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  • 2013 June 25

    Infrastructure issues of SPIEF 2013

    At the St. Petersburg International Economic Forum 2013, the state and the business shared the opinion that the best strategy in the days of the global economy crisis is to invest in infrastructure. Corresponding agreements were concluded during the event – Chinese company entered the Yamal LNG project, Rosneft secured supplies of ‘black gold’ to China, and Gennady Timchenko announced the intention to set up new VIOC. The story of Belkomur also entered a new round.

    Who is to pay?

    In his speech at the plenary meeting of the Forum, President Vladimir Putin announced that the state is willing to invest 450 billion rubles [about $14 billion] in profitable infrastructure projects on a repayable basis. “In general, about half of the National Welfare Fund will be invested in projects in Russia,” Putin said. Among the priority transport projects he noted the capacity expansion at the Trans-Siberian. “Let me point out that the Trans-Siberian Railway is one of the longest railways in the world: nearly 10,000 kilometres. A direct rail route across Eurasia will act as a key artery between Europe and the Asia-Pacific region. It will give a powerful impetus to the development of the Far East and Siberia. Our transport infrastructure is getting very close to fast-growing Asian markets,” – the President said.

    The thesis about the efficiency of infrastructure investments in the period of worldwide slump seems to comply with all economic canons. However, in practice, especially in Russia, it hits lots of ‘hidden rocks’. The first issue is who is to invest and on whose account? Infrastructure projects require ‘long’ and ‘cheap’ investments, their payback periods are extensive. ‘Long-term’ financing is actually a problem in Russia and the investment climate here is not optimal. The National Welfare Fund will certainly help but the state cannot ‘bear’ all the projects alone. Private investments and private-public partnership is required anyway.

    And it is not simple so far. As Russia’s former Transport Minister and Presidential Adviser Igor Levitin said at the panel discussion within the Forum framework, it is difficult to launch a large-scale infrastructure project in Russia. “Today, nobody wants to pay for the projects …  The Investment Fund was set up to finance the projects through the tenders but, unfortunately, this Fund does not work now and it is a problem for large projects to start... There should be a mechanism to start the projects,” Levitin said. He also noted that it is difficult to train experts of private-public partnership in Russia as there is no such a specialization here and they have to study abroad. Nevertheless, Levitin believes that the strategic responsibility for infrastructure is the competence of the state. “Infrastructure will always stay within the state responsibility but the state should set parameters and targets, strategic interests are also to be always determined by the state,” Levitin said.

    According to ex-Minister of Transport, in the context of limited budget (the situation of all countries) there are 2 ways: privatization and private-public partnership. However, Levitin sees the drawbacks of privatization in infrastructure monopolization and shifting all the risks on private investors.

    Foreign capital in Russian projects

    Meanwhile there is a tendency of purchasing the most interesting assets by private investors including foreign ones. Against the background of speculation about possible liberalization of LNG export market, Chinese company CNPC acquired 20-pct share in Yamal LNG project in return to a long-term contract for the purchase of at least 3mt of Yamal gas per year and an obligation to facilitate attraction of financing from Chinese financial institution. The deal is to be closed till October 1, 2013. Upon the completion, the shareholders of Yamal LNG will comprise NOVATEK (60%), Total (20%) and CNPC (20%). As media cites NOVATEK head Leonid Mikhelson (owner of Levit LLC holding a share in NOVATEK), the company does not rule out a possibility to reduce its share in Yamal LNG to 51%. 

    Taking into consideration that NOVATEK is already represented by foreign capital (French Total and structures of Finnish-Swiss businessman Gennady Timchenko) we see that Russian gas falls under foreign control. 

    As Gennady Timchenko said in his interview to TV channel Russia-24 at St. Petersburg Forum, there is an agreement with RF Government on LNG market liberalization in case of real contracts for its export supplies. The first vessel is expected to be loaded at port Sabetta (Yamal peninsula) in the first quarter of 2017.

    When speaking about LNG market, the prospects are quite promising. Experts say, annual demand for LNG from China alone can reach 100 mln t by 2030. Russia’s rivals here are Australia and, probably, Qatar. The matter is where the surplus profit from Yamal gas sales is to stay - in Russia or abroad, on foreigners’ accounts? This issue does not seem to be a trifle when lining up private-public partnership in infrastructure projects. 

    Bu the way, the need of deoffshorization of the economy was widely covered at the Forum. According to Putin, the government is already preparing corresponding amendments for the legislation.

    Gennady Timchenko, owner of the Swiss oil trading company Gunvor and the citizen of Finland, announced quite an extensive plan of investment in Russia including the establishment of a vertically integrated oil company and construction of mining and processing industrial complexes. All these plans should be certainly supported by transport infrastructure. Timchenko is already a co-owner of a number of terminals at Ust-Luga port: Neva Pipeline Company (oil), Rosneftbunker (oil products), NOVATEK (gas condensate processing products), Sibur (LPG). According to Timchenko, export terminals in Ust-Luga are “highly payable”.

    Rosneft agreements

    It should be noted that Rosneft and Gazprom also have LNG projects. As to the Forum, Rosneft signed a number of LNG related contracts there. 

    Rosneft also signed Heads of Agreement for sale and purchase of liquefied natural gas with Japan’s Marubeni Corporation and Sakhalin Oil and Gas Development Co., Ltd. (SODECO). LNG will be delivered to Marubeni under a new LNG project Rosneft intends to develop in the Russian Far East. The Heads of Agreement outlines key commercial parameters, which will underlie the future long-term LNG supply contract. In accordance with the Heads of Agreement, Rosneft plans to deliver 1.25 million tons of LNG to Marubeni annually on a long-term basis starting from 2019. The agreements with SODECO sets forth key commercial terms of the long-term contract for the delivery of 1 million tons of LNG to be purchased annually from Rosneft’s future project in the Far East to start in the first quarter of 2019. The agreements give Rosneft an access to the strategically important Japanese natural gas market – the largest in the Asia-Pacific region.

    Another Heads of Agreement for an LNG contract was sealed with Vitol. Following the new agreement, Vitol will become a large strategic buyer of LNG from Rosneft’s planned facility in the Russian Far East. The supplies of LNG, which are anticipated to commence in 2019, will enable Vitol to serve clients across Asia-Pacific region.

    Besides, an agreement was signed as part of the Rosneft-ExxonMobil 2011 Strategic Partnership Agreement, identifying further steps for the development of a LNG plant in the Russian Far East.

    Actually, Rosneft was one the key news makers at the Forum. Rosneft and ExxonMobil announced the achievement of several milestones under their 2011 Strategic Cooperation Agreement, including joint venture formation for the Kara Sea and Black Sea projects, and establishing foundations for joint ventures to explore seven other licenses in the Russian Arctic and to manage the joint West Siberia tight oil project.

    Rosneft and Statoil signed Completion Deed relating to the development of Russian offshore blocks in the Barents Sea and in the Sea of Okhotsk: Lisyansky, Kashevarovsky, Perseevsky and Magadan 1.

    Rosneft and Eni S.p.A. signed Completion Deed for the Russian offshore projects. The companies announced the formation of organizational structures for cooperation, signed all definitive agreements and fulfilled all conditions required to develop the offshore projects in the Barents Sea and in the Black Sea under the Strategic Cooperation Agreement entered into by the parties in 2012.

    The company also signed long-term agreements with CNPC on the supplies of $270 billion’s worth of crude oil which became unprecedented for the global business. The agreements were signed in the framework of the Intergovernmental Agreement between Russia and China, entered into in March 2013.

    Weak spots of Russian infrastructure

    Abstracting from agreements, it should be noted that the Forum participants put much emphasis on the drawbacks of Russian transport infrastructure in general and in the part of manufacturers and exporters. “Weak spots” of Russian transport were in details covered by Maksim Volkov, Director General of PhosAgro OJSC (manufacturer of chemical fertilizers).

    According to Volkov, logistics of fertilizers in the USA is twice as competitive as that in Russia. As for Europe, the density and the quality of its highways are much higher as compared with Russia. In Europe, automobile transportation of cargo is economically feasible at distances of up to 500 km, while here, in the North West of Russia, it is viable only for up to 150 km.  “That is, we can’t do it being 150 km from the port... Axle load limit is lower here than in Europe, therefore we carry 30 tonnes against 50 tonnes in Europe. The traffic speed also leaves a lot to be desired...,” Volkov explained.

    As for Europe-Asia routes, container transportation is to be developed. “In the USA, they use double-stack container trains while we can’t use such trains because of low tunnels and bridges... Of course, huge resources are needed to solve this problem but we have to start, otherwise we will always stay where we are now. Overseas, we load containerized fertilizers and see that this sector is developing more and more: containerized fertilizers go to Africa, Asia, Latin America. And such containers find the needed company. However, not a single tonne was shipped to the internal market, again because of noncompetitive container transportation. Considerable resources are to be invested here.”

    Lifelong saga

    The story of Belkomur also entered a new round at the Forum: on June 20, 2013, Komi Republic, Perm Territory, Arkhangelsk and Murmansk Regions signed a document on implementation of a comprehensive programme for industry and infrastructure development of Belkomur project under the principle of private-public partnership.

    A specific part of the strategic partnership North-West is dedicated to the construction of Belkomur railway (White Sea – Komi – Urals) which is to link the Perm territory and the Komi Republic with the seaport of Arkhangelsk. 

    With the Murmansk Region as a partnership member, Belkomur project acquires logistical completeness and additional guarantees of implementation, Interregional JSC Belkomur thinks.

    As IAA PortNews learnt from Arkhangelsk Region Governor Igor Orlov, the managing company of Arkhangelsk seaport’s deepwater district is expected to be set up by the end of 2013. However, there are no definite agreements with the project investors as the potential investors are expecting certainty in the issue of Belkomur project.

    Anyway, Putin’s speech did not include Belkomur project as a priority for financing. Moreover, Murmansk Region as one of the parties may prove to be negative news for Arkhangelsk – the railway may pass round its port. So we still treat the project of a deepwater port in Arkhangelsk as a ‘phantom’. Let’s see, what next.

    Another railway project related to ports is the construction of Elegest-Kyzyl-Kuragino line. The head of Tuva Energy Company Ruslan Baisarov disclosed the plans on the project at the St. Petersburg International Economic Forum. According to the project, 75% of resources needed for its implementation are expected to be raised from banks (the negotiations are in progress with Vnesheconombank and Sberbank) against state guarantees. The rest 25% are to be financed by the company of Baisarov himself. 410-km long railway is to link the Republic of Tuva with the Trans-Siberian Railway (the expansion of Transsib capacity was covered by Putin). The capacity of the line is to make 27 mln t per year, mainly coal from Elegest coal field (Tuva) to be sold to the countries of the Asia-Pacific region.

    It is clear that implementation of this project depends on the expansion of Transsib capacity – the first one is impossible without the second one.

    Summary

    Summarizing the Forum’s ‘infrastructure’ results we can make the following conclusions. First, Russian transport infrastructure in general is still behind the performance of the leading countries. Second, for the purposes of infrastructure modernization Russia focuses on the development of private-public partnership. Third, infrastructure is, as expected, still focused on resources – major projects are associated with the export of raw materials including LNG.  Among positive trends – the creation of some processing facilities in ports (NOVATEK in Ust-Luga, LNG plants on Yamal peninsula and in the Far East). But, unfortunately, many promising projects fall under control of overseas capital.

    Vitaly Chernov

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