Russia Transport News Week 03-05, 2004

(Dynamar Consultancy BV)

New Oil Tanker Breaks Ice
Baltic Port Seeks More Cash
Bosporus Delay ´Wildly Exaggerated´
Russia Gives Go-Ahead to Sakhalin-2
Sea Port of St.Petersburg: Results of 2003
New Ferry Line Tallinn-Helsinki-Saint Petersburg

Source: Dynamar Consultancy BV

New Oil Tanker Breaks Ice
Russia is a promising market for Finland´s Kvaerner Masa-Yards, especially considering increasing oil shipping in the Baltic Sea, said the company´s vice president for marketing and sales Mikko Niini at a press conference in Helsinki. Kvaerner Masa-Yards, one of the world´s leading shipbuilders, has developed a new type of oil tanker that can cope with thick ice cover without the help of ice breakers.
The tanker navigates icy waters using its own stern and Azipod propellers. Two such tankers are currently under construction at a Japanese shipyard. Kvaerner Masa-Yards, which is a part of Norway-based AKER Kvaerner group - the world´s fourth or fifth largest shipbuilder and the largest shipbuilder in Europe - specializes in designing and building cruise ships for Europe and the Americas), passenger-car ferries and other vessels. During the last 10 years over 25 percent of the world´s cruise ships have come from the company´s shipyards. Along with cruise and passenger ships the company specializes in ice-breakers, liquefied gas carriers, special oil tankers and cable ship construction. According to Niini, during the last 80 years Kvaerner Masa-Yards has supplied more than 1,200 vessels to Russia. The new oil tankers are equipped with a so-called compromise bow, or a hybrid ice breaker-tanker bow. The vessels are powered by the Azipod propulsion system developed by ABB. Kvaerner Masa-Yards says the system enables the vessels to turn around without moving forward. During testing of the new equipment it also became clear that the vessels move through ice most effectively stern first. Stern-mounted propellers pull the vessel as it backs up and push it more effectively into the ice cover. "The mating of Azipod propulsion with an ice-breaking bow produced a double-acting tanker, a vessel with a regular bow but an ice-breaking stern," said Niini. As a double-acting tanker reaches the edge of ice cover, it turns around, reverses the rotation of its propellers, and starts to break the ice using its stern. "It does not need any help from an ice-breaker, and it travels through warmer water with the same ease as a regular oil tanker," Niini said. The vessel can cut through a 70-cm-thick layer of ice and ice ridges 13 meters thick. The company says the first new tankers were ordered in 2003 by Finnish energy giant Fortum. These ships operated completely independently during their first winter in the eastern Gulf of Finland, running between Primorsk and western ports. Russia has placed an order for such oil tankers for the Sakhalin-1 project on the Sea of Okhotsk for 2005. "Double-acting tankers open up new opportunities in Russia´s Far North for exploring the resources of areas such as the Timan-Pechora region, the Yamal peninsula and Sakhalin. Similar potential exists in Alaska and northern Canada," Niini said.

Baltic port seeks more cash
UST-LUGA - Russia´s newest Baltic port, is seeking to raise fresh capital, Ivan Fisher, CEO of one of the port companies, Rosterminalugol, has told Fairplay. He said that $40M will be required to expand the coal terminal, which started initial shipments in 2003, and had despatched a total of 280,000 tonnes by 31 December.
Annual coal handling capacity at the port is estimated at 1M tonnes, and by 2005, when the second-phase construction is complete, this should rise to 5M tonnes. A key element in the expansion plan is the construction of a rail line to carry the larger volumes of coal. On 25 December, Rosterminalugol shareholders decided to issue new shares to raise the targeted investment amount of $40M. The new share issue will dilute the current government’s stake from 51% to 25%. Currently coal mine company Kuzbassrazrezugol owns a 45% stake, while Transneft, the state pipeline operator and controlling shareholder of the nearby oil port of Primorsk, has a 4% shareholding. Sergei Grigoriev, a senior VP of Transneft, would not tell Fairplay about Transneft´s intention at Ust-Luga and also denied Transneft´s intention to ship oil from there in the future.

Bosporus delay ´wildly exaggerated´
RUSSIAN maritime and oil industry sources claimed today that reports of Black Sea oil shipping delays and tanker traffic jams at the Bosporus strait have been wildly exaggerated by Turkish officials in the western press.
A Russian transport ministry source told Fairplay that Turkish navigation rules were tightened again in November. These do not permit vessels of over 50,000dwt to move through the Dardanelles channel without a Turkish pilot and even then there are movement and convoy restrictions. Ships under 50,000dwt can proceed without the new limitations. However, once the new rules have been integrated into sailing schedules, a Russian maritime source claims, the backlog of vessels waiting to pass through the Strait has disappeared, and "the situation is back to normal there now. ”He was backed up by data from Novorossiysk, Russia’s Black Sea oil outlet. In December Novorossiysk port shipped 4M tonnes of oil, 20% up on November. Tuapse, the smaller Black Sea port nearby, says it shipped 473,000 tonnes in December compared to 263,000 tonnes a month earlier. Compared to December 2002, Novorossiysk port shipments show 30% growth, Tuapse 20%. Sources expect shipments to stay at the December levels this month.

Domestic Air Carriers Buck International Downturn
Domestic carriers marked a third straight year of growth in 2003, flying 11 percent more passengers, civil aviation authorities said Thursday. Virtually unaffected by the war in Iraq and the SARS scare, the country´s 215 airlines last year carried 29.5 million people, or 10.8 percent more passengers year-on-year according to preliminary results, said Stanislav Ovcharenko, head of the State Civil Aviation Service licensing department.
Global international passenger numbers for 2003 will be 3 percent to 4 percent lower than in 2002, the International Air Transport Association has estimated. "Last year was difficult for the global airline industry, and in April we too were negative in all categories," Ovcharenko said. "But later the situation leveled off and we continue to grow." This year, growth of at least 6 percent is expected, he said. IATA expects a 7 percent to 8 percent rebound for the global industry. Ovcharenko attributed the increase not only to the improving domestic economic situation, but also to the end of quotas on popular holiday destinations and the development of regional routes. Flagship carrier Aeroflot carried 5.8 million passengers, up from 5.48 million passengers in 2002, and this year plans to fly 6.8 million people. No. 2 Sibir reported a 26 percent passenger increase, serving 3.4 million travelers. This year, the airline has a target of 4 million, spokesman Yevgeny Filyanin said by phone from Novosibirsk. In 2002, Sibir became the leading carrier on domestic routes. Filyanin said this growth is the result of the airline´s push to increase the number of destinations it serves. "We opened a lot of new routes in 2001 and 2002, and last year people began to recognize our airline. Last year alone we opened 15 more scheduled routes," Filyanin said. In the first 11 months of 2003, the airline reported filling a record 80 percent of seating capacity. No. 3 Pulkovo flew 2.4 million passengers, marking a 16.1 percent year-on-year increase. Pulkovo had 1.25 million passengers on domestic and 1.15 million passengers on international routes, or 15 percent and 17.4 percent more than in 2002, respectively. UTAir, the No. 4 carrier, reported flying 1.55 million passengers, on a par with 2002. No. 5 KrasAir reported 17 percent growth, moving 1.4 million passengers. No. 6 Ural Airlines flew 838,000 passengers, 19.3 percent more than in 2002. It forecasts a further increase to more than 1 million passengers this year. Yelena Sakhnova, a transportation analyst with UFG, said Aeroflot´s smaller growth compared to other carriers reflects the airline´s lack of focus on the domestic market. "Its domestic share dropped last year. They had a serious shortage of aircraft," she said. "Yet if you look at their international business, we expect it to have grown by 5 percent to 7 percent, which -- if you consider the war and SARS-related slump -- positions it better than other global carriers," Sakhnova said. Sakhnova said she forecasts an additional 7 percent growth in passenger numbers this year.

Railways Slow to Reform Power Assets
As power sector reform kicks into high gear, the restructuring of Russian Railways Co.´s vast energy assets appears to be lagging behind. Top railroad and energy officials met Friday to begin hammering out the urgently needed overhaul of power assets belonging to Russian Railways, or RZD.
"It is important that the development of the rail and power sectors be synchronized. The government must not let anyone fall behind, otherwise the overall result of the reforms will be negative," said Khasyan Zyabirov, first vice president of RZD, speaking at a round-table meeting outside Moscow. The country´s major railway research institute is located in Shcherbinka, and a number of experts joined officials from RZD, the Federal Energy Commission and Unified Energy Systems. RZD, which consumes about 6 percent of the country´s total electricity production, is also a large power company in its own right. It owns 2,000 kilometers of power lines and hundreds of substations. In 2003 RZD processed 60.8 billion kilowatt-hours, of which 32.3 percent went to non-RZD entities, including households. Because of the parallel development of the country´s power infrastructure and railways, RZD supplies up to 80 percent of its electricity output to non-RZD entities in some regions. The cost for production and distribution is included in rail prices. The question of what RZD should do with its power assets emerged only three months ago, when the company was spun off from the Railways Ministry. In the past, the powerful ministry had the authority and government connections to tackle problems related to its power assets. But now as a new joint-stock company, RZD has to start from scratch. The company needs support from the FEC and UES, as its holding of power assets contradict the energy reform. Without a solution, RZD´s energy branch will violate new legislation beginning next year -- and could face government sanctions. Last spring, President Vladimir Putin signed into law a package of bills for restructuring the power sector, most of which is managed by UES. Starting next year, companies will be forbidden from combining generation, distribution and sale of electricity. However, new rail industry legislation passed last year prohibits RZD from selling off its infrastructure assets, as they are still state-owned. Without amendment to current legislation, RZD will be unable to separate itself from its power lines, which should be transferred to the Federal Grid Company, a spinoff of UES. At Friday´s meeting, RZD seemed to have won support from Georgy Kutovoi, chairman of the FEC, who said the relationship between the railway and power industries was no longer viable. Kutovoi proposed that RZD disengage from its power business, an idea that Zyabirov has supported. "It would be rational for RZD to have a separate company or holding that would represent RZD as a large consumer of electricity -- and would unite all segments of its power business," Kutovoi said. Igor Kozhukhovsky, the UES representative at the meeting, called for a "constructive dialogue" between the two companies, which are traditional rivals. He said that first RZD "should resolve a number of issues that [UES] has already resolved a few years ago, such as separate inventory and accounting, as well as the legal separation of the electricity business." The round table participants agreed to form a working group to decide specific measures for dealing with RZD´s power assets. Environmentalists Fear Spills as Local Ports Increase Capacity Ecologists are increasingly concerned about possible oil spills in the Baltic Sea and in the Gulf of Finland in particular with heavier traffic on oil transportation routes. While all countries sharing the Baltic Sea agree on the need to increase safety in the region, most focus their attention on Russia as oil exports through new ports around St. Petersburg are expected to soar.
New Ports
Shipping remains the most popular method of transporting oil from Russia, surpassing pipelines and railways, which both lack flexibility and wear down quickly. With two thirds of all oil extracted in Russia being exported, Europe continues to be the traditional destination of exports. This leaves Russia to employ either facilities on the Barents Sea and other northern seas near Murmansk - the most developed port in the region - or to use Black Sea ports, which have already reached capacity and possess insufficient pipe facilities; or ports in the Leningrad Oblast around St. Petersburg, opening the way to the Baltic Sea. There are a number of port terminals around St. Petersburg that have been launched recently or are under construction, with all of Russia´s major oil companies contributing to investment in them. The first terminal to be opened was Primorsk, located 120 kilometers northwest of St. Petersburg and in operation since December 2001. The port is managed by state-owned Transneft, which invested $279 million in developing the facilities. Primorsk is supplied and was built specially for the Baltic Pipeline System, or BPS, which originates in the Komi Republic. The initial capacity of the port was 12 million tons of oil per year, now stands at 30 million tons and has a projected capacity of 62 million tons. In 2003 the port shipped 17.6 tons of oil, which is 42 percent more than in 2002. The second port is Vysotsk, located on Vysotsky Island, 160 kilometers northwest of St. Petersburg. The port is linked to the mainland by rail, and was used to ship coal and gravel. In 2002 LUKoil began constructing an oil terminal for light-oil products with a projected capacity of 10 million tons. The third major port in the Leningrad Oblast is Ust-Luga, 200 kilometers west of St. Petersburg. The Ust-Luga port handles coal, mineral fertilizers, timber and cargo containers. This port has a capacity of 35 million tons of goods per year. Yet another port is Batareinaya Bay on the Gulf of Finland, 80 kilometers southwest of St. Petersburg, where Surgutneftegaz is developing a terminal for the transportation of light-oil products, such as gasoline and diesel fuel. The planned capacity of the port is 15 million tons. Not far from Batareinaya is the Lomonosov port with a potential annual throughput of 2.1-4.5 million tons of oil. And last but not least, an oil terminal in Vistino Bay in the Gulf of Finland is slated to be built by 2008 with construction to begin at the end of 2004. At a cost of $115 million, the project is intended to handle 4 million tons of oil and oil products. Apart from Leningrad Oblast ports, there is the St. Petersburg Sea Port, which also increased the shipping of oil in 2003 to 11 million tons, while overall the port shipped 42 million tons of cargo; and the St. Petersburg Oil Terminal, which shipped 7.3 million tons of oil in 2003, a 7.5 percent increase over 2002. The terminal plans to expand capacity to 12 million tons of oil per year by 2005. The Finnish Environment Institute says that such an increase in the number of ports and oil terminals will lead to an immense growth of activity in the Gulf of Finland and might have a negative impact on the ecological situation in the region unless certain safety measures are taken.
Higher Risks
Sirpa Pellinen, a spokeswoman for the Finnish Environment Institute, says that oil spills mostly occur near port areas and straits, especially at the entrance of the Baltic Sea and in the Gulf of Finland. This means that the part of the Gulf of Finland between Helsinki and Tallinn faces the highest risk of a spill. At present Finland exports up to 75 million tons of goods by sea, while Russia´s exports from the Baltic ports amount to 35 million tons of goods and could reach 100 million tons in the next couple of years, said Maire Kaartama, senior advisor of the Confederation of Finnish Industry and Employers, delivering a speech on Finnish industry and sea transport on Jan. 2, 2004, in Helsinki. At present the waters of the Gulf of Finland are plied by an average of 100 vessels per 24 hours, with a minimum of 60 vessels. There is also intense passenger and cargo traffic - six million people per year and 120 departures weekly respectively - between Helsinki and Tallinn, which means that the strait at the entrance to the Baltic Sea will become very dangerous with the growth of Russia´s oil exports, Kaartama said. Another dangerous part of the Baltic Sea is the Danish Strait, which is also very narrow, she said. With sea traffic in the Baltic Sea already very dense, the annual growth of maritime traffic is expected to vary from 3 to 8 percent. According to a research project entitled Baltic-Pipeline-ERUS funded by the European Union´s TACIS program, growth of maritime traffic from 1995 to 2017 will be 186 percent in break bulk, 84 percent in dry bulk, 186 percent in general cargo, 84 percent in liquid bulk and 39 percent in oil, so that total growth will amount to 92 percent. The research project also pointed to the fact that nearly 40 percent of the vessels - or 50 percent of ships calling in ports - were more than 20 years old. VTT also studies the most likely impact of the Baltic Oil Pipeline project. The probability of a sensitive area being affected by oil from the BPS is highest in Danish waters, the western Baltic south of Sweden and the Gulf of Finland west of Porvoo. The average amount of oil spilled into the Baltic will increase by about 10 percent (about 170 tons per year) in the long term, compared to the expected "background" spill by the year 2017. In the Gulf of Finland this increase will be about 20 percent (24 tons per year). The risk of spills of less than 10,000 tons in the Baltic Sea will not change significantly, whereas the risk of spills between 10,000 and 100,000 tons will rise from one every 75 years to one every 50 years for the Baltic regions by the year 2017 due to the BPS project. The risk of such a large spill thus goes up by 35 percent for the entire Baltic Sea and by 100 percent for the Gulf of Finland. Compared to other alternatives, the Baltic Sea route is the best prepared for coping with an increase in tanker traffic in terms of the existence of environmental organizations, legal framework and oil spill response capabilities, both nationally and the region. The most noticeable effect of the BPS is an increase by more than a factor of 7 in oil tanker traffic larger than 100,000 deadweight in the Gulf of Finland. Another study by VTT Manufacturing Technology predicts enormous growth in maritime traffic by the year 2010 as a result of which the authorities can expect 6 significant spills per year. The main concerns of the Finnish environmental authorities are that sub-standard ships will be allowed to collect oil from the terminal at Primorsk, that some ships will be unfamiliar with navigating the Baltic Sea, that single-hull tankers will become vulnerable in severe weather conditions, that there is already heavy shipping traffic in the Gulf of Finland, and that the existing escort service will not meet demand. According to information provided by Bellona Environmental Foundation, during a recent meeting of the member states of the Helsinki Convention on the Protection of the Marine Environment of the Baltic Sea Area, Russia was the only country to speak out against a proposed ban on single-hulled oil tankers in the Baltic Sea. According to Rashid Alimov of Bellona´s St. Petersburg office, Russia specifically objected to wording in the declaration that said "the semi-enclosed Baltic Sea has a slow water exchange and is therefore particularly sensitive to eutrophication," meaning that the sea is abundant in accumulated nutrients that support a dense growth of algae and other organisms. Their decay depletes the shallow waters of oxygen in summer. The Helcom-Bremmen Declaration went on to say that the countries "agree to enhance our cooperation in maritime safety in the framework of the International Maritime Organization, with the objective of preventing maritime accidents and consequent pollution, through concrete measures, especially concerning the phasing out of single-hulled vessels and the ban on transport of heavy (or black) oil in single-hulled vessels." Another danger in the Gulf of Finland and the Baltic Sea in general, especially in the winter, is ice. During the winter the ice cover in the eastern end of the Gulf of Finland can reach a thickness of between 70 centimeters and 95 centimeters. However, a bigger problem is shifting pack ice, which can be as high as 10 meters, Mikko Niini, the vice president of Kvaerner Masa-Yards shipbuilders said. Another possible threat is oil spills on ice, which are quite difficult to handle. There are very few oil collectors in the world equipped to collect oil from ice. Last but not least, ecologists are extremely concerned by hidden or concealed oil spills, which are usually not reported to the public. In such cases, the oil is either dispersed and mixed with water or is made to sink or float away. "We strongly prefer mechanical recovery to any dispersants," said Sirpa Pellinen of the Finnish Environment Institute. Still, the recent oil spills near Russian ports in the Baltic and the reaction of the authorities to accidents remain controversial. For example, in July 2003 as a result of a heavy leak of black oil some 50 to 200 kilometers of shoreline near Kaliningrad were polluted, according to Bellona. Although the region officially announced later that the polluted beaches had already been "practically cleansed" and more than 4 tons of mixed black oil and sand had been removed, local ecologists, including Ecodefense! non-profit organization representatives seem to doubt this information. Bellona´s Alimov says that in the past 10 years environmental disasters resulting from oil pollution in the Kaliningrad exclave have become regular events. "But many argue that they have not been given due attention," he said. Alexander Sutyagin, an environmentalist with the non-profit Baltic Pipeline System Monitoring Project, considers that "the authorities behave the same way everywhere. In the case of oil product spills, they try to underestimate the scale of the disaster and to conceal the real source of pollution." "Black oil is collected, removed and usually buried close by," he said. Ecologists warn that in Kaliningrad oil products tend to have seeped into the sand and are lying there, while the primitive emergency response system is not likely to change soon. A more recent story is that of the dredge ship Balkhash, which carried 10 tons of diesel fuel and 400 kilograms of motor oil when it sank near Kaliningrad on Jan. 5, Interfax reported. Later it was announced that Natural Resources Ministry specialists had found a number of oil spills with some of them reaching 200 meters in length and 60 meters in width. However, the Emergency Ministry soon denied this information, denying the oil spills ever occurred. On Jan. 13 it was declared that the Hermes special oil collector began to collect the spilled oil from a polluted area of 600-800 square meters.
New Technologies
Facing the possible dangers of increasing transportation of oil and other potential polluters, researchers all over the world are trying to cope with the new demands for both building safer vessels and icebreakers and for constructing oil collectors. There are three oil collection techniques used throughout the world. The first is the pumping technique, when a floating flexible weir is used to pump the spilled oil into a container. This technique is mainly used for light oil, since crude oil is too heavy for the weir. The second technique involves the use of a drum skimmer, when a vessel is equipped with a big rotating drum the oil sticks to. The third technique is the disc skimmer, when the oil sticks to a rotating disc. However, in recent years another technique has come to the fore, that of the brush system, which employs millions of bristles attached to wheels. In this case, the oil sticks to the brushes. The recovery capacity of this method is the greatest and ranges between 20 and 500 cubic meters per hour, while the equipment can work up to three meters below the surface. The other characteristic of the new technique is that oil collected by brush skimmers can be reused. Christoffer Wallgren, the sales manager for Lamor Corporation AB, the world´s leading producer of oil collectors, says that according to EU laws oil collected after a spill is considered waste and, thus, must be treated and not used again for commercial purposes. However, this law does not affect Russia, where the oil can be used again, sold or given back to the owner after the mechanical cleaning of the brushes. Brush skimmers can be used for other chemicals, such as paint and detergents, Wallgren said. Lamor already works with Russian oil companies and has supplied several sets of oil collecting equipment to Russia. "We see Russia as one of our potential markets," Wallgren says. Oil collectors using the brush skimmers are produced mainly by three large manufacturers: the Finnish Lamor, Danish Roclean-Desmi and another the Danish Vicoma firm, which together occupy 50 percent of the world market, revenues of which amount to 300 million euros per year.
Protection as Policy
Sergei Grigoriyev, vice president of Transneft, the state-owned company that runs both BPS and Primorsk port, said that the company has invested more than $50 million in ecological programs to boost safety in the region. Moreover, single-hulled tankers are not allowed to enter the port. The government of the Leningrad Oblast, where all the new terminals are located, has also confirmed that all precautions have been taken. "We have re-cultivated the soil and carried out a number of programs aimed at protecting the waters of the Gulf of Finland. Every new terminal should have its own ecological fleet made up of oil collectors and other cleanup and emergency equipment. Apart from that, we test soil and water quality and content on a weekly basis," said Valentin Sidorin, a spokesman for the Leningrad Oblast governor. Sidorin also said that oil spills are unlikely to happen near the ports, first because the water is very deep, and second because there are certain regulations banning entry of single-hulled tankers to Primorsk and Vysotsk (where LUKoil will transport oil only using its own fleet of tankers). In addition to this, according to Sidorin, the part of the pipeline that goes under water (777 meters) also features mechanical safety installations. Regional officials say that when the construction of the BPS was still in the planning stages, the project received a number of objections from the Finnish authorities, who claimed the project would harm the environment. As an alternative, the Finns suggested building an oil terminal 50 kilometers away in Porvoo, Finland. "The Transport Ministry even tended to favor this point of view, but when Vladimir Putin became prime minister it was decided that the pipeline would be built up to Primorsk so the oil terminal would be on Russian territory," Sidorin said.

Maintaining Rail Reform Momentum
Russia´s railways are in the midst of a remarkable transformation. Two years ago, the system was entirely a creature of the Railways Ministry, a "state within a state," and the enterprise was completely owned, operated and regulated by the government.
Unfortunately, as in so many countries around the world, the funds available to the railway from its own earnings and from the government were insufficient to keep the railroad in good operating condition and, post-1998, to expand and modernize to meet the needs of a growing economy. This problem is clearly becoming more and more serious. In response to the increasing need for major investments -- and to pressures from economic reformers in the Anti-Monopoly Ministry, or MAP, and the Economic Development and Trade Ministry -- the system has begun a complete makeover:
• The operating railway enterprise is now the Russian Railways Co., or RZD, a company separate from the Railways Ministry that has in fact already gone to the capital markets in search of investment funds (and recently landed a $250 million credit line with Vneshtorgbank).
• The new tariff regime is designed to provide at least some encouragement to private firms both to purchase and organize rolling stock and to operate independent trains on the RZD infrastructure. The result has been a huge increase in private rolling stock investment and a small number of independent train operators -- just three at this point, but with more applicants waiting in the wings.
• While the Railways Ministry continues to be involved in strategic planning for the system, MAP will now regulate the terms of access to the infrastructure for independent train operators, and some combination of MAP and the Federal Energy Commission, or FEC, will oversee the tariffs charged to shippers.
So far, so good. But this is only the first stage in a planned three-stage reform process, and much of the difficult work lies ahead. Three areas in particular must be addressed very soon if progress is to continue.
Cross-subsidies: Passenger fares, both long-distance and suburban, remain far below costs. This is the case throughout the world, but most countries have by now made the important change from supporting passenger operations through cross-subsidies from freight operations to supporting them directly from government budgets. The rest of the world has seen particular success with policies that require regions and localities that ask for subsidies for their citizens to come up with some of the money themselves. And with RZD likely to face increasing competition from motor carriers and independent train operators, the freight profits that have supported passenger operations will no longer be able to do so.
Effective regulation (and deregulation): The new tariff regime, Pricelist No. 10-01, is exceedingly complicated, with commodity tariffs differentiated very specifically by commodity and by distance. The access prices to be charged to the independent train operators are differentiated in exactly the same complicated way. Together these constitute an intimidating set of tariffs and railway infrastructure charges that run a real risk of deterring shippers and would-be operators from making full use of the system. It seems questionable whether either MAP or the FEC has, or will have, the resources necessary to prevent RZD from discriminating against the new, independent train operators which would like to compete with RZD trains; and, even if these regulators can do the job, whether the Russian court system is up to the task of enforcing their orders against the railway giant.
At the same time, if RZD itself cannot vary its commodity tariffs in response to competition from motor carriers -- as train companies in the United States and EU are free to do -- it may find itself unable to hold onto the highest margin traffic. Equally important, RZD is not allowed to sign the kind of closely tailored service and quantity contracts that formed the basis of the success of North American railroad deregulation. The most urgent reform in the near term may be the freeing of tariffs in markets where competition emerges. Further restructuring: The primary reason for the urgency behind calls for the reforms to continue is that the current situation, with railway reforms more or less at the completion of stage one, is probably not stable over the long term (nor was it designed to be). It is possible that opening up the RZD tracks to entry by independent train operators will be successful in creating a workably competitive railway sector, but in other countries that have tried this reform model the result has been much the same as in Russia so far: small-scale entry but no real competition to the vertically integrated incumbent. It is possible that complete separation of RZD into a track-operating company and a train-operating company -- one possible outcome of the three-stage reform process -- would yield a more competitive outcome, but in other countries that have tried this reform the result has too often been losses in performance and reliability, and an infrastructure operator unable to generate the needed investment funds.
This is likely the reason that the long-term reform plan also introduces the possibility of a very different reform model, at least in European Russia: the breakup of RZD not vertically but horizontally, into vertically integrated train companies that compete with each other to carry freight over parallel lines, and to and from common points of service.
In the worldwide experience with railway reform to date, this has arguably been the most successful reform model in a number of dimensions: (i) it allows most railway companies to maintain complete vertical integration and so to enjoy the economies that come from the same company controlling both the trains and the tracks; (ii) it allows the integrated companies sufficient pricing freedom that they are able to earn profits, attract investment and make the capital expenditures necessary for a healthy railway sector; and (iii) perhaps most importantly, it largely substitutes competition for regulation, with tariffs constrained not by regulators or anti-monopoly authorities, but by the threat of the loss of traffic to competing railroads. Some have argued that creating competing vertically integrated railway companies would require fragmenting the ownership of the Russian rail infrastructure among private companies, and that this is contrary to Russian law. However, in countries such as Brazil and Mexico this reform model has been implemented in the form of 30-year or 50-year concessions to private companies, with infrastructure ownership remaining firmly in the hands of the state. Some have likewise argued that separating the unitary Russian railway system into competing vertically integrated railway companies would weaken Russia´s national defense, harming the country´s ability to move soldiers and materiel in military emergencies. But throughout the world, wherever operational control of the railways has passed into the hands of private companies, the government retains absolute priority rights in case of emergency -- and Russia would be no different in this regard. The long-term reform plan for Russia´s railways calls for the study and possible implementation of restructuring options such as this one, but it is not fair to ask RZD to take the lead in pushing for this kind of reform, or any other kind that would create more competition for the railway giant -- that´s just not what profit-seeking enterprises do well, in Russia or elsewhere. If the reform momentum is to be maintained, and in directions that focus more broadly on the needs of the entire Russian economy, there will have to be increased energy, expertise and resources from elsewhere: from MAP, the Economic Development and Trade, Transportation and Railways ministries, and the FEC -- or perhaps from a new railway regulatory agency. Otherwise the reforms will stall at somewhere near their current level: a good intermediate point, to be sure, but not the final destination.

Transneft to Boost Exports Via Gulf of Finland, Poland
Russia will boost oil shipments by 18 percent this year, or 600,000 barrels per day, due to the expansion of a key port on the Gulf of Finland and bigger re-exports via Poland.
This is another setback for oil cartel OPEC, which has been curbing output over the last few years to protect high oil prices while watching its key rival biting into its market share. Analysts have said Russia´s impressive output growth over the last five years may slow in 2004 because of a lack of new export capacity, reserves depletion and a judicial attack on the country´s fastest-growing and largest oil major, Yukos. But the Energy Ministry this week increased its forecast of production for 2004 to 6 to 8 percent, to breach 9 million bpd, compared to a previous growth prediction of just 2.5 percent. The head of pipeline monopoly Transneft, Semyon Vainshtok, said Friday he also saw no reason for growth to slow this year. "Last year, Transneft exported through its system some 208 million tons (4.18 million bpd). This year, we are going to add another 30 million tons (600,000 bpd)," he told reporters. Transneft is expanding its flagship Primorsk outlet on the Gulf of Finland to 840,000 bpd from the current 730,000 bpd, its pipeline capacity to Poland by 100,000 bpd, and will launch a long-awaited 100,000-bpd route to the Croatian port of Omisalj. Transneft has pushed hard to expand capacity at Primorsk as booming Russian output and stagnant domestic demand have overwhelmed pipeline export routes. Many traders, however, say they are very disappointed by the rush as they have very bad economics in Primorsk, which freezes in the winter and therefore requires them to search for scarce double-hulled tankers and icebreakers. But Vainshtok restated that his firm aimed at gradually turning Primorsk into Russia´s second-biggest outlet by increasing capacity to 1.25 million bpd.

Dredging Operations at Ust-Luga
On December 26, 2003, the state commission signed the acceptance report on the area of coal terminal at Ust-Luga, where the dredging was finished by Baltdraga JSC.
The depth of the water area near the coal terminal currently amounts to 14 m, enabling to serve vessels 70 thousand tons dwt. As the throughput is to grow (in 2005 the coal handling is to amount to 5 mn tons) the depth will be increased to 16 m. The water area of the coal terminal is to be equipped with Finnish buoys, which better suit the winter navigation.

Transnefteproduct: Results of 2003
According to Transnefteproduct JSC´s press service, the aggregate volume of oil products transported in 2003 amounted to 26.9 mn tons, 1.3 mn up year-on-year. The diesel oil transportation grew by 0.7 mn tons year-on-year, amounting to 21.4 mn tons.
The volume of petrol transportation rose by 0.4 mn tons, amounting to 4.0 mn tons. Export of oil products amounted to 17.6 mn tons, which is 1.5 mn tons plus year-on-year. Export of diesel oil amounted to 16.7 mn tons, 1.2 mn tons up year-on-year, while petroleum export grew by 0.3 mn tons from 0.6 mn tons in 2002 to 0.9 mn tons in 2003. The average loading of oil product pipe line grew from 51.2% in 2002 to 53.7% in 2003. Export loading was up to 74.2%.

Petersburg Oil Terminal: Results of 2003
In 2003 Petersburg Oil Terminal handled 7.3 mn tons of oil products, 7.5% up year-on-year, therein light oil products accounted for 3 mn tons (+2%) and dark oil products took 4.3 mn (+11%).
According to the Petersburg Oil Terminal JSC´s press department, the company continue expanding. In 2003 2 oil tanks with the capacity of 20 thousand tons each, railroad overpass and berths NN3, 4 were put into operation. The tank capacity is to be increased to 274 thousand cubic metres by 2005, this will enable the company to raise the throughput to 12 mn tons of oil products per annum. The planned capacity of 15 mn tons will be reached on the reconstruction completion.

North-West Customs Works with New Customs Code
During the first decade of January 2004 the units subordinated to the North-West customs registered 3 500 cargo written statements, and all statements are registered within 72 hours in the compliance with the new Customs Code.
This was communicated during the meeting of senior executives of the North-West customs with Vladimir Vyunov, general-colonel, Head of the North-West customs. According to the North-West customs, there are no more queues at the border caused by registration and currently the participants of foreign-economic activity do not claim the customs actions. 8 customs carriers, 84 customs brokers and 116 owners of the warehouses for temporary storage have been put into register so far.

Russian Railways: Results and Plans of Container Transportation
In 2004 Russian Railways JSC is to carry over 1.5 mn TEU, increasing the container traffic by 13-15%.
According to the Russian Railways´ press service, in 2003 the company carried 1.356 mn TEU, wherein the domestic transportation accounted for 831.7 thousand TEU, 12% up year-on-year. 214 thousand TEU was exported, 18.2% plus year-on-year. Transit contributed 160 thousand TEU of the throughput (+45% year-on-year), while import took 151 thousand TEU, 22% up comparing with the results of 2002. During the 12 months of 2003 2707 box trains, which contained 257 thousand containers, were deployed on the Russian railways. In 2004 Russian Railways JSC plans to continue box trains and speeded container trains development.

Kaliningrad Posts Results
In 2003 the throughput of Kaliningrad Commercial Sea Port JSC amounted to 4073.8 thousand tons, 12.7% up year-on-year.
Export handling grew by 6.6%, amounting to 3.32 mn tons. Metals took 36% of export. In 2003 import handling made up 752.9 thousand tons, increasing by 51% due to the growth of grain and container handling by 3.14 times and 60.3% respectively.

Big Port of St.Petersburg Posts Results of 2003
According to the St. Petersburg Port Authority, in 2003 Big Port of St.Petersburg handled 42 mn tons.
Oil products accounted for 26.3% of the throughput, metals took 18.4%, containers contributed 17.8%, chemicals took 13%, refrigerated cargo accounted for 7.4%, coal and ore contributed 6.3%, timber and logs took 6.2% and general cargo accounted for 2.8%. Grain and foodstuffs took the least shares of the throughput, amounting to 1.2% and 0.5%. In 2003 the oil products, container, coal and ore, refrigerated cargo, chemicals and general cargo handling was up by 4.1%, 13%, 12.9%, 7.8%, 27.9% and 19.1% respectively. The handling of metals, timber and logs, grain and foodstuffs dropped by 14.6%, 9.3%, 48% and 58.1% respectively.

Petrolesport JSC: Up Again
In 2003 the throughput of Petrolesport JSC increased by 15.8% year-on-year, amounting to 4 133 thousand tons. In 2002 the handling of Petrolesport made up 3 568 thousand tons, 4.5% up on the results of 2001.
Petrolesport took 9.8% of the aggregate throughput of Big Port of St.Petersburg, 1.2% up year-on-year. According to the company´s executives, the throughput grew in 2003 due to the considerable increase of container and general cargo handling and the stable leading position on the timber and logs handling market in the region. In 2003 the timber and logs handling was almost even comparing with the results of 2003, amounting to 1 557.2 thousand cubic metres (in 2002 company handled 1 590.7 thousand cubic metres). In the structure of the throughput of Big Port of St.Petersburg Petrolesport JSC accounted for 47.5% of the aggregate timber and logs handling. As SeaNews was told by financial director of Petrolesport JSC Alexey Tiskin, the timber and logs handling did not grow due to the severe ice conditions in Q1 and Q2 2003, caused moving of cargo to Baltic ports and railway, and restructuring of timber and logs export. In January-December the container traffic amounted to 92 438 TEU, 43% up year-on-year. The company took 14% of the aggregate container traffic of Big Port of St.Petersburg. General cargo handling grew by 24%, amounting to 2 014 thousand tons. In the period of January-December 2003 the company handled 1 766.1 thousand tons of metals, 20.8% plus year-on-year. In 2003 the port increased handling capacity, speeded up handling and improved services. The dredging was carried out, new rail accesses were implemented, the area for empty containers storage was extended and the third stage of the refrigerator terminal was started. In 2004 the aggregate throughput of Petrolesport JSC is to amount to 5 mn tons and container traffic is expected at 140 thousand TEU.

Sea Port of St.Petersburg: Results of 2003
In 2003 the companies incorporated in Sea Port of St.Petersburg JSC handled 21 918.5 thousand tons, 5.4% down year-on-year. In December 2003 the companies handled 1 784 thousand tons, 16.9% plus year-on-year.
In 2003 the mineral fertilizers handling grew by 33%, amounting to 5 052.2 thousand tons due to the considerable increase at Baltic Bulker terminal, the terminal reached its planned capacity handling 2 613.2 thousand tons, a 166.3% increase year-on-year. During the 12 months of 2003 First Container Terminal, one of the largest container terminals on Baltic, handled 432 988 TEUs, 1.3% down year-on-year. In the structure of the throughput of Sea Port of St.Petersburg JSC break bulk took 37%, containers accounted for 24% and ferrous metals contributed 18%.

Terminal in Vistino
According to the Vedomosti, on January 16, the Leningrad Oblast Government voiced the results of the competition on the designing and construction of the new oil terminal in the Vistino Bay.
In 2003 officials declared the project as extremely profitable and interesting for oil companies. 2 companies: North-Western Alliance JSC and North-Western Reserve JSC. North-Western Reserve JSC proposed to construct 1.5 mn t. facility worth of $50 mn. Officials stated that both companies are not connected with oil producers, however, according to the Commersant, TNK-BP controls the companies. The project of North-Western Alliance JSC won the competition. The company proposed to construct 4 mn t. facility worth of $115 mn. The construction period was stated at 4 years. According to Grigoriy Dvas, the Leningrad Oblas Government considers to start constructing as early as late 2004, the Commersant reports.

New Ferry Line
In early April the Estonian shipping company Tallink starts a new ferry route Helsinki - Tallinn - St.Petersburg. Inflot Worldwide was appointed the St.Petersburg agent for the service. As was told by Inflot Worldwide CEO Igor Glukhov, the first call is scheduled for April 1.
According to the Tallink´s press service, the launch preparation lasted half a year. The final agreements are to be concluded in the nearest time. Tallink´s representatives note that the region has a huge tourism potential and the new line launch will expand the traveling opportunities and revive the economic activity in the region. According to Glukhov, the vessel "Fantaasia" will be deployed. Initially the service includes a ship call in St.Petersburg every 2 days. Currently "Fantaasia", which houses 1700 passengers, is deployed on the line Tallinn - Stockholm. The company plans to deploy one more ferry to start daily service if the line is successful.

New VTS of Gulf of Finland
The Russian-Finnish-Estonian Vessel Tracking System (VTS) of the Gulf of Finland is to start operating in H2 2004.
This was communicated by RF Minister of Transport Sergey Frank after his negotiations with Minister of Transport and Communication of Finland Leena Luhtanen held on January 24. Frank noted that the system implementation will ensure navigation safety in the Gulf of Finland and the Baltic Sea.

Gennadiy Fadeev: Pricing Needs Revision
The pricing in the natural monopoly sector is to be revised. This was communicated by president of Russian Railways JSC Gennadiy Fadeev at the meeting of the company´s Board held on January 23.
According to Fadeev, pricing needs urgent revision to coordinate it with price forming in other sectors. As long as the problem is unsolved there is investment deficiency danger and railways can not develop in line with other sectors. Fadeev claimed that in order to change pricing the legislation base is to be amended.

Leningrad Oblast Development
In 2003 the industrial production volume of Leningrad Oblast grew by 20.9%, amounting to $4,135.03 mn. According to the Leningrad Oblast Government, food industry production volume grew by 25.3%, machine building and metal working industry production was up by 9.9%. Growth of chemical, metallurgy and construction materials industry amounted to 9.3%, 5.8% and 7.2% respectively.Also power, timber, woodworking and pulp and paper industries also reported production growth, whereas fuel industry and agriculture experienced downturn. According to Leningrad Oblast vice-governor Grigoriy Dvas, transport sector grew best. Transport services volume grew by 22.1%. Road carriers transported 4.1 mn tons, while the throughput made up 92.5 mn t/km. G.Dvas mentioned key transport projects to be realized in 2004 including first and second stage of LUKoil´s terminal in Vysotsk putting into operation and third stage of Baltic pipe line system and oil terminal in Primorsk, which will increase its capacity to 30 mn tons per annum. The foreign trade volume in the period of January-September amounted to $2997 mn, increasing by 36.1% year-on-year. Export amounted to $2133 mn, 34.6% up and import grew by 40% amounting to $864 mn. Leningrad Oblast exported fuel and energy, timber and logs and oil and products. Foodstuffs, raw materials and machinery was imported. In 2003 the investment volume amounted to $1.2 bn, 1.7 times up year-on-year, therein investments of large companies accounted for over 83%, including 46% into machinery, equipment and vehicles acquisition. The leading investors are France and the USA.

Russian oil via rail soars
EXPORT of Russian oil by rail jumped by more than 30% last year, according to Russian Railways, which predicts that rail shipments to Baltic ports and the Daqing terminal in north east China, will more than offset Turkish restrictions and rising tanker rates for shipments through the Black Sea and Bosporus Straits.
According to the state owned operator, it shipped 41.4M tonnes of oil last year, with refined products up 31.4% from 31.5M tonnes. Pipeline shipments by Transneft, the state crude pipeline agency, rose less rapidly, totalling just over 128M tonnes for the year. Growth of Russian crude output was 11% last year and is currently running at 8.8M bpd, with exports at 3.3M bpd. Speaking at a briefing in Moscow, a spokesman said shipments through Russian ports being developed on the Gulf of Finland, and the White and Barents Seas, will expand faster than anywhere else. He added that Russia could also double its crude exports to China this year to 6.5M tonnes, with rail capacity rising to 8M tonnes next year. This growth will offset delays in government approvals for a new pipeline between Angarsk, in south eastern Siberia, and Daqing.

Steelmaker tightens Nakhodka grip
RUSSIAN steelmaker Evraz says it has raised its stake in the port of Nakhodka to 91.5%. The Sea of Japan port is a major terminal for the group’s rolled steel production, through which Evraz sends more than half its steel exports. Evraz chief operating officer Andrei Sevenyuk told Fairplay the company “needed logistic security”.
The move comes in the wake of its main competitors Magnitogorsk and Severstal –Russia’s largest steel manufacturers and exporters – acquiring port assets directly or indirectly to guard their export flows from eastern, western and southern Russia. Sevenyuk told Fairplay that three-quarters of Evraz´s steel exports go to Asian markets and most of these are contracted on spot terms that put a premium on reliable delivery. The Evraz group’s share of Nakhodka´s total operations is currently 56% by volume. This comprises about 3.5M tonnes of steel products, roughly half of the port’s cargo volume for last year. Funds for the acquisition, Evraz said, were drawn from the proceeds of a $175M euro bond issue successfully placed late last year.

Baltic oil exports expected to soar
LUKOIL subsidiary Kaliningrad Sea Oil expects oil shipments from its Baltic Sea terminal to increase sharply this year to 4.5M tonnes, or 88,000 bpd. If this level is achieved, it would represent a jump of 36% on last year´s shipments.
LUKoil sources say the rise will come from higher oil production at the Baltic Sea’s Kravtsovskoye oil field, which LUKoil owns and operates near Kaliningrad and its production and shipment target there is 6M tonnes, or 120,000 bpd. LUKoil has also started tanker shipments from the new oil products terminal at Vysotsk, near St Petersburg. Its start-up capacity is 2.5M tonnes rising to 6M tonnes by the middle of this year, and up to 11M tonnes by 2005. LUKoil´s shipping plans, according to spokesman Dmitri Dolgov, calls for a shift away from 20-40,000dwt tankers it currently uses, to tankers of up to 80,000dwt after mid-year.

Russia gives go-ahead to Sakhalin-2
RUSSIA has given its approval to the second phase of the Sakhalin-2 oil and gas project, which has been facing opposition on environmental grounds. But Sakhalin press reports say local environmentalists have registered concerns about both whale and fishing habitats in the Piltun and Aniva Bays.
However, Julian Barnes of Sakhalin Energy Investment Company (SEIC), which represents main developer Royal Dutch/Shell Group, told Fairplay he was not aware of opposition to the government’s approval. He said that since 1999 SEIC and other oil companies have been monitoring the Western Gray whale, which uses a 900-km˛ area off Piltun Bay for summer feeding grounds and that the first oil production platform, which SEIC started five years ago, appears not to have disturbed the whale count of 100 animals. He insisted the construction of a second platform and the laying of a seabed pipeline would only cut across the southern tip of the feeding grounds. Tanker loading is planned for Aniva Bay, in the south of Sakhalin and shipments will transit the La Perouse Strait, an ice-free body of water, between Sakhalin and Hokkaido, Japan. "All tankers will be covered by P&I insurance up to $1Bn,” and vessels will be vetted by Shell. Refinery would free up ice breakers OIL shipments at Primorsk, on Russia´s Baltic coast, would be easier in winter if a refinery were to be built there, a Finnish professor of maritime studies has suggested. Suezmax tankers that are used to lift crude from Primorsk require two icebreakers because of their beam. The terminal does not allow several ships to be loaded at a time and escorted in a convoy, which means Russia’s three large icebreakers currently operating on the Gulf of Finland are tied up by oil exports, says Jorma Taina, professor at shipping economics at the Turku School of Economics and Business Administration. A refinery at Primorsk would enable a switch to smaller product tankers of Aframax size at most, which are easier to assist in ice conditions. Pointing out that only frequent visits to waters with ice conditions justified the investment in tonnage that can cope, he said that ice classed tonnage up to Aframax size, which serve European ports, was more likely to emerge than larger long-haul tankers. Finnish authorities are in talks concerning possible ice breakers orders with their Russian counterparts. Taina said Russian oil exports from ports in the Gulf of Finland will climb to 100M tonnes in the next few years and the issue of winter shipping needs to be solved. Chinese Bet on EU Enlargement China has been quietly developing ties with the Russian enclave of Kaliningrad with an eye on setting up a new trade route for Chinese exports to Europe. New Neighbour Russia Russia and Lithuania have announced the construction of a new EU-standard border crossing at the town of Chernyshevsky to facilitate trade between Russia and the EU.
Sources: www.seanews.ru & others

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Saint Petersburg, 2 February 2004

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