I. Artemyev Now the Economy of Oil Product Supplies is Moving in Normal Course

Head of the Federal Antimonopoly Service of Russia

The restrictions imposed by the coronavirus pandemic have strongly hit the fuel market. In the spring of 2020, oil prices had dropped to $ 10–15 per barrel, and the population’s transport activity dropped to its lowest levels. The companies were forced to shut down the oil refineries for unscheduled repairs in order to prevent their complete closure. Nevertheless, fuel prices at the Russian filling stations remained at pre-crisis high values. How the Russian fuel market survived the pandemic, how badly the independent filling stations suffered, what actions were taken by the government to support the industry, what is the situation in the Far East and how the process of recovering the demand for oil products is going on, — told the head of the Federal Antimonopoly Service Igor Artemyev in an interview with the magazine “Energy Policy”.

How did the fuel market survive the coronavirus epidemic, due to which the demand for fuel fell sharply in March-May, and also began to grow sharply in June-August? Were there any problems with lack of fuel, when the refineries did not have time to deliver the required volumes on time?

– In fact, the epidemic of coronavirus infection and measures aimed at limiting its spread (including the introduction of self-isolation regime) have led to an imbalance in the supply and demand of motor fuel on the market. Sharp price fluctuations occurred in the wholesale and small-scale wholesale segment.

To support the oil industry and ensure the country’s energy security, the Russian government has implemented a number of measures. This included temporary reduction in the regulatory amounts for exchange sales of motor fuel, a temporary ban on import, which made it possible to stabilize the situation to a certain extent.

FAS is working on the new National Plan for the Development of Competition for 2021–2025.
It provides for development of the futures market and the financial derivatives market

In order to prevent overstocking of the tanks and a complete suspension in the production of petroleum products, the oil companies were forced to reduce the production, including by carrying out preventive, unscheduled works at the factories.  After the abolition of the self-isolation regime, demand immediately recovered to 90 % of the pre-pandemic level.  In these conditions, the supply of fuel in a short period of time did not keep up with the demand. As a result, the prices began to rise in May 2020, which slowed down in June 2020, when there was a surplus balance in the production and sale of fuel in the domestic market.

Currently, the economy of supplying oil products to the domestic market and exporting have leveled off.

– How did the disparity between retail and wholesale prices for fuel in the domestic market as a whole in Russia develop in the last months of summer? Did anyone manage to solve this problem?

– Against the background of strong price volatility in the wholesale and small-scale wholesale segment caused by the coronavirus epidemic, the retail price fluctuated within inflation, without any price jumps. Due to such multidirectional dynamics in all segments of the oil product market, the disparity between retail and wholesale prices has formed in the short term. In order to stabilize the situation, on a daily basis, based on data received from various sources, including from our territorial offices, within the framework of meetings of the Exchange Committee under the FAS, the Headquarters under the Ministry of Energy, we developed the recommendations and made decisions on increasing the supply of oil products at the proper level. And this work has brought its positive results.

– How did the vertically integrated oil companies and independent gas stations go through this period? Were there any complaints about the work of large oil and gas companies, which were balancing between the drop in oil demand, closure of refineries for repairs, the social function of fuel supply and the need to maintain economically efficient operation, the profitability of fuel supplies for export, etc.?

– Of course, this period affected all market participants. We constantly monitor the current situation on the oil products market, interact with federal executive authorities and conduct a dialogue with large companies, stock exchanges, expert organizations and independent participants in the oil products market. The necessary decisions, as I already said, were taken as quickly as possible to keep the situation in the controlled area. And I think we succeeded. The measures taken made it possible to stabilize fuel prices in the wholesale segment. As a result, the growth of retail prices also restrained.

– How difficult was the situation for independent gasoline filling stations? Were the RTS complaints reasonable? How many independent chains have left the market? How did this affect the fuel supply to the regions where vertically integrated oil companies are not present? Were the measures proposed by the Federal Antimonopoly Service and the Ministry of Energy sufficient for this segment (increase in sales on the stock exchange, proposals for sales standards for non-dominants, import ban)? How will the independent gasoline filling stations market develop in the future?

In March and April, the transport activity reduced to minimum
Source: hansenn / Depositphotos.com

– For the independent gas station chains, 2020 was a test for strength and professionalism.  In 2019 and during the period of the sharp decline in wholesale prices, the marginal profitability of gas filling station chains was at a fairly premium level, which allowed the independent market participants to accumulate a margin of safety, including filling all tank farms and oil storage facilities with fuel purchased at prices that are comfortable for the market. During the period of sharp increase in wholesale prices, this “safety cushion” had worked well and allowed them to make up for the corresponding losses.

We have been discussing the need to increase sale rates for oil product exchange for long time now. Now we have come to the common opinion with our colleagues from the Ministry of Energy about their progressive increase, but with the obligatory extension to all market participants and the introduction of clear criteria for regularity and uniformity. All of this is intended to ensure a sufficient supply of fuel on the exchange, smooth out price fluctuations in the auctions, restrain the price growth, and prevent a rush of demand in the oil products market. I should note that there are no prerequisites for a fuel shortage in the country.

Currently, the FAS is working to create the new National Plan for the Development of Competition in the Russian Federation for 2021–2025. It provides for measures aimed at developing the futures market and the financial derivatives market.  This tool allows you to buy fuel not only for the coming month, but also in advance, say, 2–3 months or six months in advance. Thus, to hedge the risks and reduce losses from fluctuations in prices for oil products.

– The crisis on the market in the spring and summer again exacerbated the problem of supplying fuel to the Russian Far East. What is the reason for such high prices in the entire region (not only, for example, in Kamchatka, but also in the Khabarovsk Territory, where there is an oil refinery)?  How necessary is a new refinery, for example, Eastern Petroleum Company, in this region and will it help to solve the problem of overprices?  Why didn’t the Far East damper regime begin to work?

– The Far Eastern market of petroleum products has certain features in comparison with other federal districts.

The main large-scale wholesale supplies of petroleum products to the territory of the Far Eastern Federal District are carried out from four oil refineries. Two refineries are located directly in the FEFD. These are the Komsomolsk Oil Refinery owned by Rosneft, and the Khabarovsk Oil Refinery owned by NNK.  There are two more refineries in other regions — Angarsk and Achinsk — the both also owned by Rosneft.

The capacities of two refineries located in the FEFD do not allow providing the district’s domestic market with sufficient volumes of oil products. The cost of missing
volumes of oil products supplied by railway from the Siberian refineries also includes additional transportation costs.

The oil  companies according to rough estimates, oil companies replenished
the budget for July 2020 by about 44 billion RUB.  For August 2020, it is planned to receive in the budget about 29.7  billion RUB

According to our constant monitoring of prices for oil products, historically the Far Eastern Federal District is the price leader in all segments of the oil products market among the other federal districts of Russia. The formation of prices in the small-scale wholesale segment of the Far Eastern market of oil products is also influenced by the presence of excessive intermediary structures in the systems for the sale of oil products and underdeveloped competition.

The additional transport costs for the supply of oil products directly to the regions of the Far East, and the lack of capacities (oil depots, storage warehouses) for oil products in order to create a reserve in case of stopping the nearest refineries for modernization or scheduled/unscheduled repairs, make their contribution.  The formation of market prices in the small-scale wholesale and retail market segments and the development of competition in the Far East are negatively affected by the insufficient supply of motor fuel at exchange auctions. These problems, unfortunately, are typical for all the regions of the Far Eastern Federal District.

Of course, the presence of one more refinery in the Far Eastern Federal District will have a significant positive impact on the balance of supply and demand, and, accordingly, on prices. The construction of the Eastern Petroleum Company was proposed by Rosneft. However, according to the information we have,

Rosneft refused to implement this investment project due to a change in the tax maneuver.  In order to increase the efficiency of fuel supplies to the Far East, as well as in order to reduce the prices for petroleum products in proportion to the amount of the subsidy provided at the rate of 4000 RUB per ton, the Ministry of Energy, together with us, developed the draft government decree “On approving the rules for granting subsidies from the federal budget to Russian Railways” The essence of the decree is to compensate for the lost income arising from preferential tariffs for transportation of fuel on the domestic Russian railways, intended for sale in the Far East. Now this document is undergoing interdepartmental agreement.

Also, the FAS, together with the Ministry of Energy, are working out the amendments aimed at increasing the standards for sales of oil products on the exchange, clarifying the criteria for the regularity and uniformity of such sales, and also extending this to all participants in the oil products market (of course, including companies that do not occupy the dominant position).

Aviation kerosene is mainly transported by railway
Source:  Alex-VN / Depositphotos.com

– To what extent, from the point of view of the FAS, were the claims of car owners about high prices for gasoline reasonable in the face of the drop of oil prices? If we take oil prices at this moment, they fell to $ 40–45, while gasoline prices rose to 44 RUB per liter of AI-92 and to 47–48 RUB per liter of AI-95. Is there any sign of collusion between the major oil companies?

– Currently, the prices for petroleum products are formed on competitive conditions. There is no government regulation in this market.

As you know, many factors affect the wholesale price. These are, of course, the economic factors, resource endowments, the conjuncture of domestic and foreign markets, including the tax burden on the oil sector, and changes in duties.

Starting from March 2020, there was a decrease in world prices for Brent crude oil from $ 52.46 per barrel (02.03.2020) to $ 19.93 per barrel (27.04.2020), which amounted to about 62 %. World prices for petroleum products decreased by 63 % (from 44,466 RUB/t

to 16,077 RUB/t).

Against the backdrop of the concluded OPEC+ deal and the gradual return of demand, the world oil price increased to $ 39.88 per barrel (September 14, 2020), for oil products to 41,602 RUB per ton.

Since the beginning of 2020, the increase in excise rates on motor gasoline and diesel fuel was 3.5 %.

In order to smooth out the impact of sudden changes in external prices for domestic consumers, the government approved a reverse excise tax on oil with a damping component. According to the damper, companies receive compensation from the budget if export prices for fuel are higher than the notional domestic price. If export prices are formed below this level, companies already pay extra to the budget. In the current market conditions, the oil companies, according to approximate calculations (within the framework of paragraph 27 of Article 200 of the Tax Code of the Russian Federation), replenished the budget for July 2020 in the amount of about 44 billion RUB. For August 2020, it is planned to receive funds to the budget in the amount of about 29.7 billion RUB. In such a situation in the oil product market, retail prices for motor fuels are assessed as stable.

– From the point of view of the FAS, is it necessary to change the indicative prices to exchange prices in the formula of the damper for gasoline, as suggested by Rosneft? What will the market benefit from this?

– The damper became a necessary measure that helped stabilize the situation associated with sharp price surges in the oil product market. But at the present time it may need a small adjustment to its values, which, in my opinion, should be as close as possible to current market prices.

We propose to expedite the adoption of
the rules for granting subsidies from the Russian Railways budget, to work out the issue of using  exchange and OTC price indicators by airlines when making purchases

– What is happening on the jet fuel market now? Are the airlines’ complaints about the multiple rise in fuel prices at Russia’s main airports justified, why are airlines reluctant to buy fuel on the exchange, why are the exchange trading volumes at such a low level? What measures are needed to stabilize the fuel market?

– At present, the jet fuel market can be assessed as stable, both in terms of sales volumes, and in terms of pricing and cost. Today’s prices for aviation kerosene refineries are significantly lower than prices recorded in the same period last year.

A huge impact on the final cost of jet fuel at airports is exerted by logistics and other services (transportation, storage, aircraft refueling).  In order to reduce them, we propose to accelerate the adoption of the rules for granting subsidies from the federal budget to Russian Railways, to work out the issue of using exchange and over-the-counter indicators of prices for aviation kerosene by airlines during procurement procedures. Companies supplying aviation kerosene at airports consider it necessary to work out the issue of reducing the transport component in the final price of aviation kerosene. For example, to optimize the number and cost of logistics services for the delivery of aviation kerosene, to reduce the number of intermediary organizations if the delivery of kerosene can be carried out by one company).

It is also important to work out the issue of increasing the liquidity of exchange trading in aviation kerosene, including by attracting airlines to purchase aviation kerosene at exchange trading.

I would also recommend that aviation fuel producing companies develop draft trading policies aimed at selling aviation kerosene in Russia in order to prevent violations of antimonopoly legislation.

Realization of these proposals will help stabilize the price situation on the aviation
fuel market in the regions of the Far East and will contribute to the formation of fair and transparent price indicators for aviation kerosene.

– Independent participants in the fuel market have repeatedly spoken about the need to increase the liquidity of exchange trading. From the point of view of the FAS, do the indicators of exchange prices correspond to the real ones? Are oil companies willing to go to the stock exchange? Are the proposed recommendations to increase the share of gasoline and diesel fuel sales on the exchange to 11 % and 7.5 %, respectively, sufficient?  Are such recommendations generally needed if companies go to the stock exchange themselves?

– Exchange trading as an effective pro-competitive instrument was used by the FAS in the oil products market for the first time in 2008 in the framework of the instructions issued by the antimonopoly authorities in relation to oil companies.  Currently, the exchange sells oil, oil products, natural gas, mineral fertilizers, wood and timber, petrochemicals, sugar, grain.

The issues of development of exchange trading are among the priorities of the state competition policy, which are enshrined in Decree No. 618, as well as in the National Plan approved by it.

As a systemic measure, exchange trading contributes to the development of competition in commodity markets, primarily in commodity markets, as well as financial markets, taking into account the synergistic effect. In particular, the transparency of pricing is increasing. Price indicators, regularly published by the exchange, are used by companies in their business activities, as well as by the authorities in the performance of their functions.  In order to increase the liquidity of exchange trading, together with the Ministry of Energy, we have developed draft regulatory legal acts providing for an increase in the minimum standards for sales on the exchange for gasoline to 11 % and 7.5 % for diesel fuel. The obligation to sell oil products in the specified volumes will apply to all oil refiners, including those who do not occupy a dominant position in the oil products market. I also consider it necessary to introduce responsibility for non-observance of regularity and uniformity in the sale of oil products at the exchange and prohibit traders to buy oil products in the interests of oil companies.

Now drafts of these documents have been published at regulation.gov.ru and are undergoing regulatory effect assessment. Acts will be adopted upon the completion of all the necessary measures provided for by the current legislation.

Their implementation will help stabilize the situation on the oil product market, ensure a sufficient supply of motor fuel at exchange auctions, and restrain price increases. I hope that this will also serve to prevent rush demand in the oil products market.

– How will the Russian fuel market develop in the future? Will prices continue to rise, will it be possible to keep it within inflation limits? What should be done for that? Should we impose restrictions on fuel exports for large oil companies, as suggested by the RTS? How balanced is the domestic market, are new support measures required?

– This year a rather difficult situation has developed in the oil product market. The exchange mechanism has shown itself to be a verified market instrument that helps stabilize the situation.  It allowed to ensure a delicate balance between supply and demand. Its further development is absolutely natural and timely.

As I said, we are constantly monitoring the current situation on the oil product market. We are in constant interaction with other authorities and in dialogue with vertically integrated oil companies, stock exchanges, expert organizations and independent participants in the oil products market.

In the framework of the meetings of the exchange committee under the FAS, the headquarters under the Ministry of Energy, we discuss the current situation on the oil products market and make decisions aimed at maintaining stability there.  Currently, the economy of supplying oil products to the domestic market and export have leveled off and is in its normal course.