OREANDA-NEWS. November 05, 2014. The Federal Antimonopoly Service (FAS Russia) held a joint session of the Expert Council on Developing Competition in the Market of Oil and Oil Products and the Expert Council on Developing Competition in the Financial Markets (the Section on Organized Trading).

The session was opened by the Chairman of the Expert Council, Deputy Head of FAS, Anatoly Golomolzin. “FAS platform is the place where the most important rules of the game are formed, the contours of antimonopoly policy are shaped and new market segments are projected in cooperation with the interested agencies, organizations, experts and general public.

Under this format, three years ago we discussed the issues of developing exchange trading for oil products. Today it’s an established price index. In conjunction with off-exchange price indices and indices of prices on comparable foreign markets (Net Back), they reflect the market situation. The exchange allows prices to flexibly react to changing demand and supply, the situation on external and internal markets. Price indices for physical commodities form a reliable basis for establishing and executing domestic bilateral direct contracts (ОТС-contracts). Price indices for physical commodities also are of paramount importance for financial markets, for the markets of derivatives.

This segment of exchange trading has considerable preconditions for growth, creating preconditions for risk hedging”. Anatoly Golomolzin reminded that the previous meeting of FAS Expert Councils had focused on exchange trading with gas. Trading with natural gas took place on 24 October 2014. 21 million m3 of gas were sold for supplying in November for around 55 million RUB. The price adjusted in accord with comparability conditions is lower than the regulated tariffs. Next trading for a month ahead will take place on 25 November and 25 December 2014. In 2015 it is planned to launch trading for ten days (a week) and the day ahead. Overall it is planned to sell around 35 billion m3 of gas next year.

Then Anatoly Golomolzin commented FAS changes and additions to some legal acts.

1. To obtain representative price indices that accounts for price parameters of transactions with oil and oil products concluded, in particular, on the off-exchange market, both the export and supplies on the domestic market, FAS drafted an order to add natural gas and export transactions with oil to the list.

It also specifies the persons responsible for submitting information on an off-exchange contract: producers of goods or persons acting in the interests and at the producer’s expense.

Changes introduced by the Draft Order also concern the list of information to be submitted to the exchange by a person that concluded an off-exchange contract. It enables adjusting exchange and off-exchange indices to the comparable conditions, and obtaining information from the Register of off-exchange contracts for the purposes of not only antimonopoly but also tax control.

2. A draft Order by FAS and the Ministry of Energy approved the lowest amount of oil sold through exchange and particular categories of goods derived from oil and gas, produced and (or) sold by an economic entity with the dominant position on the relevant markets.

It is proposed to approve the minimum amount of oil sold through exchange at 5 % of the monthly extraction by each dominant economic entity and no less than 4% of the aggregated monthly oil output by all dominant economic entities.

3. Upon discussions of the draft order and in view of the need to legislatively encourage excluding two-sided transactions from anonymous trading, FAS put forward amendments enabling to conclude two-sided transactions during a particular session, when transactions are concluded at average weighted prices formed under market pricing at a preceding trading session. Anatoly Golomolzin also informed participants that FAS drafted an agreement on improving the mechanisms for sale of oil and oil products, which is currently at the stage of signing, to be concluded between the interested federal executive bodies and market participants (the Exchange Council).

“Sustainable indices of exchange and off-exchange prices for oil products, sustainable exchange and off-exchange coal prices, along with a developed organized spot market of electric power for a day ahead – all this facilitate development of inter-fuel competition. Developed organized markets of physical goods and derivatives for those base assets together with organized trading on the stock market and forex market create preconditions for efficient capital flow tools. Therefore, the work that we do together with the Bank of Russia is very important. Correlation between the established centre of organized trading with raw commodities and a financial centre under development is obvious. Such commercial infrastructure will be an important element of global financial-and-economic relations. It will also encourage development of exchange contracts for ESPO and Urals oil, worked-out exchange contracts for oil products (diesel fuel), as well as developing the system of reporting off-exchange transactions on all export raw commodities at exchange”, pointed out Anatoly Golomolzin.

According to St Petersburg Mercantile Exchange (SPIMEX), from 2011 to 2014 the number of trading participants at the oil products section increased by 1.5 times (from 905 to 1391), the number of completed transactions went up nearly six-fold (from 11714 to 68102), while the average transaction volume decreased by nearly five times (from 968 to 207 tons). According to Anatoly Golomolzin, it means that accessibility and competitiveness of the trading enhanced considerably. Deputy Head of FAS forecasts that “Exchange trading becomes an important method of selling oil products. In 2013 12.1 million tons of oil products were sold through exchange (diesel fuel – 38%, gasoline – 35.8%, aviation kerosene – 15.2%, residual oil – 10/2%) for 347 billion RUB; in the ten months of 2014, 14 million tons were sold for 420 million RUB. By the end of the year the sums can reach around 16 million tons and 500 billion RUB accordingly.

Discussing the issue further, SPIMEX President Alexei Rybnikov, emphasized the importance of continuous development of exchange trading with oil, improving to this purpose the regulatory framework in line with FAS proposals. He gave data on the outcome of trading and reporting of off-exchange transactions at exchange. He pointed out that along with exchange quotations off-exchange market indices radically increased the extent of information transparency of the market of fuel-and-energy resources. “In the ten months of 2014 over 100,000 contracts for oil products in total for over 90 million tons and over 550 contracts for supplying oil, in total exceeding 85 million tons and over 10,000 coal supply contacts for more than 150 million tons were registered. The efforts of the exchange with market participants to form export exchange contracts for ESPO oil and diesel fuel”, stated Alexei Rybnikov.

Representatives of the Bank of Russia and the Ministry of Energy also supported FAS initiatives.

General Director of “Market Analytics” Non-Profit Association M. Turkalov gave a presentation on the “Problems of Russian Gasoline Market and Approaches to Solving Them”. He supported the amendments on regulating the issues of concluding two-sided transactions. His presentation focused mostly on the problem of disparity between exchange and small wholesale prices. Commenting the presentation, Anatoly Golomolzin pointed out that the issues are partially resolved under the frame of trading policies adopts and being adopted by oil companies, and can be finalized through the draft Laws “On Specifics of Oil and Oil Products Circulation” and “On Market Pricing” devised by FAS. As for the proposal on possible increase of the proportion of oil products at the exchange, Anatoly Golomolzin pointed out that the set threshold value (10%) ensures market pricing, which, in its turn, facilitate attracting additional amount of oil products to the exchange. In 2013 supplies to the domestic market on the outcome of exchange trading vary from 9.9% on residual oil to 19.2% on aviation kerosene; in 2014 = from 12.2% on residual oil to 22.4% on aviation kerosene. At the same time no excessive requirements were set for the companies that due to various reasons had difficulties supplying more than 10% through the exchange.

Oil products buyers were concerned with further expanding exchange trading, while a representative of an oil company – “Surgutneftegaz” OJSC were more interested in a high threshold for oil sales through exchange, as well as the threshold status – mandatory or voluntary. Anatoly Golomolzin explained that the 10% share of oil products is ser in accord with a FAS determination. Neither the FAS determination or the law sets such a requirement for oil. This parameter is not restrictive or suppressive, it is stimulating. Exchange trading with oil in Russia already exists. Its building-up potential is formed through participating independent oil-producing companies extracting around 14.5 million tons of oil per year. Even higher growth potential is engaging in trading resources of those oil companies without balanced oil extraction and processing. Establishing the level of market prices that conform to the law is an additional possibility to avoid claims form the antimonopoly or tax bodies.

Then, Deputy Chairman of the Board of “Independent Domestic Oil Traders” Non-Profit Partnership, Bazhenov, discussed the pressing issues and prospective mechanisms of antimonopoly regulation and development competition on the market of oil and oil products. He emphasized the importance of the institution of exchange trading for independent companies and fully supported all FAS initiatives to make changes and additions to the normative legal acts on exchange trading. The main part of the report focused on the issues of relations between independent market participants and oil companies. Some of the speaker’s proposals, for instance, on creating a system to monitor the situation, are already implemented to a considerable extent and are presented at the FAS web-site. The same related to violations typology, FASA provides such information on a regular basis although with continuously decreasing urgency of the issue: since 2008 till present the annual number of cases investigated by the antimonopoly authority went down by nearly 8 раз, primarily, through developing market pricing measures.

Summing up the meeting, its participants supported FAS proposals on introducing and changing the regulatory framework.