OREANDA-NEWS. May 25, 2012. Dmitry Medvedev: Good afternoon, colleagues. We have a very brief video gate on two urgent issues. I have gathered you today to discuss two important questions – preparations for the next heating season, which is not at all far off despite the approaching summer; and I’d like us to talk about the situation on the market of fuel and lubricants.

The previous heating season ended recently but we must already start preparing our power industry for next winter. It is very important to carry out repairs according to plan, stock fuel reserves and do everything we can to prevent emergencies. We must work consistently, and according to the plan. Special commissions formed by the governors and energy companies must control and coordinate this work.

Of course, one of the main conditions that is necessary before we can consider our preparations complete is the existence of long-term contracts for the supply of fuel required for uninterrupted work during the entire autumn and winter period. This is not even a condition, but simply a demand that you must fulfill as governors and heads of departments. Above all, this applies to the regions with high risks of power failures, and we have established links with representatives of some of these regions. I don’t expect you to report to me today. I simply want you and other governors to hear what I'm saying and start these preparations as actively as possible. It's typically said that winter will test everything. But before winter comes we must complete the testing of hundreds of energy companies in order to have a stable heating season without any mishaps. Incidentally, the previous heating season went well. Our people were able to live comfortably, without undue hassle caused by the need to address household problems.

Now let me turn to the second important issue. Despite constant changes in the world oil market, we generally manage to keep our domestic market stable. I must admit that this is a very important issue. It is in the focus of attention of key global energy players; major energy powers are following the situation closely and we are dealing with it as well. We have encouraged fuel producers to saturate the domestic market and, importantly, to make their products more eco-friendly. In addition, there is a fuel reserve that can be used only in a dire emergency. Regions are reporting to me that they have enough permanent fuel reserves to last for 10 days or more. As of May 21, the aggregate petrol stocks at oil refineries and oil supply companies totaled 1.5 million tonnes, which is 20% more than in December of the previous year. Nonetheless, problems may occur and we must make sure there is no shortage of fuel this year in all regions. In some regions, prices of fuel and lubricants are growing faster than the national average, and this is a bad trend. That is why I’d like the Energy Ministry and the Federal Anti-Monopoly Service to pay special attention to this.

Let’s have a brief discussion. I’d like the energy minister to make a brief report and then we will bring a few more people in via satellite to discuss the two issues we are dealing with today.

Mr Novak, please go ahead.

Alexander Novak (energy minister): Thank you. Mr Medvedev, ladies and gentlemen. Let me say just a few words about the past heating season. This is important because last year we registered a number of peak loads for the national power grid. Here are some figures: from October 2011 to March 2012 energy consumption by the United Power Grid was 559.600 GW, or 1.6% higher than last year.

A new record in consumption was set last February – 155,200 GW. This figure exceeded the previous record that was established 20 years ago in 1991. One of the primary reasons for this increase in energy consumption is economic growth. Low temperatures and complicated weather conditions throughout most of the country in January and February also contributed to this winter heating season record.

We had abnormal weather conditions last season, mostly in the south. During relief work, we took into account our past experience, in part, the frozen rain in 2011. On the whole, despite natural and man-made disasters, our energy companies reliably supplied consumers with electricity and heat and did not have any serious mishaps.

Today, our main immediate task it to prepare for the next autumn and winter period. In this context the ministry has drafted and endorsed a plan of priority measures on preparing for winter and organised control over its implementation. The ministry has also approved mandatory standards for fuel reserves that they must have before the start of the heating season: 12.6 million tonnes of coal, 2.6 million tonnes of oil fuel, 128,000 tonnes of diesel fuel and 41,000 tonnes of peat.

Fuel reserve standards are being approved every month, and oversight of compliance is carried out on a daily basis. The ministry has established a working group to monitor preparations for the heating season and resumed the practice of weekly teleconferences with the participation of power companies, fuel suppliers and Russian Railways. Considering past experience, we think that this will help us to considerably reduce the risks during the heating season.

Mr Medvedev, as you’ve said, this year the ministry will introduce a new requirement – energy companies will only receive a readiness certificate if they have signed fuel supply contracts for the entire forthcoming heating season. This is a necessary measure and we believe it will make it possible to guarantee adequate fuel reserves at electric power stations.

One more measure provides for administrative liability for company executives up to and including their disqualification for three years. This punishment can be used when the latter fails to fulfil fuel [reserve] standards for the accounting dates.

In addition, following the initiative of the Ministry of Energy, amendments to the Code on Administrative Offenses providing for a similar punishment for failure to obtain a readiness certificate have been prepared. All the listed measures will improve the performance discipline and provide for a safer heating season.

To reduce risks in the autumn/winter period, the ministry has determined in advance the regions with high risks of power supply failures. These regions rely on energy systems with a higher probability of power restrictions in the event that the power generating or power distribution equipment is disconnected. To date these regions include the Sochi Energy District of the Kuban Energy System, the Dagestan Energy System, the Primorye Energy System, the Sakhalin Energy System, the energy districts of the Tyumen Energy System and some energy districts of the Irkutsk Energy System.

In our view, when preparing for the winter season it is very important to conduct an extensive programme of repairs. This year plans call for repair work on turbine generating units with an aggregate capacity of 64,000 megawatts, steam generating units producing a total of 175,500 tonnes per hour, and about 96,000 kilometres of power lines with a voltage between 110 and 750 kilowatts.

The planned volumes are mostly higher than last year except for heating power grids, which outperformed last year’s plans. A considerable increase in the commissioning of generating capacities in 2011 and a considerable increase of the plan for the 2012/2013 season are also positive points. The total commissioned capacities will account for 6 gigawatts, which is the highest indicator since 1985.

Here I’d like to mark some capacities which we see as significant: Boguchany HPP in the Krasnoyarsk Territory will produce 2,000 megawatts, it is slated for commissioning in 2012; Nyagan Thermal Power Plant in the Khanty-Mansi Autonomous Area – 836 megawatts, Urengoy TPP in the Yamalo-Nenets Autonomous Area – 450 megawatts. To provide for a safer winter, this year it is planned to commission new power distribution capacities including 22,000 kilometres of power lines and almost 30,000 megawatts of transformer capacities. This year will see 9% growth compared to last year.

Mr Medvedev, I would like to report that, under the ministry’s authorities, we are constantly monitoring power prices on the wholesale and retail electricity markets, and, when necessary, we develop measures to level out price fluctuations. This makes it possible to prevent spikes in power prices in the autumn/winter period. To check the readiness of power engineering facilities for operation in the heating season, in September the Ministry of Energy will form commissions with the participation of the Federal Service for Environmental, Technological and Nuclear Supervision, the Ministry of Civil Defence, Emergencies and Disaster Relief, regional executive bodies and a grid operator. The plan is to check 100% of power engineering facilities controlled by the Ministry of Energy. Their number is 536, including all Russian power companies – there are 61. In October, the traditional national conference is expected to review the preliminary results of the preparations for winter, and in November after the conclusion of the repair programme, I will present to you, Mr Medvedev, a comprehensive report on the preparations.

Now, regarding the situation with the supply of oil products to the domestic market and their prices. Providing for stable supplies to the domestic market is one of the priorities in the work of the Ministry of Energy. The ministry has created a headquarters to monitor oil product production and consumption. Representatives of all oil companies, branch regulators and, if necessary, representatives of the regions take part in the work of the headquarters. 

Having conducted online monitoring of the situation, we can affirm that currently there is no threat of fuel shortage in any of the Russian regions.

Recently the Ministry of Energy conducted a set of measures to prevent shortages: the ministry has created fuel reserves and monitored repairs of the equipment at the refineries. Previously, springtime repairs of refinery equipment hindered fuel supply to the consumer, caused queues and uncontrolled price inflation at filling stations. Now the oil companies agree the schedule of planned repairs of refinery capacities with the Ministry of Energy. The ministry closely monitors compliance with this schedule. 

Regarding specific figures, as of May 22, from the beginning of the year the production of high-octane petrol grew by 1.2 million tonnes to almost 13 million tonnes, and the growth rate was 10.3% compared with last year, which is considerably higher than growth of domestic consumption. That means the excess above the growth in domestic consumption is being exported.

The production of diesel fuel for the same period this year fell by 1.2 million tonnes to 26.4. Shipments to domestic markets increased to 12.5 million tonnes, exceeding by almost 3% the level of the last year. The decreasing production of diesel fuel was due to the growing production of liquid petroleum oil and petrol due to higher demand and the changing configuration of refinery utilisation.  

As for fuel reserves, as the slide shows: currently permanent reserves per region equal, as you noted in your address, 10 days or more. And aggregate petrol reserves at refineries and supporting enterprises as of today are 1.5 million tonnes, which is more than last year, when they had only 940,000 tonnes.

Providing jet fuel for large airports, including the Moscow aircraft hub, remains stable, and permanent reserves of aviation kerosene in airports exceed 6 days.

The price situation on the domestic market is stable in general with a small growth trend. The average retail price for 92-octane petrol is 26.79 roubles, which compared with December 31, 2011 is 0.39 roubles higher, or only 1.5%; 95-octane petrol costs 28.8 roubles, which is 0.5 rouble higher than the prices of December 31, or plus 1.7%; and the average retail price of summer diesel fuel is 27.79 roubles, which is 1.87 roubles or 6.7% higher. The faster growth of the price of diesel fuel is due to the premium for petrol on the domestic market in December 2011 compared with diesel fuel.

I’d like to note that the Energy Ministry sees its task not in directly regulating fuel prices but in creating the conditions for increased production and also in coordinating equipment repairs and the stocking of fuel reserves by oil companies for the domestic market.

We will also continue monitoring prices together with the Federal Anti-Monopoly Service per the instruction you gave us in your opening address. I’d like to ask the governors to report to the Energy Ministry information on the available capacities and fuel reserves and guarantee cooperation with our ministry in accordance with established procedure.

Mr Medvedev, I’d like to say a few words about two government instructions. On May 4, a government resolution was signed on the basic provisions of the functioning of retail markets drafted under the supervision of the Energy Ministry. This document is crucial for our discussion because it reduces electricity costs for small and medium companies, thereby lowering the prices of the final products. The new rules for retail markets are aimed at balancing the interests of electricity suppliers and consumers, developing competition between the former and preventing energy suppliers from making excessive profits. Introducing these rules will make it possible to specify in detail all business processes and enhance the responsibility of the market players and their payment discipline.

Second, a resolution endorsing a road map was also signed in early May. It will make energy facilities more accessible to consumers by easing the terms under which they connect to energy infrastructure. The procedure of connecting to a power source will become simpler, faster, more transparent and less expensive. This resolution will make it possible by 2018 to reduce the number of connecting stages from 10 to five (as shown by this slide), and to cut the cost of this procedure and the time period from 281 to 40 days. We expect the initial effect from its implementation to be felt in 2013.

Importantly, Russia’s inclusion on the World Bank’s list of the TOP-20 annual rating was chosen as a criterion of the project’s success. The resolution instructs the Energy Ministry to take a number of measures in Russia to encourage adoption  of the world’s best practices with respect to relations between consumers and infrastructure facilities. I’m ready to report to you on the implementation of measures under the road map. Thank you.

Dmitry Medvedev: Thank you. Let’s bring our governors in via satellite. I’d like to hear a few words about preparations for the heating season. Let’s start with Primorye Territory. Mr Miklushevsky, how are you doing? Please, tell us how you’re feeling.

Vladimir Miklushevsky (Primorye Territory governor): Good afternoon, Mr Medvedev.

Dmitry Medvedev: Good afternoon.

Vladimir Miklushevsky: First, I’d like to say a few words about the 2011-2012 heating season. It went without a hitch and ended on May 15. We started preparing for the next heating season, 2012-2013, before completing this one. Our administration issued a directive on the membership of the territorial headquarters, a schedule of stage-by-stage winter preparations and main tasks. It will cost 1.7 billion roubles to prepare the fuel-and-energy complex for a new heating season. In line with the standards endorsed by the Energy Ministry, by October 1, 2012 the complex will have stored reserves of fuel oil (almost 17,000 tonnes) and coal (nearly 570,000 tonnes).

As Mr Novak noted, our territory has high risks of power outages. Our power grids are not strong enough to transfer electricity to our southern districts that are short on energy. Our territory’s administration and energy suppliers are working to reduce these risks.

We are building the 500 kV Chuguyevka-Lozovaya-Vladivostok high transmission line with a 500 kV Lozovaya substation. As of today, 98% of its construction has been completed. It will be put into service next October. 

We are also converting the seventh and eighth boilers of the Vladivostok thermal power plant (TPP) to burn natural gas. They will be commissioned next September.

The construction of a 220 kV high transmission line – the Artyom TPP-Zeleny Ugol-Volna on Vladivostok’s mainland – has been completed. We plan to complete the renovation and construction of electricity generation facilities by the beginning of the heating season.

The sub-programme for the development of Vladivostok as part of international cooperation in the Asia-Pacific region provides for the building and renovation of 36 energy supply facilities, out of which 31 have been put into service and five are still being worked on. The latter include the Tsentralnaya mini-TPP (80% complete) and the Okeanarium mini-TPP (70% complete) on Russky Island; the 110 kV Artyom TPP-A (50% complete), the De-Friz substation (98%) and the Gornostai substation (95%).

These measures will make energy supplies to consumers in the Primorye Territory more reliable. In case of an outage, we can use 348 diesel generators with an aggregate capacity of more than 20 megawatts, including 76 that we bought last year with our budget funds. That concludes my report.

Dmitry Medvedev: Thank you. What is your assessment of the situation as a whole? Is it stable? Will you have enough time to get ready for the heating season?

Vladimir Miklushevsky: Absolutely, Mr Medvedev.

Dmitry Medvedev: Okay, get ready. Now let’s move to the south, to central Russia. Mr Tkachyov, governor of the Krasnodar Territory. Please, take the floor.

Alexander Tkachyov: Good afternoon, Mr Medvedev.

Dmitry Medvedev: Sometimes you also have problems. How are things now?

Alexander Tkachyov: First, I’d like to tell you that we’ve had a very severe drought in Kuban for about two months. We feel good today – it started raining last night. 

Dmitry Medvedev: Thank God, as they say.

Alexander Tkachyov: Indeed. I think everyone has had a sigh of relief. We are getting a break and it gives us hope that there will be a decent harvest in Kuban.

Now I will report on the subject at hand. Of course, the past winter was a serious trial for us, unlike the Primorye Territory, as my colleague just described. This was a trial for all power grids in our territory and has shown us once again how important it is to start preparing for the autumn and winter season in time. We think such preparations should start without delay, right after the end of the previous heating season. We have been following this pattern for several years now. This is why we are working now, in May, in line with the plans that were approved in advance.

I’ve reported to you on our recovery effort in response to the natural disasters in Novorossiysk and Anapa last winter. The windstorm that reached more than 50 metres per second left more than 200,000 people without electricity in a matter of hours. It is only by using reserve diesel generators that we managed to guarantee the uninterrupted operation of utilities. Our regional headquarters worked round the clock and we mobilised all our capacity. Effective support came from the Energy Ministry, as well as the Federal Grid Company and the Inter-Regional Grid Company, which operated in Novorossiysk under the supervision of the energy minister.

We have made conclusions from the recovery effort and will take them into account during preparations for the winter season. Together with the Energy Ministry we have drafted a programme to improve the reliability of the Black Sea power grid. We’ve allocated about 400 million roubles from our budget to get our municipal economy ready for winter. We’ll spend 300 million roubles to buy more reserve diesel generators, which were so helpful to us this year. Under the territorial programme, we will invest 896 million roubles into energy-saving measures. All in all, we’ll spend more than eight billion roubles from all sources on winter preparations and we are planning to complete them by October 1.

Average prices on fuel and lubricants since the beginning of the year have grown just a bit in our region – from eight kopecks for one litre of 92-octane petrol to 16 kopecks for one litre of 95-octane petrol. The price of a litre of 76-octane petrol has risen by 10 kopecks on average.

Wholesale prices declined during this period by 7.5% for 92-octane and 8% for 95-octane petrol. Lukoil and Rosneft are major suppliers of petrol in the Krasnodar Territory, accounting for over half of high-octane petrol supplies to the region. The Krasnodar Territory is fully supplied with petroleum products. Local petroleum bases have reserves for 14-35 days.

Mr Medvedev, the Krasnodar Territory is still using fuel discounts for agricultural enterprises provided by the Russian government. They help farmers a lot, especially given this year’s weather conditions. Our farms buy diesel fuel at 20,000 roubles per one tonne (price valid on November 1, 2010). I would like to thank you and the Russian government for supporting our farmers, and we hope that these prices and this support will remain unchanged this year as well.

Dmitry Medvedev: Thank you. We have discussed prices for agricultural producers. As you are aware, I had a meeting in the Bryansk Region yesterday. Although we focused on other issues, the fuel issue is invariably kept in mind. Of course, we will maintain the current level of support only because our farmers won’t be able to survive without it. This is an absolutely justified economic measure with a significant social effect.

It’s good that you are making preparations in advance, because last winter was full of surprises precisely in Krasnodar and the Krasnodar Territory. Things should be done in advance in order to keep such surprises in check. I hope the decisions that you have made will be enough. Accordingly, all decisions should be properly codified in law. I’m not sure who is sitting behind you, but that person is obviously holding an important document. I hope that everything you talked about will find its way into gubernatorial acts.

Alexander Tkachyov: It’s Catherine the Great with a decree on granting land to Zaporozhie Cossacks.

Dmitry Medvedev: Be sure to come up with a decree as well, so that you keep everything that you have now…

Alexander Tkachyov: All right.

Dmitry Medvedev: Thank you. Now, let’s focus on the domestic market of petroleum products and bring on the Trans-Baikal Territory. Mr Geniatulin, please go ahead.

Ravil Geniatulin (governor of the Trans-Baikal Territory): Thank you. Mr Medvedev, the Trans-Baikal Territory is fully provided with fuel and lubricants. Someone has pointed out absolutely correctly that prices are fairly high in our region. Unfortunately, we are located too far away from major refineries. The closest one, the Angarsk refinery, is 2,200 km away from us.

Dmitry Medvedev: That’s a lot.

Ravil Geniatulin: The distance is about the same to the Khabarovsk refinery. Then, there’s nothing within the 3,000-km radius. Certainly, this affects prices. We are selling 92-octane petrol at 29.4 roubles per litre, which is high. 80-octane sells for 28.33 roubles. We are doing our best to hold the line on prices. We have managed to keep wholesale prices unchanged for five months now, and even brought some of them down by 3.3% with Rosneft and 4% for another product.

We are expanding the network of petrol stations. Eleven providers of fuel and lubricants are operating in the region. We are expanding retail operations as well, with 210 petrol stations available throughout the region. We built six major stations last year and will commission another ten this year. In other words, we are creating a competitive environment.

I am very grateful to Rosneft, because they helped us out a lot during peak loads last winter when we had to discuss supplies on a case-by-case basis. They all did a great job, including Mr Khudainatov and his assistants. But I believe that we should move on, because this kind of work is reminiscent of the 1990s, when we had to do a lot of legwork in order to get a thousand tonnes of fuel shipped to us.

We know how much fuel we need to cover all regional needs. We would like to build long-term relations with suppliers in order to receive guaranteed fuel supplies from the Angarsk refinery or from Komsomolsk, depending on which one we are assigned to. I believe that refineries should be interested in such an arrangement, because it’s sort of a government contract. We would be responsible for buying everything that we order. Perhaps it should be done similarly to the way it was done in the agriculture: identify limits and proceed according to the plan.

I have another request, this time for Rosneft. I’ve been discussing this issue with them for a long time now. I would like to thank them for setting up Branch No. 7. However, I would also like them to promptly take another step and establish a Rosneft subsidiary in our region. That will take us to a new level, because a subsidiary will engage in wholesale operations in a much more professional manner, and we will be able to tackle larger volumes. I have two requests related to supplies of petroleum products: establish a branch and introduce scheduled supplies of petroleum products to our region.

Dmitry Medvedev: Thank you Mr Geniatullin.

Ravil Geniatulin: Just one request regarding the first issue. May I?

Dmitry Medvedev: Yes, please go ahead.

Ravil Geniatulin: I am referring to winter preparations. There are great concerns regarding military towns. I have good contacts with Mr Serdyukov, and I saw him recently. We agreed on everything, including transfers, and we have already accepted several major facilities, but have so far failed to agree on ways to finance these facilities. People in the Finance Ministry tell me that moneys were made available to the Defence Ministry, and Mr Serdyukov tells me he doesn’t have them and suggests that we try to find an alternative solution together. I would very much like to have an official decision. That way, we could start looking for loans. Look, I have 33 military towns, 127 houses, 18 boiler plants that mostly use fuel oil, and 92 other facilities that need to be put on my balance. I won’t be able to get everything ready in three months. Mr Medvedev, I need your help.

Dmitry Medvedev: We will get you help if you need it. I will let Mr Serdyukov know about it, and I will also instruct Deputy Prime Minister Dvorkovich to clear up the situation with these funds and find out where they are: in the Finance Ministry, the Defence Ministry or some other place. Thank you for letting me know about this.

Ravil Geniatulin: Thank you.

Dmitry Medvedev: I will discuss the refinery and the subsidiary issues with Rosneft. I would like to ask Mr Artemyev (head of the Federal Anti-Monopoly Service) what he thinks about the situation. I believe that it’s more or less acceptable and controllable. The global oil markets show signs of the start of a downtrend, which is not good news for the budget, I guess. However, it’s beneficial for establishing effective and uninterrupted supplies of petroleum products at reasonable prices. How are things in your opinion?

Igor Artemyev: We noted some not quite appropriate activities on the part of Lukoil and TNK-BP with regard to increasing prices which were not justified by the situation on global oil markets.

You have rightly noted that global prices have fallen from about USD 115 a barrel to USD 102 a barrel lately. As a matter of fact, we issued a warning to these companies telling them not to make any unsubstantiated price increases. They complied and reduced prices over the past 30-45 days. The way we see our mission is to secure a steady decline in prices across all Russian markets, literally on a weekly basis, if global prices keep falling. We have issued such notices to all oil companies.

However, there is an issue that may give rise to certain problems automatically in light of recently adopted legislative acts. I am referring to an increase in excise taxes on petroleum products scheduled to enter into effect on July 1. The thing is that even price for 95-octane petrol doesn’t cross the psychologically important barrier of 30 roubles per litre. As a matter of fact, prices have never crossed the 30-rouble price tag in central Russia.