Putin’s Goal of Benchmark Urals Seen in Rotterdam Tanks: Freight

29 december 2011
By Jake Rudnitsky, Bloomberg

Prime Minister Vladimir Putin has been calling for Russia, the world’s largest oil producer, to narrow the price gap between its Urals export crude and the Brent benchmark since 2005. A $1 billion terminal in Rotterdam may help achieve that goal.

Summa Group, a shareholder in Russia’s biggest oil-export terminals, in Novorossiysk and Primorsk, is investing in a 3 million-cubic-meter facility. It will expand liquids capacity at Europe’s largest port by about 10 percent, said Summa First Vice President Alexander Vinokurov. Vitol Group, the world’s biggest independent oil trader, is a partner in the project.

The Rotterdam terminal will create a European trading hub for Urals crude, providing deliveries directly to the port and contributing supply stability. Vinokurov said that will be a key step for Urals in becoming an international benchmark, at a time when the world’s most prominent benchmark, Dated Brent, faces declining output and supply disruptions.

“The physical market for Brent is narrowing and risks are becoming too volatile,” Mikhail Temnichenko, a vice president for the St. Petersburg International Mercantile Exchange, said Dec. 26. “Urals is the most obvious alternative benchmark, offering large, stable volumes from a variety of market participants.”

The Rotterdam terminal is evidence that competition is “heating up” as crude oil benchmarks evolve, Platts, the energy-pricing division of New York-based McGraw Hill Cos., said in a November presentation. On Jan. 6 Platts will broaden the base for Brent pricing by extending the length of time over which cargoes are measured.

Joint Ownership

The terminal could help develop a futures market for Urals, which is necessary to become a benchmark, said Olivier Jakob, managing director at Petromatrix GmbH, a Zug, Switzerland-based oil-market researcher.

“It makes sense to create a hub in Rotterdam for Russian crude,” Jakob said by telephone yesterday. “We need to see who has access to the barrels. If it’s like Cushing with lots of participants, a market could develop in time,” he said, referring to the delivery point for New York Mercantile Exchange oil futures in Oklahoma.

The hub may also help ensure export volumes from the Primorsk terminal, owned by Novorossiysk Commercial Sea Port, as Russian oil pipeline operator OAO Transneft works to open a new facility on the Baltic Sea, said Denis Vorchik, an analyst at UralSib Financial Corp. in Moscow. Transneft and Summa jointly own 50.1 percent of Novorossiysk, which rose 0.4 percent to 3 rubles at yesterday’s close, the highest level in a week.

Ahead of Schedule?

“There are not many opportunities to enter the European market and given Russia is a major crude exporter to that market, it makes sense,” Mikhail Ganelin, an analyst at Troika Dialog in Moscow, said Dec. 26.

Under an “ambitious” schedule, the terminal may be commissioned by 2013 or 2014, earlier than the initially planned 2015 deadline, Vinokurov said in a Dec. 16 interview.

Russia is the biggest supplier of oil to the European Union. Urals, a blend of crudes from the Volga region and western Siberia, accounts for about 80 percent of Russia’s 5.6 million barrels a day of exports

Output of the crudes used to price Dated Brent, the benchmark for more than half of the world’s oil including Urals, has fallen from 1.5 million barrels a day in December 2007 to
1.1 million barrels this month, according to a Bloomberg assessment of loading schedules.

Longer Period

Platts is considering lengthening the cargo-measuring period even further in 2015 or 2016 and may include more grades of crude into its Brent assessment, according to a Sept. 16 statement. The assessment is based on a blend of several types of crude pumped in the North Sea, including Brent, Forties, Oseberg and Ekofisk.

The Brent benchmark has required regular adjustments since production went into decline in the 1990s. Forties and Oseberg crude were added to the benchmark in 2002 and Ekofisk in 2007.

Urals in northwest Europe has had an average discount to Brent of $1.79 over the past two decades. Putin called the gap “very unfair” in an address when he was president in 2005. In response, the government introduced a national oil exchange and brand, calling it Russian export-blend crude oil, or Rebco.

The Russian crude traded at a 40-cent premium to Brent, its biggest ever, on Dec. 1 to Dec. 6 as the EU weighed tougher sanctions against Iran. On Dec. 28, it was trading at a 20-cent discount.

Summa expects the Rotterdam facility to add stability to Urals supplies by creating accessible volumes outside Russia.

This may help create a market for the Urals forward market and futures contracts, Temnichenko said by phone in Moscow.

More Visible

“Urals will be more visible to traders and this could contribute to it becoming a price indicator,” Temnichenko said.

Futures contracts for Urals have been sold on the Nymex, the world’s largest energy futures marketplace, since October 2006 under Rebco name. Allan Schoenberg, a spokesman for Nymex parent CME Group Inc., said no Rebco contracts have traded in the past two years.

Transneft and state-controlled gas export monopoly OAO Gazprom have cut energy deliveries to neighboring transit countries during supply and transportation pricing disputes, disrupting shipments to Europe.

Gazprom has twice in the past six years cut gas deliveries to Ukraine on New Year’s Day. Transneft halted oil deliveries to Belarus for almost a month on Jan. 1, rerouting about 650,000 metric tons.

Transneft built the Baltic Pipeline System-2 oil link to the Gulf of Finland as Russia expands transportation capacity away from transit countries.

Engineering Issues

“This Rotterdam terminal could ensure volumes from Primorsk” in the face of competition from the new Ust-Luga crude terminal, UralSib’s Vorchik said by phone Dec. 26. Ust- Luga has been delayed for as much as three months from its expected Dec. 1 start because of engineering difficulties, Transneft said in last month.

Ust-Luga is being built by Vitol’s competitor, Gunvor Group Ltd., at the end of Transneft’s Baltic Pipeline System-2 oil link. The pipeline has a capacity of 38 million metric tons a year, or 451,000 barrels a day, while Primorsk handles about 70 million metric tons of crude a year.

Buyers will be able to purchase Urals to be loaded in Rotterdam using a “floating pipeline” that relies on icebreaking shuttle tankers shipping crude from Primorsk on the Baltic Sea, Vinokurov said.

Urals in Rotterdam could become a benchmark with the development of forward and futures markets, Summa said in an Oct. 20 presentation.

“A case could be made for it to be a benchmark if there was a stable supply in the heart of Europe,” Vinokurov said. “We have an aggressive schedule.”