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Cablegate: (C) Oil Traders: Pipeline Exports to Europe Still

VZCZCXRO7650
PP RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR
DE RUEHMO #3380/01 3290635
ZNY CCCCC ZZH
P 240635Z NOV 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 0848
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY

2008-11-24 06:35:00 08MOSCOW3380 Embassy Moscow CONFIDENTIAL 08MOSCOW2632|08MOSCOW2880 VZCZCXRO7650\
PP RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR\
DE RUEHMO #3380/01 3290635\
ZNY CCCCC ZZH\
P 240635Z NOV 08\
FM AMEMBASSY MOSCOW\
TO RUEHC/SECSTATE WASHDC PRIORITY 0848\
INFO RUCNCIS/CIS COLLECTIVE PRIORITY\
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY\
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY\
RHEHNSC/NSC WASHDC PRIORITY\
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 003380 \
\
SIPDIS \
\
DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT \
EUR/CARC, SCA (GALLAGHER, SUMAR) \
DOE FOR HEGBURG, EKIMOFF \
\
E.O. 12958: DECL: 11/21/2018 \
TAGS: EPET ENRG ECON PREL RS
SUBJECT: (C) OIL TRADERS: PIPELINE EXPORTS TO EUROPE STILL \
OPAQUE; SEABORNE TRADE MORE COMMERCIAL \
\
REF: A. MOSCOW 2880 \
B. MOSCOW 2632 \
\
Classified By: Econ MC Eric T. Schultz for reasons 1.4 (b/d) \
\
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SUMMARY \
------- \
\
1. (C) The oil trading business in Russia has long been \
opaque, benefiting politically connected firms such as the \
secretive oil trading firm Gunvor. Contacts tell us, \
however, that the business has lately become more transparent \
because seaborne trade is now largely conducted via \
commercial tenders and terms. They caution, however, that \
pipeline exports to Europe remain problematic. Shell's oil \
trading manager (protect), for instance, told us he believes \
the recent supply reduction to the Czech Republic (ref A) was \
politically coordinated. To the extent that a shift toward \
greater transparency has taken hold, it is another example of \
the role of international commerce and finance in forcing \
Russian businesses to behave commercially. End summary. \
\
-------------------------- \
RUSSIAN OIL TRADING OPAQUE \
-------------------------- \
\
2. (SBU) Oil traders at major Western companies explained to \
us recently that the market for physical oil trades is very \
developed globally and has two segments. One is comprised of \
major international oil companies who trade oil largely to \
optimize their own global operations -- to ensure the right \
amounts of oil are transferred to the right facilities at the \
lowest cost. The other is comprised of companies such as \
Glencore, Vitol, and others who serve as intermediaries \
simply trying to make money buying and selling oil using \
their marketing, shipping, or risk tolerance advantage. \
\
3. (C) According to these experts, oil trading in Russia has \
had a reputation for secretive deals involving intermediary \
companies with unknown owners and beneficiaries. Oil exports \
from state-owned or state-influenced oil companies have \
reportedly been funneled through favored oil traders, \
potentially yielding billions of dollars of profits for these \
companies. Of particular note in the Russian oil trading \
business is the Swiss firm Gunvor. The company is rumored to \
be one of Putin's sources of undisclosed wealth, and is owned \
by Gennady Timchenko, who is rumored to be a former KGB \
colleague of Putin's. \
\
4. (C) Political activist Alexei Navalny, who has sued Gunvor \
and several Russian oil companies for information regarding \
their oil trading practices (ref B), estimates that Gunvor \
may control up to 50% of total Russian oil exports. He and \
his lawyer told us recently that it is impossible to know the \
extent of Gunvor's penetration of the market, however, \
because the companies involved refuse to disclose this \
information. (Note: Gunvor claims in its glossy but \
uninformative brochure that it "handles a third of Russia's \
seaborne oil exports." End note.) As Navalny has \
discovered, verifiable information on the volumes and terms \
of oil trades is very difficult to come by. \
\
---------------------------- \
BUT BECOMING MORE COMMERCIAL \
---------------------------- \
\
5. (C) Managers at two western oil companies, however, \
explained to us recently that oil trading in Russia has taken \
a welcome turn toward greater transparency thanks to open \
tenders for seaborne exports. Demetrios Anyfantakis \
(protect), the General Manager of oil trading for BP \
Russia/CIS, told us in a recent meeting that oil trading via \
Russian seaports is now, in his view, "completely \
commercial." Anyfantakis, explained that during the last \
year, and especially since Medvedev's inauguration, there has \
been a deliberate and successful push by the state to ensure \
transparency and commercial terms for most of the oil \
exported from Russia via ports. \
\
6. (C) Anyfantakis claimed his view is not just conjecture. \
He said it comes directly from hard numbers and evidence that \
he sees from his participation in tenders by Rosneft, Lukoil, \
and other major Russian oil companies. He said that while \
\
MOSCOW 00003380 002 OF 003 \
\
\
Gunvor rose based on the "administrative support" of the GOR, \
the government came to realize it could no longer promote \
Gunvor at the expense of, for example, state-owned Rosneft \
and Gazpromneft. Anyfantakis said he believes the trend \
toward greater transparency in seaborne exports will continue \
and he welcomed Navalny's lawsuit toward that end. \
\
7. (C) Dave Chapman (protect), General Director of oil \
trading for Shell Russia, painted a similar picture of oil \
trading in Russia, calling seaborne trade "open and \
transparent." He added that domestic trading, while \
depending on middlemen, is now also largely commercial. \
Chapman told us the Russian oil trading market is among the \
most difficult in the world, but that it also offers good \
opportunities and that Shell has built a "healthy business" \
here. He said he has seen great changes in the 1 1/2 years \
he has been in his current job, and suggested that much of \
the change has come as a result of the government's push for \
greater transparency in the economy as a whole. He added \
that he believes this push has largely been driven by the \
financing needs of the state-owned companies. \
\
8. (C) Chevron's Mike Ryan (protect), a London-based trader \
who handles the company's trade in Russian/CIS oil, was less \
impressed by the degree of transparency in the business, even \
for seaborne oil exports. He told us recently that while \
there are more open tenders and more participants for \
seaborne exports, "the same firms seem to often win." He \
suggested that favored firms may get inside information and a \
"second chance" to bid. Ryan agreed, however, that there has \
been a trend toward greater transparency, but cautioned that \
it is far from an "open and commercial" market. He \
highlighted Rosneft as a company that has evolved toward \
greater transparency, and Surgutneftegaz (another reported \
source of Putin's illicit wealth) as a company that has not. \
\
------------------------------------------ \
PIPELINE EXPORTS TO EUROPE STILL A PROBLEM \
------------------------------------------ \
\
9. (C) All three company representatives noted, however, that \
the trend toward greater transparency stops with seaborne \
trade. They all said Russian oil exports to Europe through \
pipelines, especially through the southern Druzhba pipeline, \
is still a very opaque business. Anyfantakis said pipeline \
exports, in general, are inherently more political than \
exports from ports, and that the trade through southern \
Druzhba is so opaque that "no one knows who is getting what." \
Ryan said many in the business "wonder what goes on between \
buyers and sellers" along that route. \
\
10. (C) As an example, Chapman specifically cited the recent \
oil supply reductions from Russia to the Czech Republic (ref \
A). He said that despite claims by officials that \
"middlemen" were the problem, he did not believe that to be \
the case. He said producers generally offer their oil using \
formulas that include some premium on top of a base price, \
depending on the export market. He explained that just prior \
to the supply reduction to the Czech Republic (where Shell \
has a stake in a refinery), all producers demanded the exact \
same premium, $1.25 per barrel, which he said was 4 to 5 \
times the previous figure for that route. He believed this \
price increase was coordinated, and resulted in the \
re-routing of oil exports away from the Czech Republic. \
\
11. (C) Chapman said that in the case of the Czech Republic, \
the refineries involved had access to other supplies, but \
that there was indeed an additional cost associated with \
obtaining alternate supplies. He said similar demands for \
higher premiums have occurred with regard to deliveries to a \
German refinery partly owned by Shell, but that the refinery \
had more limited access to alternatives. In such cases, \
Chapman explained, managers have to decide whether to run \
refineries at sub-optimal levels, or pay the higher costs. \
\
12. (C) Chapman also noted that oil exports to Hungary, by \
Transneft decree, must go through "a certain intermediary" \
(Gunvor), which adds one dollar to each barrel. He said in a \
competitive market, by contrast, an oil trader might add \
anywhere from five to 20 cents "maximum" to the price of a \
barrel of oil. \
\
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COMMENT \
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MOSCOW 00003380 003 OF 003 \
\
\
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\
13. (C) Oil traders play an important role in the market, \
helping provide liquidity and optimizing the operations of \
oil refiners and producers. However, while it appears that \
the GOR has realized that the more transparent and commercial \
the trading business, the better it is for Russia's oil \
sector, it unfortunately has not decided to apply this \
realization uniformly. Greed, corruption, and geopolitical \
concerns still trump efficiency, especially with regard to \
certain export routes to Europe and with regard to certain \
connected oil traders, such as Gunvor. End comment. \
BEYRLE \

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