(C) OIL TRADERS: PIPELINE EXPORTS TO EUROPE STILL \

2008-11-24 06:35:00 08MOSCOW3380 Embassy Moscow CONFIDENTIAL 08MOSCOW2632|08MOSCOW2880 VZCZCXRO7650\ PP RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR\ DE RUEHMO #3380/01 3290635\ ZNY CCCCC ZZH\ P 240635Z NOV 08\ FM AMEMBASSY MOSCOW\ TO RUEHC/SECSTATE WASHDC PRIORITY 0848\ INFO RUCNCIS/CIS COLLECTIVE PRIORITY\ RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY\ RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY\ RHEHNSC/NSC WASHDC PRIORITY\ RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 003380 \ \ SIPDIS \ \ DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT \ EUR/CARC, SCA (GALLAGHER, SUMAR) \ DOE FOR HEGBURG, EKIMOFF \ \ E.O. 12958: DECL: 11/21/2018 \ TAGS: EPET ENRG ECON PREL RS SUBJECT: (C) OIL TRADERS: PIPELINE EXPORTS TO EUROPE STILL \ OPAQUE; SEABORNE TRADE MORE COMMERCIAL \ \ REF: A. MOSCOW 2880 \ ¶B. MOSCOW 2632 \ \ Classified By: Econ MC Eric T. Schultz for reasons 1.4 (b/d) \ \ -------------- \ SUMMARY \ -------------- \ \ ¶1. (C) The oil trading business in Russia has long been \ opaque, benefiting politically connected firms such as the \ secretive oil trading firm Gunvor. Contacts tell us, \ however, that the business has lately become more transparent \ because seaborne trade is now largely conducted via \ commercial tenders and terms. They caution, however, that \ pipeline exports to Europe remain problematic. Shell's oil \ trading manager (protect),for instance, told us he believes \ the recent supply reduction to the Czech Republic (ref A) was \ politically coordinated. To the extent that a shift toward \ greater transparency has taken hold, it is another example of \ the role of international commerce and finance in forcing \ Russian businesses to behave commercially. End summary. \ \ -------------- \ RUSSIAN OIL TRADING OPAQUE \ -------------- \ \ ¶2. (SBU) Oil traders at major Western companies explained to \ us recently that the market for physical oil trades is very \ developed globally and has two segments. One is comprised of \ major international oil companies who trade oil largely to \ optimize their own global operations -- to ensure the right \ amounts of oil are transferred to the right facilities at the \ lowest cost. The other is comprised of companies such as \ Glencore, Vitol, and others who serve as intermediaries \ simply trying to make money buying and selling oil using \ their marketing, shipping, or risk tolerance advantage. \ \ ¶3. (C) According to these experts, oil trading in Russia has \ had a reputation for secretive deals involving intermediary \ companies with unknown owners and beneficiaries. Oil exports \ from state-owned or state-influenced oil companies have \ reportedly been funneled through favored oil traders, \ potentially yielding billions of dollars of profits for these \ companies. Of particular note in the Russian oil trading \ business is the Swiss firm Gunvor. The company is rumored to \ be one of Putin's sources of undisclosed wealth, and is owned \ by Gennady Timchenko, who is rumored to be a former KGB \ colleague of Putin's. \ \ ¶4. (C) Political activist Alexei Navalny, who has sued Gunvor \ and several Russian oil companies for information regarding \ their oil trading practices (ref B),estimates that Gunvor \ may control up to 50% of total Russian oil exports. He and \ his lawyer told us recently that it is impossible to know the \ extent of Gunvor's penetration of the market, however, \ because the companies involved refuse to disclose this \ information. (Note: Gunvor claims in its glossy but \ uninformative brochure that it "handles a third of Russia's \ seaborne oil exports." End note.) As Navalny has \ discovered, verifiable information on the volumes and terms \ of oil trades is very difficult to come by. \ \ -------------- \ BUT BECOMING MORE COMMERCIAL \ -------------- \ \ ¶5. (C) Managers at two western oil companies, however, \ explained to us recently that oil trading in Russia has taken \ a welcome turn toward greater transparency thanks to open \ tenders for seaborne exports. Demetrios Anyfantakis \ (protect),the General Manager of oil trading for BP \ Russia/CIS, told us in a recent meeting that oil trading via \ Russian seaports is now, in his view, "completely \ commercial." Anyfantakis, explained that during the last \ year, and especially since Medvedev's inauguration, there has \ been a deliberate and successful push by the state to ensure \ transparency and commercial terms for most of the oil \ exported from Russia via ports. \ \ ¶6. (C) Anyfantakis claimed his view is not just conjecture. \ He said it comes directly from hard numbers and evidence that \ he sees from his participation in tenders by Rosneft, Lukoil, \ and other major Russian oil companies. He said that while \ \ MOSCOW 00003380 002 OF 003 \ \ \ Gunvor rose based on the "administrative support" of the GOR, \ the government came to realize it could no longer promote \ Gunvor at the expense of, for example, state-owned Rosneft \ and Gazpromneft. Anyfantakis said he believes the trend \ toward greater transparency in seaborne exports will continue \ and he welcomed Navalny's lawsuit toward that end. \ \ ¶7. (C) Dave Chapman (protect),General Director of oil \ trading for Shell Russia, painted a similar picture of oil \ trading in Russia, calling seaborne trade "open and \ transparent." He added that domestic trading, while \ depending on middlemen, is now also largely commercial. \ Chapman told us the Russian oil trading market is among the \ most difficult in the world, but that it also offers good \ opportunities and that Shell has built a "healthy business" \ here. He said he has seen great changes in the 1 1/2 years \ he has been in his current job, and suggested that much of \ the change has come as a result of the government's push for \ greater transparency in the economy as a whole. He added \ that he believes this push has largely been driven by the \ financing needs of the state-owned companies. \ \ ¶8. (C) Chevron's Mike Ryan (protect),a London-based trader \ who handles the company's trade in Russian/CIS oil, was less \ impressed by the degree of transparency in the business, even \ for seaborne oil exports. He told us recently that while \ there are more open tenders and more participants for \ seaborne exports, "the same firms seem to often win." He \ suggested that favored firms may get inside information and a \ "second chance" to bid. Ryan agreed, however, that there has \ been a trend toward greater transparency, but cautioned that \ it is far from an "open and commercial" market. He \ highlighted Rosneft as a company that has evolved toward \ greater transparency, and Surgutneftegaz (another reported \ source of Putin's illicit wealth) as a company that has not. \ \ -------------- \ PIPELINE EXPORTS TO EUROPE STILL A PROBLEM \ -------------- \ \ ¶9. (C) All three company representatives noted, however, that \ the trend toward greater transparency stops with seaborne \ trade. They all said Russian oil exports to Europe through \ pipelines, especially through the southern Druzhba pipeline, \ is still a very opaque business. Anyfantakis said pipeline \ exports, in general, are inherently more political than \ exports from ports, and that the trade through southern \ Druzhba is so opaque that "no one knows who is getting what." \ Ryan said many in the business "wonder what goes on between \ buyers and sellers" along that route. \ \ ¶10. (C) As an example, Chapman specifically cited the recent \ oil supply reductions from Russia to the Czech Republic (ref \ A). He said that despite claims by officials that \ "middlemen" were the problem, he did not believe that to be \ the case. He said producers generally offer their oil using \ formulas that include some premium on top of a base price, \ depending on the export market. He explained that just prior \ to the supply reduction to the Czech Republic (where Shell \ has a stake in a refinery),all producers demanded the exact \ same premium, $1.25 per barrel, which he said was 4 to 5 \ times the previous figure for that route. He believed this \ price increase was coordinated, and resulted in the \ re-routing of oil exports away from the Czech Republic. \ \ ¶11. (C) Chapman said that in the case of the Czech Republic, \ the refineries involved had access to other supplies, but \ that there was indeed an additional cost associated with \ obtaining alternate supplies. He said similar demands for \ higher premiums have occurred with regard to deliveries to a \ German refinery partly owned by Shell, but that the refinery \ had more limited access to alternatives. In such cases, \ Chapman explained, managers have to decide whether to run \ refineries at sub-optimal levels, or pay the higher costs. \ \ ¶12. (C) Chapman also noted that oil exports to Hungary, by \ Transneft decree, must go through "a certain intermediary" \ (Gunvor),which adds one dollar to each barrel. He said in a \ competitive market, by contrast, an oil trader might add \ anywhere from five to 20 cents "maximum" to the price of a \ barrel of oil. \ \ -------------- \ COMMENT \ \ MOSCOW 00003380 003 OF 003 \ \ \ -------------- \ \ ¶13. (C) Oil traders play an important role in the market, \ helping provide liquidity and optimizing the operations of \ oil refiners and producers. However, while it appears that \ the GOR has realized that the more transparent and commercial \ the trading business, the better it is for Russia's oil \ sector, it unfortunately has not decided to apply this \ realization uniformly. Greed, corruption, and geopolitical \ concerns still trump efficiency, especially with regard to \ certain export routes to Europe and with regard to certain \ connected oil traders, such as Gunvor. End comment. \ BEYRLE \