Novorossiysk Loses Cargo Amid Oil to Asia: Freight Markets

Russian Prime Minister Vladimir Putin’s quest to sell oil to China, the world’s hungriest market, may lock in a $797 million decline in value at the country’s biggest port.

OAO Novorossiysk Commercial Sea Port on the Black Sea, Russia’s biggest outlet to the Mediterranean, is likely to lose crude volumes to a new pipeline to Russia’s Pacific coast and to China. The project creates “notable competition” to European deliveries, Putin, 58, said in August at the ceremonial opening of the China spur in eastern Siberia.

Russia, the world’s largest oil and gas producer, sent its first crude by pipeline to China in January. It is part of the $26-billion link, known as ESPO, being built to carry 1 million barrels of oil a day across Siberia by the end of 2014. That may divert about 10 percent of Russia’s oil output from ports and pipes serving Europe as the country seeks to exploit growing Asian demand.

“Investors are shy of Novorossiysk stock right now because there is uncertainty over how long the gap between losing oil and picking up other cargos will last,” said Chris Weafer, chief strategist at UralSib Financial Corp., Russia’s fifth- biggest private bank by assets. The lag may last as much as three years, he said.

Novorossiysk shares are already being pressured by a government-backed transaction that would turn over control of it to shareholders of another port.

Falling Shares

The Black Sea port’s value has plunged 24 percent, or by about $797 million, since the day before its Sept. 15 announcement that it would pay $2.15 billion to take over the Primorsk port, whose shareholders would then gain a controlling stake in the combined company. Shares fell 1.8 percent yesterday in Moscow to close at 3.75 rubles.

“Primorsk will be of no help as it will probably lose volumes too,” said Elena Sakhnova, a transportation analyst at VTB Capital in Moscow. In addition, “Investors were disappointed with Novorossiysk’s acquisition of Primorsk because it was expensive.”

The Black Sea route will likely bear the brunt of falling crude flows as Russia builds ESPO to the Pacific, Jonathan Kollek, vice president for sales, trading and logistics at TNK- BP, Russia’s third largest oil company, said in an interview today. It is not as profitable as other export routes, he said.

Fuel Oil

Novorossiysk will seek to compensate for lost crude exports by handling other oil products, such as fuel oil, said Igor Dyomin, a spokesman for state oil pipeline operator OAO Transneft, which is part of a group that gained control of the port in January. Crude accounted for almost 52 percent of volumes through the port in the past two years, while refined products accounted for less than 16 percent.

Novorossiysk is located on the only southern coastline Russia has left after the December 1991 breakup of the Soviet Union. It shipped almost 16 percent of the 269 million tons of crude Russia exported last year, according to the Energy Ministry. From it, tankers must navigate the crowded Bosporus Strait to reach the Mediterranean Sea.

The Transneft-owned ESPO pipeline, when expanded to the Pacific port of Kozmino, will span about 4,700 kilometers (2,900 miles), longer than the distance from London to Tehran. The Chinese spur runs 1,024 kilometers, from Skovorodino, where ESPO now ends, to Daqing in northeast China.

Japan Buys

Putin’s push to extend deliveries to the Pacific gives remote East Siberian deposits an export route, while achieving his strategic aim of broadening Russia’s customer base. The crude blend from Kozmino has found buyers at refiners in Japan, South Korea and the west coast of the U.S., and Russia has made the Kozmino price the benchmark for pipe deliveries to China.

Consumption of oil in Europe’s five biggest countries will fall 1.1 percent this year while Chinese demand is forecast to grow by 6.5 percent, according to the Paris-based International Energy Agency, which said last July that China had passed the U.S. as the world’s biggest energy user in 2009.

“Oil demand growth in China was the fastest-growing on an absolute basis last year,” Michael Waldron, an energy-markets analyst at the agency, said in a phone interview, speaking of volume. “The IEA predicts it will be again this year.”

Oil volumes at Novorossiysk Port will probably decline at a rate of between 3 percent and 6 percent for a couple of years before stabilizing, said VTB Capital’s Sakhnova. The port handled 42.1 million metric tons of oil last year, a decrease of 5.5 percent from 2009, the company said in a Jan. 31 statement.

New Strategy?

“Once shareholders come up with a new strategy and investment plan, it will help share prices return to previous levels,” she said.

The Primorsk port’s owners, state-run Transneft and businessman Ziyavudin Magomedov’s Summa Capital, acquired 50.1 percent of Novorossiysk in a deal completed in January.

The port’s market value has shrunk to about $2.6 billion since Sept. 14. Transneft preferred shares have climbed 31 percent to 44,836 rubles ($1,584) in the same period.

Transneft and Summa Capital, as shareholders of the Novorossiysk port company, want to boost its value, so “it’s safe to assume Transneft’s other projects won’t compete,” Novorossiysk port’s press service said in an e-mailed response to questions.

Having Transneft as a shareholder may help to guarantee oil volumes or raising shipments of oil products, Sakhnova said. Transneft also operates the country’s product pipelines.

Terminal Construction

The port is building a fuel-oil terminal with Cyprus- registered energy trader Gunvor Group Ltd., Dyomin said. The terminal will have capacity to handle 4 million tons of oil products a year, the port said. Oil-product loadings fell 3.5 percent last year to 12.7 million tons, according to the January statement.

Deliveries of materials as the Black Sea resort of Sochi prepares for the 2014 Olympics may lighten the blow, Sakhnova said. The port is also seeking to boost volumes of containers and bulk and dry goods, according a presentation on its website.

The risk to minorities is that Transneft, as the ports’ largest customer, may use its shareholder position to lower its own costs by paring the terminals’ handling rates, Weafer said.

The government has reason to foster the port’s value, as it plans to sell its 20 percent stake, possibly at auction this year, according to the Economy Ministry. The sale is part of a 1 trillion-ruble ($35 billion) program to sell state assets over three years.

“Novorossiysk will remain a core part of Russia’s infrastructure,” Weafer said. “If you look ahead five years or more the outlook is strong.”

To contact the reporter on this story: Stephen Bierman in Moscow sbierman1@bloomberg.net.

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net.

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