The Russian oil industry is so far cautious about the Summa and VTTI project to build a new oil terminal in Rotterdam. Most of the experts said that so far the system with which Russian Urals oil is traded is better than what the new project can offer. They are also wary about pipeline monopoly Transneft’s joining the project.

Modern-style terminal

A tender for the construction of the new oil terminal in Rotterdam was announced at the end of 2010. Shtandart TT, which is owned by Russian investment company Summa (75%) and Dutch terminals company VTTI (25%), was declared the winner of the tender this fall. VTTI is the joint venture of oil trader Vitol and Malaysian shipping company MISC Berhad.

The future terminal in Rotterdam, which will be called Tank Terminal Europoort West (TEW), will occupy an area of 55 hectares divided into zones of 45 and 10 hectares. The depth near zone A berths will be 20 meters and more, making them capable of handling supertankers with deadweight of up to 300 000 tons. Zone B will be linked with zone A via a pipeline about 750 meters in length. Zone B will be adjacent to the inner canal (Dintelhaven) equipped with a railroad tank car loading facilities.

The northern part of zone A could be used for transshipping oil products. Construction is set to begin in 2013, and the launch is planned for 2015.

Summa reported that the new terminal will mostly handle Urals oil from Primorsk Port. Regional and local refineries will buy the oil on FOB Rotterdam terms. The terminal should become a major European logistics hub for the Urals oil blend and be a part of a competitive chain of Russian oil transportation by shuttle tankers toward a floating oil pipeline.

Rotterdam and Primorsk?

Russian oil company traders polled by Interfax showed no optimism for the project. “We do not have any information and then there is Transneft’s (RTS: TRNF) joining, so it is difficult to say what this is all for and what the advantages will be,” one trader said.

Russian oil from Primorsk hardly goes to Rotterdam, another trader said. Most of the Urals deliveries go to the Finnish Port Porvoo. Russian crude is consumed in Sweden, Finland, and Poland. Germany buys oil for its Schwedt Refinery and Norway’s Statoil for blending with other types. In addition, small amounts of crude go to Britain and Northern Spain.

Russian oil is sold in Primorsk on FOB terms. The price is based on CIF Rotterdam terms, so if crude is transported a distance that is further than Rotterdam, a higher addition is made to the price of the freight, and if the distance is smaller a lower addition is made. Thus, if Russian oil from Primorsk goes to the Rotterdam terminal, oil companies will be paying twice for the trans-shipment, as most of its crude goes to countries in Northern Europe, located at a shorter distance than the Dutch port.

Another trader said that so far the main advantage claimed of the Summa project is that Russian oil can be supplied on FOB terms. “But we now have most of the major oil companies supplying on FOB terms to Primorsk. Possibly if the terminal is going to work it will be with independent traders, with small independent companies,” he said.

What about Gunvor?

The proposal for independent companies to use the new terminal in Rotterdam seems attractive amid completion of the Baltic Pipeline System-2, through which up to 13% of Russian oil exports can be transported in the direction of Primorsk. The Russian government mid-year suggested the redistribution of oil flows between the Druzhba pipeline and Primorsk. For this it was necessary to ensure priority in the transportation via Druzhba of oil supplied to European refineries on direct contracts. Oil for the spot market was to go in the direction of Primorsk. This system, they thought, should increase oil export revenue.

However, a problem could arise here as the terminal for oil trans-shipment at the final point of the BPS-2 is being built by Gennady Timchenko’s Gunvor, a Swiss-based oil trader in direct competition with Vitol. How these two companies will resolve the issues that arise: whether they will fight or come to an agreement – nobody wants to forecast.

Urals – our sulfurous benchmark

The project could have other aims, such as raising the liquidity of Urals oil, quotes for which are still tied to North Sea Brent oil. However, one trader says, the owners of the terminal will have to try hard to attract buyers for the oil. “Perhaps there will be interesting proposals, some kind of easy terms at this terminal, that will attract buyers,” he said.

The terminal, through the use of shuttle tankers, could provide more flexibility in supplies because it would enable crude to be purchased not in tanker consignments of 100 000 tons, but in smaller consignments of 20 000 tons.

In addition, the terminal would help create better opportunities for arbitration of Russian oil disputes in the United States. So far this is not an attractive direction for the company.

Russian oil company chiefs are also ambiguous about the Summa project.

“We do not have anything to do with this project. I found out about the project from the newspaper,” Gazprom Neft (RTS: SIBN) Chairman Alexander Dyukov said.

“We carry out shipments from Primorsk. But not many tankers go to Rotterdam. We make direct shipments to Finland, Sweden, and Germany. What is the point of going to Rotterdam to make trans-shipments there? The terminal will only be required by companies that supply the Asia-Pacific region countries and the United States, which Gazprom Neft does not supply to. We are satisfied with shipments to Europe, and everything suits us. We would not like to leave these markets,” he said.

Lukoil President Vagit Alekperov did not have any comment on this issue, but he did tell the press that his company had several types of oil, such as Arctic light, supplied from Varandey, Urals from Primorsk, and heavy oil from the Yareg field. Lukoil (RTS: LKOH) plans to open its own blending center in Rotterdam for direct deliveries to refineries in Holland.

The Summa project is interesting, but Bashneft (RTS: BANE) has not yet been asked to take part in it, Bashneft CEO Alexander Korsik said. The closer the oil gets to the end consumer the better, he said. “However, correct logistics need to be ensured,” he added. Bashneft exports small volumes of oil, and such projects are of more interest in terms of petroleum product shipments, Korsik said.

The project can only be successful if there is transparent trading of Urals oil on CIF terms, said TNK-BP vice president for sales and logistics Jonathan Kollek.

“If somebody creates a center for free transparent trading in Rotterdam, where CIF Urals trading is carried out, that will be interesting and good for business. But this will only be good if there is transparency, when private or government companies do not interfere.”

Russian officials and government companies who have already announced their interest in the project, despite skepticism on the oil market, do not seem to share that opinion.

My vast country – from Rotterdam to Omisalj

The agreement was signed with the participation of Russian President Dmitry Medvedev. Almost immediately many Russian officials announced they were ready to support it at a government level. “We are ready to look at proposals and discuss the necessary types of support,” Deputy Prime Minister Igor Sechin told the press a few days after Summa’s victory in the tender was announced. He did not specify what kind of support he meant.

Transneft chief Nikolai Tokarev has said Summa Capital had made a proposal to Transneft prior to the announcement of the results of the tender for building the terminal. “After the news that Summa had won, we confirmed our interest in looking over this proposal,” he said.

Russia already had the grand idea of providing synergy of northern routes via Primorsk and Rotterdam and southern routes via Novorossiysk and Omisalj, Tokarev said. “Here it is possible to diversify routes on the basis of the Omisalj Port from Croatia’s Janaf, from Novorossiysk,” he said. He did not add that Transneft owns the Novorossiysk Port together with Summa.

Transparency is key

Market dealers do not want to comment on the initiatives of the deputy Prime Minister and the Transneft chief. “It is difficult to say what officials and Transneft see in this. Possibly it is simply that they want to work and take part in this business, to enter the European market..,” one dealer said.

The participation of the state pipeline monopoly in such a project could lead to corruption in deliveries of Russian oil to the European market, said another dealer. Transneft is working closely with the Energy Ministry, which means government officials and this company could influence the export volumes and destination of Russian oil.

Kollek seems to best sum up the opinion on the oil market when he says “this will be good and useful, if trading is transparent. But, if only private companies are going to participate [in the project], it would be harmful. And more so if government structures participate. It will be a big mistake for Transneft to go there,” he summed up.