Best in the Trade | |||
For Jonathan Kollek, then head of TNK’s trading operation, the acquisition in 2003 by BP of a 50% stake in Russia’s biggest foreign oil industry investment, caused deep apprehension: “I had never worked for a major before and I was scared. I said, ‘These guys are going to come – and they are going to drive me nuts!’’
Key facts about STL
Since 2003
- $2 bn netback additional to business plan
- 276 mln tons of crude sold
- 92 mln tons of products sold
- $135 bn revenue realized
Today STL
- sells 8 types of crude and 47 products
- delivers to more than 70 export destinations
- has 260 customers
Five years on, the reality has turned out to be very different for Kollek, a successful trader with almost 20 years of experience, who had joined TNK only the year before and now heads a 125-strong team in the Sales, Trading and Logistics (STL) operation: “The merger proved to be the most interesting, fulfilling professional experience I have ever had.”
Things could not have got off to a more difficult start. On the eve of ‘Day One,’ Sept. 1, 2003, a fire destroyed a tanker and a terminal on the Volga river, claiming the life of a Ukrainian crew member and spilling 2,000 tons of TNK-BP fuel oil (see Safety on Ship and Shore).
At first, new managers brought in from BP did not always see eye to eye with the existing team running the Russian operation, some of whom resented what they saw as a high-handed and bureaucratic approach that the newcomers brought to the business.
But, as the two sides got to know one another better, they came to realize that each had a unique contribution to make. Kollek says he and his immediate colleagues took a fundamental decision early on to back their boss, Tony Considine, who was appointed Executive Vice President for the downstream business after a long career with BP.
“The key to success was the ability to extract the top qualities from these two polarized, unique and outstandingly capable groups,” says Kollek, Vice President of STL. “This is the key for TNK-BP – for STL, upstream and downstream. We managed to extract the optimum from the historically unique platform that was created for us by the investment from BP.
“Suddenly, you were served with dishes that were the best on the planet in terms of ingenuity, depth of knowledge, experience – streetwise and classroom-wise – top-in-class technology, experience in processes, systems and controls.”
Crucial to finding a way forward was recognizing not just the strengths, but also the weaknesses of the partners in the business.
“We managed in STL and downstream to take the best of both worlds and pretty much push away the disadvantages. But this took time.”
Low-hanging fruit
By Kollek’s own admission, the trading operation he found when he joined TNK in 2002 had significant shortcomings. Controls were mediocre, standards of professionalism were inadequate, there was a lack of international experience and transparency was poor.
Kollek took the strategic decision then and there to eliminate all speculation from the trading operation and minimize exposure to market risk.
With BP on board, he set about optimizing the trading and supply operation of TNK-BP, which by contrast to its Russian competitors – which have ports, railcars and overseas trading offices – is ‘infrastructure-light.’
“The original TNK shareholders did not want to invest in logistics – it didn’t fit their profile of business,” Kollek says.
The first ‘low-hanging fruit’ involved tasks such as finding new destinations to deliver crude oil and refined products that would add value. But, with time, it became clear that the STL operation needed to be shaken up to achieve further efficiency gains.
In a first for the Russian industry, TNK-BP remodeled its trading setup, which had previously been divided into domestic and export operations. In their place, STL introduced trading books for each of its five product lines – crude oil, niche products, middle distillates, light products and fuel oil.
“This allowed the traders to optimize between domestic and export markets and arbitrage on a daily basis in a way that didn’t exist before,” Kollek says.
He took another pioneering decision: To shift away from fixed-price deals to month-average, floating-price contracts that avoid the considerable risks of the volatile oil market.
“We were confronted with a basic difference between the domestic markets, which are traded on a fixed-price basis, and export markets, which trade on a floating basis,” Kollek explains. “We were the first company in Russia to introduce floating price sales based on international indexes for crude and products.
“This pushed us in 2006 to create the floating-price, month-average contracts, which are today the industry standard. Lukoil sell all their crude volumes today on month average. (State-controlled) Rosneft and Gazprom moved to this at the end of 2007 – following the lead of TNK-BP.
“This is exactly the right thing for them and the Russian government, because they are selling production. They are not speculating – this is transparent. This is what we started,” says Kollek, who has continued to develop TNK-BP’s contracting framework to maximize both profitability and the flexibility needed to meet client needs.
| Product sales 2007 (incl. product from YANOS) – 27 million tons |
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| Product sales 2007 (incl. YANOS share) – 27 million tons |
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The same can be said for the system of annual open tenders that TNK-BP uses to market the bulk of its crude oil export volumes. These competitive tenders offer TNK-BP considerable discretion in determining how many cargoes are nominated each month and to which destination. The tender system has since been adopted by Rosneft, Russia’s largest oil company.
Similar tenders have been held for diesel, gasoil and, starting this year, for naphtha.
In other innovations, TNK-BP became the first company in Russia to export the high-quality gasoline blending component alkylate, which commands a premium thanks to qualities such as extremely low sulphur content and high octane.
TNK-BP has also become a first mover in delivering very low-sulphur (10 parts per million) gasoil via a new pipeline to the Primorsk terminal on the Baltic coast.
Big brother is watching you
Another innovation brought in by Kollek to Russia was ‘ASPECT,’ an online system that allows managers to monitor the entire transaction process from front to back. The system can be used to track oil flows, oversee trader performance and keep tabs on contractual amendments.
ASPECT maintains a database of approved customers based on compliance and security criteria, ranking counterparties according to risk and seeking to minimize the chance that a deal might unravel.
“This system may have been common in the international industry in the 1990s, but it was revolutionary in the Russian context,” Kollek says. “BP supported this and Tony Considine, as a leader, encouraged me to develop this system, create further controls and implement tighter corporate governance systems.”
| Crude sales structure (by volume) |
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| Refined products sales structure (by volume)* |
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* Without Orsk and LINIK volumes, including volumes of Slavneft/YANOS from 01.08.05 |
Then, in April 2007, TNK-BP added a new Supply Department to STL, headed by Marcus Cooper, to deepen the interaction between the refining business and buyers to ensure that the company’s five refineries – four in Russia and one in Ukraine – deliver exactly the right product slate to meet customer needs.
The Supply Department has five sections – production planning and optimization, scheduling, dispatch management, inventory and IT solutions. It produces a monthly production plan based on a model that optimizes crude oil and product flows, with scheduling of cargoes managed on a daily basis to maximize efficiency.
“Supply takes a bird’s-eye view approach across all the varying activities of all assets in the company and tries to identify where value is not being unlocked,” Cooper explains. “Supply aims to develop closer cooperation with the assets to identify lost value, thereby becoming a kind of commercial glue, filling in all the missing value.”
On the process side, the TRAP project (the acronym stands for trading, revenue, accounts receivable and products) has further refined oversight over trading activity. The system features 24 controls – including monitoring trading limits, price, invoicing, payment and counterparty checks – and has now been fully automated.
TRAP also cut the number of information technology systems that the STL department was using from five to two – ASPECT and SAP – and its efficiency gains mean that transaction approval has been accelerated from 12 hours on average to just half that time.
Five years on
The past five years have witnessed enormous change in the oil industry – both in Russia and globally. Oil prices surged to more than $140 a barrel in 2008 from around $30 a barrel five years ago. The competitive landscape has been transformed by the breakup of former market leader Yukos and the emergence of Rosneft as a dominant player.
Throughout that period, TNK-BP’s trading operation has sought to stay one step ahead of the competition. Last year, the company transported and sold 37 million tons of crude oil for export by pipeline and rail. A further 44 million tons of crude was delivered to refineries in Russia and the Commonwealth of Independent States (CIS).
On the products side, 15 million tons were exported, a further 3 million tons supplied to domestic consumers and 9 million tons distributed to marketing.
| 2007 Sales structure (by volume)* |
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* Sales structure represents volume after losses & includes crude and petroleum products purchased |
Throughout, the primary focus for STL has been on enhancing TNK-BP’s netbacks – in 2008 this focus was applied to the 1.6 million barrels of oil equivalent a day in produced. Kollek looks back with satisfaction on his team’s performance, saying it was able to deliver each year on increasingly demanding ‘stretch’ targets.
There’s no doubt that challenges remain, and Kollek is determined to land a contract to supply the Russian armed forces. Budgetary constraints make it hard for the Ministry of Defence to shift to a more flexible pricing model that would at the end of the day save it money on its fuel purchases. “This is one we didn’t crack yet, but it will come,” he says.
Looking to the future, Kollek says it will be vital to keep investing in the human capital of his team. “It’s all about people, people, people,” he says. “We send our people on more courses than any other department in the company. We have great people – they are the key to optimization we have seen.”
His greatest source of satisfaction? “What we managed to do for our colleagues, and our shareholders. Because on this journey, people not only made money but they had fun; they developed as human beings and were able to realize more of their potential,” Kollek says.
“The other thing that is extremely important is our contribution to the neighborhood we live in – be it in health and safety, new contractual systems, control systems, new standards of transparency and governance or new ways of optimization.
“All these things are contributions to Russia, because eventually they will be copied and become established as basic standards in the industry.”
| Downstream optimization process |
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Safety on Ship and Shore
The first distress signal was sent at 4:45 a.m. on Nov. 11, 2007, by Volgoneft-139, a tanker carrying a cargo of 4,000 tons of fuel, which lay at anchor in the Kerch Strait as a fierce storm swept in off the Black Sea.
The waves whipped up by the storm split the tanker in half, resulting in the spillage of half of its cargo. A total of four ships sank, six ran aground and two were damaged. Twenty-three sailors lost their lives and fuel oil spilt by Volgoneft-139 spread across six kilometres of coastline, killing 30,000 maritime birds.
No TNK-BP cargoes were involved in the Kerch Strait disaster, where in addition to the forces of nature, ageing ships – Volgoneft-139 was 30 years old – and the failure by some ships’ crews to respond quickly enough to storm warnings by seeking shelter contributed to the scale of the disaster.
In TNK-BP’s case, safety standards adopted since the fatal Saratov tanker and terminal fire of 2003 were designed to prepare ships and crews for adverse events such as the Kerch Strait storm. Since its first week of operations, TNK-BP has suffered no significant oil spills.
At the first meeting of the Management Board after TNK-BP’s creation, it was agreed that only BP-approved vessels would be chartered for sea-going cargoes. The situation was more challenging concerning the barges plying rivers such as the Volga, a key artery for refined products exports. No vessel in the Russian river fleet met international standards.
TNK-BP set about establishing a set of minimum standards that would enable it to charter enough vessels to handle its operational requirements. It then sought improvements in areas such as hardware and crew procedures, and also worked with BP to implement a series of “Interim Shipping Fleet” standards.
| A new double-hulled vessel constructed in Nizhny Novgorod in 2005-2006 |
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Stage two of the shipping safety drive featured a $100 million investment into Russian shipyards, helping them to develop and build state-of-the-art vessels, some of which have now entered service.
“We have implemented river shipping standards which are by now equal to international BP standards and are the highest in the country,” says Jonathan Kollek, the TNK-BP Vice President who heads up the Sales, Trading and Logistics.
TNK-BP has adopted a ‘zero tolerance’ approach to safety, summed up in their HSE objective ‘No Accidents, No Harm to People, and No Damage to the Environment.’
Critical here is the recognition that the most modern ships and terminals will not alone guard against accidents. Studies show that poor safety training and human error are the most common cause of accidents. Loading and discharging of cargoes (the riskiest area of operations) account for 37% of industry accidents.
“For the terminals, we implemented several seminars to ensure that the personnel operate according to the highest possible standards of ship-to-shore interaction – this is much more important than the hardware,” Kollek says.
“You can have a great ship and the best terminal in the world, but if you have the wrong procedures, one is going to bump into the other.”
TNK-BP has conducted a comprehensive audit of safety at Russia’s oil terminals, eliminating 129 identified high risks in 2003, 67 such risks in 2004 and a further 55 in 2005, with a sharp fall thereafter demonstrating the effectiveness of the program. In recognition of the initiative, TNK-BP won an environmental award from the UK Energy Institute in 2005 for improving the safety and environment operational standards on the Volga.
TNK-BP’s transportation safety drive is ongoing, now operating as HSE Caravan, bringing in a BP terminal safety audit team with global experience. And TNK-BP is offering its advice and consulting services to its Russian peers to help bring about an industry-wide improvement in standards.
“Now we are trying to spread what we did into the Russian industry so that everyone will adopt these measures,” Kollek says. “Why? It’s the right thing to do as a good corporate citizen. And because we could: BP gave us the support and TNK-BP gave us the money.”
Elena Lobodina, Oil and Products Supply Management Department Director
The creation of the Supply Department in April 2007 marked a new stage in TNK-BP’s STL history. It is a unique division among other Russian oil and gas companies. Its primary role is to maximize profit through operational flexibility (in particular, through introduction of unified scheduling for all elements of the operational chain from oil products production to supply to the terminals), timely response to market changes and efficient inventory management. A key to success is aligning the work of all functions, including trading, refining, logistics and marketing. The Supply Department is a team of 38 professionals who came from different parts of the company. After one year working together, the group has produced specific results. Better planning and scheduling allowed us increase production of gasoline products by 10%; and more transparent and better structured inventory reporting systems saved about $9 million for the company through reduction of working capital. In 2008—2009, we are continuing to optimize our processes and to make data gathering fully automatic to ensure timely decision making.
We are especially proud of the tolling agreement with LINIK that we started to implement in 2008, thus becoming the first Russian company to work under such license. Producing gasoline and diesel at LINIK allows us to satisfy ever-growing demand for light products in the southern regions of Russia. A cross-functional team from both the Russian and Ukrainian offices worked hard to make this project come true. The lifeblood that makes the heart of this project beat lies in the alignment between STL, Russian and Ukrainian marketing teams, LINIK, Legal and other company divisions. Over the past 6 months not only did we generate profit of $50 mln, but we also reduced operational cycle time by a factor of two. This is an excellent result.
Dmitry Kuranov, Senior Trader
Over the five years we have introduced the most progressive trading techniques based on the best international practices and Russian specifics. In 2007, we started selling new gasoline components such as alkylate, as well as M-grade and N-grade gasoline, new types of gasoline for the Russian refining sector, which dramatically improved our margin per ton. In addition, from 2008 we switched to floating prices based on the Platts quotations for selling products in Russia. In March this year, we concluded the first deal based on floating prices to supply jet fuel to Moscow airports and in September – our first deal on gas condensate. Flexibility in oil products sales, new types of oil products, application of financial tools, ongoing optimization of sales and thus impressive financial results – this all was achieved thanks to the well – aligned work of the highly professional international team.
Trym Nordhus, Head of Crude Trading Section
Over the past five years we have increased the price premiums for seaborne Urals cargoes to a level where there is very little, if any, trading margin left even for the sharpest traders in Europe. This has helped raise the industry benchmarks for both seaborne and Druzhba pipeline contracts. We also improved our internal benchmarks and understanding of price risks through continued dialogue between traders and planning, performance and control department, which means that the traders can now easily calculate profits and estimate price risks for each deal, as well as take the necessary action to manage the price risk. Also, the delegation of authority within STL has improved dramatically over the past years. In the beginning, a high level of approval was needed to execute a monthly sales plan. The process has now become more efficient and live, enabling us to capture opportunity at high speed. We see the opportunity, verify economics, get the approval and conclude the deal, all in a matter of minutes.
Elena Alekseyeva, Residual Trading Section Director
The implementation of the Trading and Revenue Accounting Process re-engineering project (TRAP) is no doubt one of the main achievements in STL over the past few years. It helped restructure all processes for buying and selling crude oil and oil products and improve transparency, efficiency and control of business processes. The cycle for concluding the deals has reduced from 5 to 1 1/2 days and the number of approvals has reduced by half.The whole process has moved from paper to electronic format.
We were also the first Russian company to introduce the practice of long-term tenders for oil products sales. This has allowed us to achieve annual prices at $5—15 per ton higher than the average spot market. A clear and transparent benchmarking system for oil products introduced in the company now allows the traders, planning department and company management to track work efficiency on a daily basis. In addition to the traditional sphere of expertise, we also started buying products from third parties discovering additional sources of income on the basis of our daily business.
STL has managed to achieve these outstanding results thanks to a unique team of professionals with rich experience, a team that was formed on the basis of the most progressive international and Russian business practices.
Best in the Trade (671 KB)