• 2014 February 24

    Rosneft could base itself in Rotterdam

    It was reported in mid-February that Summa Group had consolidated 100% of the project for construction of an oil terminal in the Port of Rotterdam by buying out the 25% share that belonged to the Dutch-Malaysian VTTI. Rosneft may become Summa's new partner in the project. We have taken a look into why a Russian state company might be interested in such a project, and if any potential pitfalls lie in store for Rosneft in Rotterdam.

    The back story

    Summa and VTTI jointly won a tender to build a new oil terminal at the Port of Rotterdam back in 2011. The land plot had been earmarked for development for some time – in the mid-2000s a liquefied natural gas (LNG) terminal was planned there. However, the project was put on ice in the 2008 financial crisis. By 2011 there was strong interest in building an oil hub – 20 other companies were the competitors of Summa and VTTI.

    The agreement for building Tank Terminal Europoort West (TEW) was signed back in the spring of 2011. However, the Port rented the land plot for the project only in April 2013. Unforeseen delays occurred during the project implementation – for example, at the end of 2012 the Port announced that it needed to carry out further survey on the land plot. This could be due, for example, to the presence of shells from the World War II era in the area.

    The project contractor for the terminal's construction is Shtandart TT BV. It's planned that this company could complete the terminal by the end of 2016. The storage capacity of the completed terminal would run to 3 million cubic meters. Construction of some part of the infrastructure, including the piers, will be financed by the Port itself.

    At the outset Summa held a 75% holding in Shtandart, with the remaining 25% held by VTTI.  VTTI itself is a consortium of the Dutch trading company Vitol and the Malaysian shipping concern MISC. VTTI specializes in the management of port terminals, and it currently holds stakes in 11 terminals worldwide. However, the Port of Rotterdam was an unusual project – the only one in which VTTI took such a small stake as 25%.  Its usual holding is between 90% and 100%, with only two ports where it holds 49-50%. Another interesting fact is that VTTI already owns another oil terminal in Rotterdam. VTTI's official explanation for its exit from the joint project with Summa was internal corporate decisions, alongside the fact that VTTI is currently on a “high investment roll” in a number of other projects to which it gives a higher priority. Sources close to the situation say that it was an arrangement which both sides considered desirable. “VTTI was needed at the outset of the project, because there was no chance to win the tender without Dutch participation.” But Summa has been actively lining up contacts with the local business community and government officials. It's no coincidence that the company was one of the founders of the Association of Russian-Dutch Business Cooperation, which sets up meetings for businessmen of both sides, sponsored the Gergiev Festival in Rotterdam, and financed the rebuilding of the former Dutch house of Russian Tsar Peter I. “Local business links have been set up, and there was no longer a need to have VTTI as a lobbyist of the Group interests in the Netherlands”, the same local insider source confirmed.

    However, there's a more compelling reason driving this deal. Sources close to Summa told Vedomosti that a new partner might soon enter the deal. In fact it's very clear that the whole deal was set up with this in mind. Many in the media with sources close to Rosneft believe that the new partner may be the very same state oil company.

    What's in it for Rosneft?

    Rosneft's involvement in the deal hadn't previously been mentioned – but logic quickly leads to such a scenario for the project. In the first place, Rosneft is making a priority out of international expansion – you can even read it in their strategy. But it has not so many foreign assets yet; primarily these are extraction assets in Venezuela, and an oil refinery in Germany. From this perspective, such a terminal at the large-scale Port of Rotterdam would make another link in the company's chain of international status. But there's a further project that would make operation in Rotterdam desirable for the state company. At the very end of 2013 it was announced  that Rosneft was buying Morgan Stanley's oil-trading business. This would give the Russian company a 49% stake in Heidmar Holdings LLC – a company which operates a fleet of approximately 100 oil tankers belonging to various owners. The deal also includes contracts for the supply and purchase of oil, and its transportation; an international network of oil storage depots, and a number of equity investments, the report says. Rosneft would also acquire around 100 top managers from Morgan Stanley. The Russian company would be able to expand its oil-trading portfolio thanks to the deal, pit itself against large world oil traders such as Vitol and Glencore – leading global energy players, as it was reported in December 2013 by the authoritative newspaper Financial Times.

    Seen in the context of its purchase of Morgan Stanley's business and the consequent new areas of activity in oil-trading, the entrance of Rosneft into the Port of Rotterdam deal becomes more clearly explicable. Furthermore, the Rotterdam project would serve a valuable geopolitical function which Rosneft frequently fulfils. Setting up a major trading presence for Russian oil in this European port would facilitate the promotion of the Urals oil brand on the world market. The price of Russia's principle export product does not just depend on someone else's price quote (primarily for Brent) for it these days – but instead is based on lowering the differential for it. Back in 2005 the President Vladimir Putin entrusted his Cabinet with the task to solve this thorny problem and obtain a fairer price. Up to now, it's a challenge which has gone uncrowned with success. Thus, in 2006 the Ministry of Economic Development managed to get futures trading of REBCO Russian oil (de facto being the same Urals) started on the New York Stock Exchange – but the price they commanded looked like some kind of statistical error. The market failed to materialize, because it was an attempt to create a new market for a new product all at once. Creating a permanent location for the physical trading of Urals in a major European business centre like Rotterdam might at last help in solving the set problem. Moreover, everything is going in the right direction at the moment for Urals to bolster its position. It's worth noting that just a few days after rumors spread of the possible approach from Rosneft in the Rotterdam project, Ian Taylor, General Director of Dutch oil trading company Vitol, called for immediate changes in the international oil-trading benchmarks. Taylor said that Brent – which serves as the benchmark for over half of the world's traded oil supply contracts – is no longer such an “effective” benchmark. This is due to the reduction of supplies of oil from the North Sea, which are an important constituent of Brent.  Mr. Taylor claims that when setting a new value for Brent, consideration must be made for the costs of oil from Western Africa, Kazakhstan, the USA, and also from Russia. Perhaps this can be read as an attempt for alternative trading of Urals oil in Europe – avoiding strengthening Urals's position, by taking Russian oil within the calculations of Brent.

    Rosneft's ambitious swagger seems unlikely to take a minority stake in the Rotterdam terminal project.  However, it will most certainly need Summa as a partner – once again the question of good local relations comes into play, and Summa has already carried out the building work, plus it has strong stevedoring credentials. It's even possible that Rosneft's involvement in the project was worked out long ago – but kept out of the picture, in consideration of the caution the Netherlands has towards Russian state capitalism.

    What could hinder the Russian state company?

    The biggest difficulty which the entry of Rosneft into the Port of Rotterdam could encounter is the prevailing political face-off. In the first place, the entire European Union views the strengthening of Russian state corporations with dislike – and does all it possibly can to weaken their influence. Just recall the negotiations which Gazprom had over the South Stream pipeline, or the third energy package.  On top of this, Russia is currently going through a period of soured relations with the Netherlands itself. In October 2013 the Netherlands made an official application to the UN International Tribunal for Maritime Law over Russia's arrest of Greenpeace activists. Readers will recall that Greenpeace activists attempted to board the Prirazlomnaya Russian oil rig – and had got to the rig aboard the icebreaker Arctic Sunrise, which sails under a Dutch flag. Another incident was that of Russian Embassy official in the Netherlands Dmitry Borodin – who was detained in his own home, along with his children, by Dutch police. Eventually the Netherlands authorities felt compelled to apologize to Russia for this incident. Yet the most prominent clash arose as a result of the official visit of Russian President Vladimir Putin to the Netherlands in spring of 2013. Thousands of local people took to the streets to protest against Russia's laws on gay propaganda, and were officially supported in their protests by the City Mayor's department of Amsterdam. This was followed in December 2013 by a Russian ban on the import of a number of types of milk products from the Netherlands.

    Since the Government of the Netherlands owns 75% of the Port of Rotterdam, and the City of Rotterdam owns 25% thereof, it's clear that it will toe the line according to national interests and the political face-off. The project could similarly meet further bureaucratic demands – especially since the approval for the construction work hasn't been formally issued yet. There is no agreement from the Fire Service, no final sign-off on the environmental impact... and so on. Even the simplest formality in obtaining such documents can quickly turn into a serious problem.

    Yet for Igor Sechin there is no problem which cannot be solved – something he has continuously demonstrated when it comes to negotiations with Europe's major oil companies. If it really turns out that the Rotterdam project is necessary, then it will be rolled-out – whatever the risks might be, and even if those risks are political. And now it's the move of Rosneft.

    Sofia Vinarova.