OREANDA-NEWS. November 03, 2009. There isn’t that much information on the Russian oil products market today about companies that actually hedge their sales, especially amongst the vertically integrated oil companies. Aleksey Golubev, head of the Light Products Sales Section at TNK-BP, spoke to us about the company’s strategy in this area and about exchange trading of oil products, reported the press-centre of TNK-BP.

— Aleksey, you spoke in detail at the conference about the company’s oil product supply activities. Is TNK-BP active on Russia’s off-exchange electronic trading platforms?
— As far as the domestic market is concerned — no, not yet. We trade on the Interregional Oil and Gas Exchange and the St.Petersburg International Mercantile Exchange.

Though we’re actually looking closely at the moment at the possibility of running auctions and sales on the off-exchange platforms. I think this is something we will study quite closely. We are in favour of diversification and so we will be looking at all options.

— Could you talk in more detail about TNK-BP’s range of customers in the wholesale sector?
— In the domestic wholesale segment our clients are virtually all the major industrial consumers, including RZD and the Ministry of Defence. If we take diesel, a large part of that is exported due to the lack of demand on the Russian wholesale market, whereas 99% of our petrol, by contrast, is consumed inside the country. I should point out that the crisis has hit diesel demand inside Russia hard, with some consumers reducing demand by as much as 40%.

— You mentioned deliveries via Primorsk in particular. What kind of diesel volumes are you planning to deliver through that terminal?
— We’re now at maximum production volumes for export via that port. The maximum possible production is around 100,000 tons at the Ryazan refinery and 120—130,000 tons at Yaroslavl. So when the refineries are on maximum load it’s around 250,000 tons a month. We just can’t produce any more than that physically. And everything we have goes to Primorsk.

— Does TNK-BP have a strategy of hedging price risks?
— Yes, we are one of the few companies that do this on the domestic market. We hedge virtually all our sales. Everything we sell on the domestic market at fixed prices is hedged against Platts quotations via brokers – these are the major banks and trading companies. We also hedge virtually all our export sales. This is usually to do with redirection of shipments, if we switch, for example, from northern quotations to southern quotations there needs to be some insurance around these operations. Where we sell for export at fixed prices, this will also be hedged. Our hedging strategy today is a bit limited, but we aim to develop risk insurance mechanisms and to try to create similar instruments on the domestic market.

— Were you hedging prior to the price drop last year? Were you able to insure yourselves against the collapse in oil prices?
— You remember what things were like before the crisis, when virtually all the analysts were maintaining that prices would continue upwards and could reach US200 a barrel. Few were willing to take on those kinds of operations.

— What do you think of the idea of equalizing product export duties?
— This is quite a complicated issue for the country. The idea, of course, is to incentivize production of high-quality light products. But for the moment there’s no answer to the question of what to do with the dark products if duties are equalized. The thing is that most Russian refineries produce quite a large share of fuel oil and have no short-term flexibility to increase their refining yield. It will take years to complete upgrading work required. The Government obviously has to incentivize refinery upgrades through benefits and bank loan guarantees. And, of course, they should immediately set a longer and more realistic transition period. Also, having such a tight deadline for introducing the single export duty may cause a reduction in refining volumes because there’s no way of selling a large quantity of fuel oil. And this will result in a reduction in the supply of light products for both the export and domestic markets, causing growth in prices.

— And what do you think the criteria should be for setting recognized price indicators on the off-exchange trading floors?
— First of all the government needs to set out clear criteria for the market price and document these definitions in laws and regulations to be used by the FAS. They should establish two price segments: volume sales and individual wholesale. The new antimonopoly legislation package as it stands today risks recognizing even a non-market exchange price.

As I said earlier, TNK-BP is in favour of diversification. We’re trying to use the maximum available range of instruments and possible methods of sale, such as bilateral exchange auctions and unilateral price-rise auctions. The eOil platform is now looking interesting and is attractive in terms of technical solutions. In the near future it’s possible we might run some trial trades from the auction point of view.