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TNK-BP Says Russian Oil Trading Needs Single Exchange

TNK-BP Russia should have a unified oil products exchange, with liquidity supported by a combination of government measures and activity of major oil producers, a top official of Russia's third-largest oil producer, TNK-BP, said Friday.

TNK-BP, the 50:50 joint venture between BP and a consortium of Russian shareholders, last week started trading gasoil and jet fuel at the St Petersburg International Commodities Exchange, which is now operating in full stream.

Jonathan Kollek, TNK-BP vice president for sales, trading and logistics, said the exchange is theoretically not limited in capacity but current trading volumes are small as the new project undergoes its "teething problems". When asked about volumes TNK-BP plans to sell at the exchange, he said those would be determined by the price offered by the buyers.

"If the price is good the volumes will be larger," he said.

The government should stimulate the trade with exemption of taxes and excises, but there have not been any decisions in this regard yet, he said.

To kick-start volumes, the industry should also move the exchange forward, he added.

"We believe that this tool should be supported. As long as it is not economically costly then we should support this, to help create this liquidity, but it is a long process."

One exchange
As the Russian government wants to have transparent price-setting and hedging instruments on the domestic oil market, it has encouraged the creation of several exchanges and electronic trading floors for oil products over the last year.

TNK-BP believes it would be logical to mingle all existing exchanges into one efficient transparent trading floor, which will help build up liquidity and volumes.

"I don't understand the logic in having numerous exchanges for the same product," Kollek said.

"Segmenting this business is completely counterproductive. [For] the exchange to work [it] needs liquidity. Liquidity needs volumes."

SPICEX has a potential to convert into a unified exchange as it has a solid foundation, Kollek said.

"The reason we support this particular exchange is that we find them to be cooperative and transparent," he said.

Next Step
If there is a liquid spot market, the next logical step would be to develop the exchange into a futures market for the same product and at the same location, Kollek said.

"I think that the exchanges are efficient when they concentrate on homogenous product as much as possible. There are two changing valuables: the price and the location where you are going to collect your [product] or store it," Kollek said.

"To put in export involves new different problems such as where you will deliver it, how you will deliver, via what tanks, it involves third parties who own the ports and who own handling facilities so immediately you are including so many more valuables that by definition will make the product not homogenous and therefore not efficient to trade with."

While TNK-BP plans to sell both gasoil and jet fuel at SPICEX, the company believes gasoil has more potential.

"You don't have a market of jet fuel. You have a few buyers, you have a few sellers, that's it, it is very limited," a company manager said Friday.

"Gasoil probably has more future. But Transneft system allows you to sell jet, so we can try that as well," he said.

Currently only TNK-BP and Rosneft participate in trading at SPICEX, but Lukoil and Gazprom Neft plan to join shortly, too.

Refining Capacity
Separately, Kollek said that there is currently an excess of global refining capacity but that stricter quality regulations should stimulate investments in upgrade of existing refineries.

A substantial fall in refining margins over the last year is pushing oil majors to shut down or sell refining units, Kollek said. But that reduction in capacity goes together with additional refining capacity coming on stream in other parts of the world, he said.

"And with the current demand today you have no shortage of refining capacity, and if anything, we have excess of refining capacity," Kollek said.

"This of course will not stimulate investments in refining. But together with increasing restrictions on quality, it might stimulate upgrades of existing refineries," he said.

Russia, as a refining hub, can get more value for the process of refining, he said.

"That does not mean that everyone should go out and start building refineries. That means that existing refineries should be to the maximum upgraded and made more efficient."

Posted 07/04/09

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