OREANDA-NEWS. December 14, 2009. The first meeting of the Expert Council on Oil and Oil Products Market at the Federal Antimonopoly Service (FAS Russia) took place. Due to the agenda - development of exchange trading with oil products in the Russian Federation - the meeting was held jointly with the FAS Russia's Expert Council on Financial Markets, reported the press-centre of FAS Russia.

Apart from the FAS Russia's leadership the meeting was attended by representatives of interested authorities - the Executive Office of the President of the Russian Federation, the Russian Ministry of Economic Development, the Ministry of Finances, the Ministry of Energy, the Ministry of Interior, the Federal Tariff Service, the Federal Service for Financial Markets, and the State Duma of the Russian Federation. Representatives of oil companies, financial organizations, exchange sites, analytical agencies, field-specific unions and associations, experts and researches were also engaged in the work of the Expert Council.

Opening the meeting, Anatoly Golomolzin, Deputy Head of FAS Russia and the Chairman of the Expert Council on Oil and Oil Products Market, said that current situation on the oil products markets obviously was a consequence of market monopolization and non-transparent pricing.

The oil and oil products market in the Russian Federation is an oligopoly. Vertically-integrated oil companies (VIOCs) control a major share in all market segments: oil production and processing, storage, wholesale, small-scale wholesale and retail sales of oil products. Market participants, that are independent from VIOCs, experience difficulties accessing refinery capacity, and the supplies of oil and oil products by independent participants are small.

Oil and oil products pricing on domestic market is not transparent and VIOCs use transfer prices within their groups of persons. VIOCs can move the focus of their profit to any market segment (refinery - wholesale - small-scale sale - retail), which allow them to exercise price pressure upon independent market participants in all market segments.

Anatoly Golomolzin pointed out that according to the statistical data of the Federal State Statistics Service (Rosstat), ground transport enterprises are loss-makers (-6% in the first six months of 2008 and -5% в in the first six months of 2009), in particular, due to expensive motor fuel. At the same time, profitability of oil production and refinery was 37% in the first six months of 2008 and accordingly 34 and 23% in the first six months of 2009. For a number of cars per capita Russia is 2-3 times behind Europe, and the gap with the USA is even worth. By the scope of air carriage Russian is way behind the US and EU. For Russia with its geography such backward gap is inadmissible.

Severity of the fuel supply problem was discussed by Mr. Shoulyar, the Head of "InforTEK" consultancy, and Mr. Ryabov, General Director of the Association of Oil Refiners and Petrochemists.

The issues of the oil products markets overpasses pure economics and affect security of energy supply, which explains concerns of the President and the Government of the Russian Federation with regard to those markets. The Government has issued instructions to state agencies and interested organizations, aimed at developing exchange trading.

As part of investigating antimonopoly cases, FAS Russia issued determinations to oil companies, where it not only requested to stop abusing their dominance on the wholesale oil products markets, but also to exercise actions towards protecting competition. The companies must sell no less than 10% of all products to be sold (motor petrol, diesel fuel and aviation kerosene) on domestic market, through commodity exchange and/or electronic trading sites. It is essential to meet market pricing conditions and other antimonopoly requirements (sufficient number of bidders, procedures of equal access to bidding and participation in competitive bidding, the procedures for setting the initial price, the mechanisms of bidding organization, etc.).

The "second antimonopoly package" legally formalized antimonopoly enforcement practice. They introduced changes to the Federal Law "On Protection of Competition" and expanded the scope of powers of the antimonopoly authority, related to possibility of issuing mandatory determinations to economic entities, including sale of certain quantity of products through commodity exchange, and preliminary consent of the antimonopoly authority regarding specifics of developing the initial price for the products sold through a commodity exchange, according to the procedures established by the Government of the Russian Federation.

For more than ten years oil companies opposed exchange trading. The issue was raised repeatedly but it was always blocked, in particular, by some government agencies. VIOCs have become more active after introduction of "turnover" fines and criminal liability for antimonopoly violations, and when they understood that FAS Russia applied, is and will be applying those enforcement measures.

From the second half of 2008, oil companies started trading through commodity exchanges and electronic trading sites.

In 2009 the volume of trading with oil and oil products through exchanges and electronic trading sites was growing and reached 5420,000 tons (inclusive October), in particular:

Еoil.ru electronic trading site - 4050,000 tons;

The electronic trading site of "Gazprom Neft" OJSC (based on the platform of Еoil.ru) - 80,000 tons;

The Interregional Oil and Gas Exchange - 700,000 tons;

The St Petersburg Interregional Commodity Exchange - 222,000 tons; and
The "St Petersburg" Exchange - 105,000 tons.

As pointed out in his speech by Mr Perfilov (Argus), in the near future we should develop an optimal hierarchy of the oil market products, including spot market, forward market, and derivatives market. Most of the speakers said that each of the trading sites was able to make considerable progress in their specific areas.

Еoil.ru has the largest accumulated volume of sold oil products and the largest number of participants, among which are not only oil traders, but also oil companies. It is important that Еoil.ru keeps an index of wholesale prices for oil products based on the actual trading results; also Еoil.ru is preparing to launch a futures contract for this index with a possibility to introduce on their basis hedging instruments.

The Interregional Oil and Gas Exchange (IOGE) facilitated sale of the largest quantity of oil products among exchange trading sites. To develop exchange trading, IOGE explored the issue of organizing trading on the common basis of the "Transnefteproduct" pipeline system and engaging the Federal Agency for State Reserves (Rosrezerv) in the trading system for the purposes of commodity intervention on the market to smooth out price fluctuations.

The St Petersburg Interregional Commodity Exchange is the most dynamic exchange site: in November it sold the maximum quantity among organized sites - around 200,000 tons. Currently IOGE is discussing a possibility of registering all off-exchange contracts at the authorized exchange in order to determine the price index for oil products. Representatives of the St Petersburg Interregional Commodity Exchange proposed to form a composite index on the basis of trading results on the spot market and information about off-exchange contracts. It will create an objective price target for the market participants.

FAS criticized the system for creating delivery basis in Federal Districts linked to specific refineries, which was presented by the St Petersburg Interregional Commodity Exchange. FAS finds it inacceptable to segment the federal market of oil products by linking it to specific refineries: the federal market must be built on a possibility or expediency for the buyers to buy oil products from any refinery.

The "St Petersburg" Exchange specializes in futures contracts for oil products. Its representative drew attention of the participants (which other attendees also did) to the need of restoring the norm of the law on exchange trading about a possibility of buying fuel at exchange prices for state customers. Along with other effects, this is important for stimulating demand at exchange sites.

Andrey Kashevarov, Deputy Head of FAS Russia and the Chairman of the Expert Council on Financial Markets, informed the participants of the joint meeting about the draft Decree of the Government of the Russian Federation "On Approving the Regulations on the Procedures for Preliminary Agreement upon Specifics of Initial Pricing for Products Sold through a Commodity Exchange".

The joint meeting of the Expert Councils explored the issues and problems of exchange trading. Regulators, oil companies, exchange sites and other interested parties presented their points of view. Overall, the discussion participants were unanimous in their opinion about the need to use exchange trading on the oil products market and positive prospects of this instrument for developing market pricing.

At the same time, careful study of the current problems related to specificity of the situation on the oil and oil products markets and legal, organizational and technological aspects of tendering is required.

A decision was made to form a Working Group on Exchange Trading with Oil Products that should meet within two weeks. The purpose of it will be to summarize and evaluate proposals and organize events to develop organized exchange trading in Russia.

The participants agreed to put forward proposals on the agenda of the meetings of the FAS Russia's Expert Council on Oil and Oil Products in 2010. It is expected that discussions will focus, in particular, on considering the Rules for non-discriminatory access to the services for transporting oil and oil products; and devising comprehensive measures for developing competition in the markets of oil and oil products as part of the Eurasian Economic Community due to formation of the Customs Union.

In the context of the latter initiative, Anatoly Golomolzin will visit Kazakhstan at the end of the week to take part in the meeting of a similar Council on oil products at the antimonopoly authority of Kazakhstan and the meeting of the Working Group on oil products, at the Headquarters for Joint Investigations, of the Interstate Council for Antimonopoly Policy of the CIS member-states.