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Legal regulation of domestic trade in the markets of crude oil and petroleum products

Kozlov Sergey Vladimirovich, fourth-year student of the Faculty of Law of Moscow State University

The article considers issues of functioning of the domestic market of crude oil and petroleum products, studies legal regulation of trade in these goods in the territory of the Russian Federation. Special attention is paid to the formation and development of exchange trading in crude oil and petroleum products in Russia and to the analysis of bills in this sphere.

Today, we are so dependent on oil,

and oil is so embedded in our daily doings,

that we hardly stop to comprehend its pervasive significance.

It is oil that makes possible where we live, how we live,

how we commute to work, how we travel…

It is the lifeblood of suburban communities[1].

 

Daniel Yergin. The Prize

 

Overview of the Market of Crude Oil and Petroleum Products

 

In 2013 Russia reached the first place in the world for oil production with an average daily rate of 11 million barrels. This rate was a record breaker for our country. But the oil produced and oil refinery products should be sold, wherefore we need distribution channels, commercial and technological infrastructure of the relevant commodity market and proper legal regulation. As Marcus Samuel, founder of Shell, once said, “…the mere production of oil is almost its least value and its least interesting state. Markets have to be found”[2].

At present, the market of crude oil and petroleum products is represented by mostly vertically integrated oil companies (hereinafter referred to as the VIOC) engaged in the whole energy business chain – from oil production to sales of petroleum products. The bulk of oil production in the Russian Federation relates to the four largest VIOC (Rosneft, OJSC; Lukoil, OJSC; Surgutneftegas, OJSC; Gazpromneft, OJSC) – about 80% of the market. Nevertheless, over 100 small and medium-size oil producers operate in Russia, which, according to E. Korzun, should include “all enterprises that do not belong to vertically integrated holdings, have oil production licenses and 70% of their revenue accounts for this activity, i.e. sales of crude oil”[3].

Market players (entities), according to the type of activities, can be divided as follows: 1) producers; 2) oil refineries (hereinafter referred to as the OR); 3) petroleum products suppliers that study petroleum product demand in a certain territory; 4) regulated wholesale markets, including petroleum and gas exchanges; 5) entities engaged in oil transportation[4].

More than half of oil produced in our country is exported (making internal prices for crude oil and petroleum products dependent on the level of world prices); the other part is sold in the domestic wholesale market. About 75% of oil processing is attributable to oil refineries belonging to the VIOC, which excludes their need to purchase crude oil for refining. Surplus oil produced by the VIOC, which the latter are unable to process due to the OR’s strained productive capacities, is sold to third parties, thus, forming the so-called free oil market. The free oil market share in Russia is extremely small – about 8-10% of the total amount of oil produced in Russia (about 50 million tons per annum)[5].

Petroleum products are sold in both wholesale and retail markets. In this regard, the wholesale and retail markets have different range of sellers and purchasers, and different target use. The retail market of petroleum products in Russia includes the market of bunker fuel (vessel refueling), the market of aviation kerosene (aircraft refueling (“into-plane refueling”)) and sales of petroleum products through fuel stations[6].

Large-batch wholesale in the market of crude oil and petroleum products has three major areas: conclusion of export contracts, exchange trading and conclusion of direct contracts.

 

Formation and Development of Exchange Trading in Crude Oil and Petroleum Products

 

In 2006 in his Address to the Federal Assembly, President of the Russian Federation V.V. Putin wondered why our energy resources are traded on international exchanges, and not in our country, and drew attention to the need to arrange exchange trading in oil, gas and other commodities in Russia with settlements in rubles[7].

Pursuant to the Address of the President of the Russian Federation dd. June 5, 2007, Resolution of the Government of the Russian Federation No. 350 “On Arrangement of Procurement and Supplies of Crude Oil and Petroleum Products Through Commodity Exchanges” was adopted, which gave rise to the development in Russia of exchange trading in the wholesale market of crude oil and petroleum products[8]. In accordance with the said Resolution, since August 1, 2007 purchase orders for crude oil and petroleum products should be placed on the commodity exchange chosen by the Ministry of Economic Development and Trade of the Russian Federation on a competitive basis[9]. Besides, this Resolution of the Government of the Russian Federation recommends that since October 1, 2007 budget users should purchase at least 15 percent of crude oil and petroleum products procured within a fiscal year on the commodity exchange (if the said amount is no less than the minimum commodity exchange lot)[10]. Based on the competitive selection results, the Exchange “St. Petersburg” became the commodity exchange and in April 2008 was transformed into the St. Petersburg International Mercantile Exchange.

Entry into force on July 16, 2013 of Joint Order of the Federal Antimonopoly Service of Russia No. 313/13 and the Ministry of Energy No. 225 dd. April 30, 2013 “On Approval of the Minimum Amount of Petroleum Products Sold on the Exchange and the Requirements to Exchange Trading, where Business Entities Occupying a Dominant Position in the Relevant Commodity Markets Settle Petroleum Products Transactions” adopted as part of the “third antitrust package” became an important step towards development of exchange trading in crude oil and petroleum products[11]. This Order set the minimum amounts of petroleum products subject to sale through exchange trading for the VIOC occupying a dominant position in the markets of relevant petroleum products. Thus, it was established that relevant entities shall sell at least 10% of motor gasoline, at least 5% of diesel fuel, at least 10% of jet engine fuel and at least 2% of fuel oil produced within a month on the exchange[12]. This Order also approved the requirements to relevant exchange trading.

At the moment, trading on SPIMEX in the Sections “Crude Oil” and “Petroleum Products” is arranged pursuant to the Rules of Regulated Trading in these sections approved on January 1, 2014[13]. In 2013 the exchange’s spot market saw sales of 13.5 million tons of petroleum products and settlement of 53,240 transactions. In this regard, we have growth of sales as compared to 9.6 million tons of petroleum products sold in the previous year[14].

Speaking at the XI International Conference - Exhibition “Modern Gasoline Filling Station and Petroleum Storage Depot: Oil Products Market in Russia”, Dmitry Makhonin, Head of the Department for Control over Fuel-and-Energy Complex of the Federal Antimonopoly Service of Russia, noted that, “Today, the exchange sells over 10% petroleum products of the domestic market amount. And there are all prerequisites for development of exchange trading in oil. According to the Federal Antimonopoly Service of Russia, the optimal amount of oil sold on the exchange will be 5% of its production. Such amount will ensure real access to raw materials for consumers”[15].

It is certainly necessary to develop exchange trading in crude oil and petroleum products, because it is meant to ensure pricing transparency and long-term planning of business activities. It seems that this sphere requires a separate federal law or regulation of relations in market pricing for crude oil and petroleum products within a separate section of Federal Law “On Oil”, if the latter is adopted.

In this regard, Federal Bill “On Market Pricing for Crude Oil and Petroleum Products in the Russian Federation” posted in the website of the Federal Antimonopoly Service of the Russian Federation[16], and Federal Bill “On Specific Features of Crude Oil and Petroleum Products Turnover in the Russian Federation”[17] are of particular interest. Federal Bill “On Market Pricing for Crude Oil and Petroleum Products in the Russian Federation” stipulates formalization of price indices applied in large-batch wholesale of crude oil and petroleum products and regulation of certain types of price indices (price indices of comparable foreign markets, price indices of off-exchange transactions, and indices of exchange prices). Besides, this bill in its initial wording stipulated establishment of a special Exchange Committee under an executive body authorized by the Government of the Russian Federation, which would consist of representatives of the state, representatives of exchange commodity sellers and representatives of crude oil and petroleum products purchasers, which do not form the same group as exchange commodity sellers and (or) representatives of infrastructure organizations, and representatives of infrastructure organizations. In the wording presented on October 15, 2013, the bill stipulates establishment of the Exchange Council consisting of the board, the secretariat and the Exchange Council chambers (chamber of suppliers, chamber of purchasers, chamber of public authorities, chamber of commercial and technological infrastructure, and chamber of experts)[18].

The bill pays special attention to the standards of information disclosure. Nevertheless, the contents of this bill do not fully conform to its title. It seems that it needs to define the exchange trading principles, the procedure for determination of the exchange, to develop other issues associated with regulation of exchange trading in crude oil and petroleum products.

Federal Bill “On Specific Features of Crude Oil and Petroleum Products Turnover in the Russian Federation” describes a conceptual and terminological system that has not been legally formalized yet, but has great practical importance (concept of crude oil and petroleum products turnover, concept of engine fuel and its retail trade, concept of large- and small-batch wholesale of petroleum products). Besides, this bill contains a number of provisions aimed at elimination of discriminatory conditions for independent oil companies. Thus, the bill prohibits combined wholesale and retail sales of petroleum products within one legal entity occupying a dominant position in the relevant commodity market. This prohibition is supposed to help independent fuel stations to purchase fuel under the same conditions as sales companies – owners of fuel stations belonging to the VIOC. The provision on granting the priority in oil (petroleum products) transportation to rail and/or pipeline transport for exchange trading participants is also of great importance.

Nevertheless, this bill consists of 10 articles (as amended) and, in general, is rather fragmented.

In my opinion, it would be a good idea to include the provisions of the bills proposed by the Federal Antimonopoly Service of the Russian Federation in a separate section of Federal Bill “On Extraction, Refining and Main Pipeline Transportation of Oil Stock and Refinery Products”, which is informally called the “Law on Oil”. This bill has been developed for several years now in the Ministry of Energy of the Russian Federation upon instructions from the Government of the Russian Federation[19]. It seems that it is high time to adopt this kind of law, because nowadays the oil sector with its key, strategic importance is the only sector of the Russian fuel and energy complex that has no systematized legal and regulatory framework in federal legislation. In this regard, Federal Law “On Oil” proposed in the current wording will not be able to become a fundamental source of legal regulation of the sector leaving aside issues of sale and marketing of crude oil and petroleum products, including pricing issues.



[1] Yergin, D. The Prize: The Epic Quest for Oil, Money, and Power. Moscow: Alpina Publisher, 2012, p. 21 (in Russian).

[2] M. Samuel is a founder of Shell. Cited from: Bakhtizin, R.N. The Battle for Oil. Russia’s Struggle for Black Gold. Ufa, 2003, p. 5 (in Russian).

[3] Korzun, E. No Small Contribution of Small Companies // Oil of Russia, No. 1, 2003, p. 53 (in Russian).

[4] See: Lakhno, P.G. Legal Issues of Formation and Transformation of the Oil and Gas Market in the Face of the Financial Crisis and Thereafter // in the book “Law and Business in the Face of the Economic Crisis: Experience of Russia and Germany” / Eds. E.P. Gubin, E.B. Lauts. Moscow: Yurist, 2010 (in Russian).

[5] Gavrilina, E.A., Lakhno, P.G. Legal Support of Formation and Development of Energy Markets in Russia (Crude Oil, Petroleum Products and Natural Gas) // Entrepreneurial Law, 2009, No. 3 (in Russian).

[6] Gavrilina, E.A. The System of Contractual Relations in the Retail Market of Petroleum Products // Entrepreneurial Law, 2011, No. 2, pp. 42-47 (in Russian).

[7] See: The Address of the President of the Russian President to the Federal Assembly dd. May 10, 2006 // Rossiyskaya Gazeta, No. 97, May 11, 2006 (in Russian).

[8] See: Collection of the Legislative Acts of the Russian Federation, June 11, 2007, No. 24, Art. 2919 (in Russian).

[9] The procedure for competitive selection (including selection criteria) was approved by Order of the Ministry of Economic Development of the Russian Federation dd. July 4, 2007 No. 225 “On Arrangement of Competitive Selection of the Exchange for Placement of Purchase Orders for Crude Oil and Petroleum Products” (along with the “Procedure for Competitive Selection of the Exchange for Placement of Purchase Orders for Crude Oil and Petroleum Products”) // See: Legal Reference System “ConsultantPlus” (in Russian).

[10] See: Collection of the Legislative Acts of the Russian Federation, June 11, 2007, No. 24, Art. 2919 (in Russian).

[11] Rossiyskaya Gazeta, No. 145, July 5, 2013 (in Russian).

[12] See: the same source.

[13] See: The Rules of Regulated Trading in the Sections “Crude Oil” and “Petroleum Products” of SPIMEX. URL:

http://spimex.com/upload/iblock/345/34550155f5abb1e42abe257e0c6d608e.pdf; http://spimex.com/upload/iblock/43e/43ee824c255639e0c5ee19e39fc031a2.pdf (in Russian).

[14] See: The website of the Federal Antimonopoly Service of the Russian Federation. URL: http://www.fas.gov.ru/.

[15] URL: http://www.energyland.info/news-show-tek-neftegaz-120120

[16] See: http://fas .gov.ru/legislative-acts/legislative-acts_51026.html

[17] Federal Bill “On Specific Features of Crude Oil and Petroleum Products Turnover in the Russian Federation” was presented in three versions: dd. October, 8, 2012, November 8, 2012, October 15, 2013. See: Legal Reference System “ConsultantPlus” (in Russian).

[18] See: the website of ConsultantPlus. URL: http://www.consultant.ru/law/hotdocs/28843.html.

[19] See: The interview of V.M. Azbukin, Deputy Minister of Energy of the Russian Federation, to journal “Legislation”, 2010, No. 3, p. 8 (in Russian); Yanovsky, A.B., Baron, Yu.L. Energy Strategy of Russia until 2030 and Regulatory and Legal Support of its Implementation // Energy Law, 2010, No. 1, pp. 2-7; Lakhno, P.G. Op. cit. (in Russian).

Bibliography:

  1. Gavrilina, E.A. The System of Contractual Relations in the Retail Market of Petroleum Products / E.A. Gavrilina // Entrepreneurial Law. 2011. № 2. pp. 42-47 (in Russian).
  2. Gavrilina, E.A., Lakhno, P.G. Legal Support of Formation and Development of Energy Markets in Russia (Crude Oil, Petroleum Products and Natural Gas) / E.A. Gavrilina, P.G. Lakhno // Entrepreneurial Law. 2009. № 3 (in Russian).
  3. Korzun, E. No Small Contribution of Small Companies / E. Korzun // Oil of Russia. 2003. № 1 (in Russian).
  4. Lakhno, P.G. Legal Issues of Formation and Transformation of the Oil and Gas Market in the Face of the Financial Crisis and Thereafter // in the book “Law and Business in the Face of the Economic Crisis: Experience of Russia and Germany” / Eds. E.P. Gubin, E.B. Lauts. Moscow: Yurist, 2010 (in Russian).
  5. Yanovsky, A.B., Baron, Yu.L. Energy Strategy of Russia until 2030 and Regulatory and Legal Support of its Implementation / A.B. Yanovsky, Yu.L. Baron // Energy Law. 2010. № 1. pp. 2-7 (in Russian).
  6. Yergin, D. The Prize: The Epic Quest for Oil, Money, and Power / D. Yergin. Moscow: Alpina Publisher, 2012 (in Russian).
  7. Zrelov, A. On Market Pricing for Crude Oil and Petroleum Products in the Russian Federation / A. Zrelov // Tax Bulletin. 2013. № 6. pp. 18-21 (in Russian).