kerosene) was produced by all oil refineries in the Russian Federation, including 102 million tonnes produced by the refineries connected to the PPTP system. Of these, 39.1 million tonnes went to the PPTP system.
The Company’s share of the petroleum products transportation market grew by 4% in 2018, achieving 30%, which was attributable to the implementation of the Yug and Sever investment projects. At the same time, Transneft’s share in the transportation of light petroleum products to the domestic market consumers stood at less than 13%.
Main Сompetitors of Transneft in Petroleum Products Transportation
Transneft mainly competes with railway transport, as regards the transportation of petroleum products for export and to regional markets in Russia. Around 53% of light petroleum products is currently transported by rail. Such advantages as a greater number of spurs as compared to the system of petroleum products trunk pipelines (PPTP), as well as the widest possible range of transported petroleum products, given the processing specifics at refineries, play an important role. The given advantages are the reasons why railway transport is responsible for transportation of a significant share of light petroleum products (especially motor petrol) on the Russian market.
Water transport also competes with Transneft, as regards long-distance transportation of petroleum products. However, this type of transport can only compete with petroleum products pipelines during a relatively short navigation season lasting 5 to 6 months.
Motor Vehicle Transport
Motor transport appears to be a competitor to pipelines when it comes to short distances and mainly intraregional transportation. Door-to-door petroleum products deliveries from refineries and oil depots to local consumers is its advantage.
Pipeline transport has a number of competitive advantages compared to the above types of transport, such as:
- Short petroleum products delivery terms
- The ability to store petroleum products and create reserves
- High level of protection from adverse weather conditions
Sectoral Forecast until 2024 Forecast of Social and Economic Development of the Russian Federation up to 2024, published by the Ministry of Economic Development of the Russian Federation
Macroeconomic Indicators of the Russian Federation
Taking into account the moderately tight monetary policy of the Bank of Russia aimed at stabilising the inflation and restraining the growth of inflation expectations, a 4.3% inflation is forecasted at the end of 2019, and a 3.8% inflation at the end of 2020. Thereafter, the inflation will remain around the target level of 4%.
At the end of 2019, a 1.3% GDP growth is expected. Taking into account the implementation of national projects and the plan to increase the investment activity, gradual acceleration of the economic growth rate to 2.0% is expected in 2020, and to more than 3.0% per annum starting from 2021.
World Raw Materials Market
By 2024, the global GDP growth rate is expected to decline to 3.2%. This will affect the demand trends for raw materials, in particular, the slowdown in the growth of Chinese economy will have a negative impact on the basic metals and coal markets, where China is the largest consumer, in the medium term.
As for the oil market, supply trends will be playing the key role in pricing in the coming years. US production of shale oil keeps growing, and it should be noted that infrastructural restrictions on its transportation will be removed in 2019. The supply on the world oil market will also go up due to the growth in production in Saudi Arabia, Russia, and other OPEC+ countries as a result of amendments made to the agreement in June 2018.
In this context, a gradual decline in prices for Urals oil from USD 69.6 per barrel in 2018 to USD 63.4 in 2019 and USD 53.5 by 2024 is expected. At the same time, an increase in oil prices is possible in the short term under the influence of reduced supplies from some major oil-producing countries such as Iran and Venezuela.
Oil Production in the Russian Federation
The forecast for the development of the oil industry relies on the assumption of a steady oil production level until 2024. It is expected to grow by 0.2% to achieve 557 million tonnes by 2024. Western Siberia and the Urals-Volga region will remain the key production regions where a stable output will be achieved through new drilling and geological and technical measures at the existing fields. In Eastern Siberia, the development of the Verkhnechonskoye and Talakanskoye fields already brought into production will continue. The increase in oil production in this region will allow to level out the effect of production stabilisation and decline in Western Siberia. Still, the achievement of these oil production levels will depend on the macroeconomic conditions, the removal of external technological and financial sanctions currently applied to Russian oil and gas companies, the efficiency of import substitution and the development of domestic production in related industries.
Due to the gradual upgrade of refineries and an increase in the depth of refining, supply of oil to the domestic market will grow, while the exports will decrease by 1.4% to 253.9 million tonnes by 2024. At the same time, oil export to non-CIS markets is projected to grow and reach 235.5 million tonnes, mainly due to growth of deliveries to Asia and the Pacific. Export to the CIS markets will stand at the current level throughout the entire forecast period.
Starting production at new oilfields on Russian continental shelf is not anticipated during the period considered herein. Changes in the production rates on the shelf will result from growth in the production and achieving the planned production level at the existing fields.
Measures implemented by oil companies to introduce a wide range of technologies designed to achieve a higher oil recovery efficiency (ORE) will allow for minimising the risk of decrease in oil production. With a 1% increase of ORE, oil production in Russia will grow by 20 million tonnes per year.
Production of Petroleum Products in the Russian Federation
The depth of crude oil refining in the Russian Federation grew to 82.7% in 2018, however, it is still lagging behind the world level (89-99%). In 2018, motor petrol production stood at 39.42 million tonnes, diesel fuel production amounted to 78.23 million tonnes, and fuel oil production to 47.98 million tonnes.
The following is expected by the end of 2024:
- Stabilisation of motor petrol production at the level of 49.3 million tonnes
- Growth in diesel fuel production to 90.6 million tonnes
- Stabilisation of aviation kerosene production at the level of 17 million tonnes
- Decrease in the production of fuel oil to 33 million tonnes
Tariff Formation at Companies of Infrastructure Sector Forecast of Social and Economic Development of the Russian Federation up to 2024, published by the Ministry of Economic Development of the Russian Federation
It is planned to maintain the tariff policy restricting the growth of regulated tariffs and prices at infrastructure companies, not allowing them to go beyond the anticipated inflation level, during the forecast period. In order to provide a legislative framework for the approaches and methods of regulation that are being implemented, systemic changes will be made to the basis of state regulation of prices and tariffs to ensure maintenance and strengthening of the principle of balance of economic interests of infrastructure companies and consumers, along with the principle of economic feasibility of tariffs, as the fundamental principles of state regulation of tariffs.
Pipeline Transportation Outlook
Analysis of the key trends contained in the industry forecast allows for the following to be concluded on Transneft’s mid-term position in the field of oil and petroleum products transportation:
- Volumes of oil transported through the oil trunk pipelines system will keep at a level equal to or exceeding the volumes in 2018
- The share on the light petroleum products transportation market will increase
- Transneft’s revenue from the transportation of oil and petroleum products through the trunk pipeline system will stand at a level equal to or exceeding the 2018 values