8 Apr 2019 13:38

Sechin proposes alternative for regulating fuel market

MOSCOW. April 8 (Interfax) - The measures adopted at the government meeting chaired by Russian Deputy Prime Minister Dmitry Kozak on March 26 were not discussed with oil companies before being announced, but those companies are suffering losses from controls on motor-fuel prices and non-market regulation of the domestic market, Rosneft head Igor Sechin wrote in a letter to Prime Minister Dmitry Medvedev, a copy of which Interfax has seen.

On March 26, it was decided to extend by three months, until June 30, 2019, the agreement with oil companies on supporting prices for motor fuel by adjusting supply volumes and changing petroleum product prices according to inflation. It was also agreed that the damping component of the reverse excise should be improved, but because Finance Ministry representatives did not attend the meeting, the source of funding for the proposed adjustment remained unclear, though it could come from increased taxes in the oil sector. The proposal to introduce licensing for exports of petroleum products in order to provide additional guarantees that the domestic market gets enough motor fuel raises questions about the transparency of such a system.

"Essentially, there's been manual non-market regulation of motor fuel prices since May 2018, and new mechanisms of manual regulation of entrepreneurial activity continue to be proposed, which not only creates systemic risks for the functioning of the systemically important oil industry, but also, according to an absolute majority of market players, is started to double already existing regulatory instruments," Sechin wrote.

The company's retail prices for fuels and lubricants have been frozen, being corrected only for the VAT increase, and small-scale wholesale prices have fallen 5-16%. Simultaneously, associated production costs have grown significantly, and excises on fuel have grown 50%; as a result, the oil industry is essentially subsidizing related sectors of the economy, Sechin wrote. The company estimates its losses from the freezing of prices at levels that do not correspond to the market situation, the increased excise load, the tax maneuver, and the improperly calibrated damping mechanism at more than 75 billion rubles since May 2018. If the agreement with the government is extended, there will be losses of 30 billion rubles a quarter.

Sechin wrote that the mechanisms announced by the Finance Ministry to compensate oil companies for their losses from price controls did not work, as they did not cover the difference between export prices and prices in the domestic market.

The domestic motor-fuel market is balanced and ready for market-based regulation, he wrote. As a system-wide measure for developing the petroleum-products market, Rosneft proposes adding new obligations for subsoil users to legislation starting in May and writing them into license agreements: namely, obligations to process and deliver to the domestic market a quantity of light petroleum products equal to at least 17.5% of the total oil produced in Russia (excluding projects with PSAs and deliveries to Belarus). According to Sechin, this measure was supported by the government at a meeting with oil companies in September 2018, but the competent agencies said it would be difficult to administer.

"Additionally, it is proposed, as a possible mechanism for administering the mandatory refining of a share of the oil produced in Russia, to elaborate the use of the mechanism for replacing the share of the mandatory volume of oil for refining with a basket of light petroleum products ('swapping')," Sechin wrote. Under this proposal, companies with available oil-refining capacity in Russia could buy oil from producers at an agreed-on price and give them in return a basket of light oil products produced using that oil. The Federal Anti-Monopoly Service could establish the price for processing for each refinery. Additionally, vertically integrated companies could help producers that do not have relevant trading divisions sell the light oil products at market (exchange) prices.

Medvedev has instructed Kozak and First Deputy Prime Minister and Minister of Finance Anton Siluanov to prepare a position on these proposals.

Kozak's spokesman Ilya Dzhus declined to comment, saying only that the government "pays close attention to the position of oil companies." A representative of Siluanov also declined to comment. Rosneft's press service said that the company does not comment on business correspondence.