The battle for a barrel of jet fuel in Ekaterinburg: TNK-BP vs. LUKOIL

07.12.2010 — Analysis

The fuel facility at Ekaterinburg's Koltsovo airport is to be sold to a private company. Aleksandr Misharin, the governor of the Sverdlovsk region, believes that privatizing the fuel facility (FF) will provide a powerful stimulus to the development of air transport in the region. But experts do not share his optimism. They believe that a monopoly supplier of fuel will create a serious imbalance in the development of the aviation market. This columnist for RusBusinessNews explains how no competition will be possible until the government stops building business relationships through exclusive agreements.

The TNK-BP oil company appealed to Russia's Federal Antitrust Agency for permission to purchase 100% of the voting shares of the Koltsovo FF. The fuel facility, which will remain an integrated part of the Ekaterinburg airport until January of 2010, has the exclusive right to pour jet fuel "into the wing." The FF's monopoly position has been responsible for the majority of Koltsovo's income (up to 50% of its revenue). The federal government decided to turn all the fuel facilities in Russia into independent legal entities, and thus forced the airport to liquidate this asset. Public officials claim that this is how they are trying to foster competition among the sellers of jet fuel and to lower ticket prices. But experts suspect that privatizing the FF merely means handing the facility over to the "proper parties" and has nothing to do with eliminating a market monopoly.

This is not the first time someone has tried to sell Koltsovo's fuel infrastructure to a private party. In 2000, Yuri Kirillov, who was director of the airport at the time, proposed creating a limited liability company, Koltsovo FF, 80% of the shares of which would belong to the financial group Koltso Urala. The state, who at the time owned 60% of the shares in the airport, had no objection. It is possible that this was because Aleksandr Venediktov, one of the advisors to Governor Eduard Rossel, had created the financial group. The deal never took place because Petr Latyshev, the Russian president's authorized representative in the Urals Federal District, campaigned against it.

In the mid-2000's, Renova (a Russian shareholder in TNK-BP) became one of Koltovo's owners. In return, Viktor Vekselberg was forced to build a new rail station complex at the airport. He kept his promises, but first the airlines had to pay their full share of the cost of the infrastructure, and then it was the passengers' turn. Fuel prices, which increased by 90% a year during Koltsovo's reconstruction, caused some flights to be discontinued. At one point, jet fuel became more expensive at the Ekaterinburg airport than in Europe, where prices for petroleum products are by necessity higher, and the Federal Antitrust Agency (FAA) was forced to intervene.

In 2007, the FAA uncovered conspiracies among both fuel suppliers (oil companies) and consumers (airlines and airports). The Koltsovo joint-stock company was fined 13 million rubles. The Antitrust Agency found that Mikhail Maksimov, the airport's new general director, was openly lobbying for the interests of the Aviaprad airline, which they suspect was created by Renova. They tried once again to sell the fuel facility, but the airport tripled the price (120 million euros) and no buyers for the FF were found. Experts believe that the responsibility for the failure of the deal lay with Viktor Vekselberg, who claimed more than once that the proceeds from fuel sales would go toward the reconstruction of the airport rail station.

This situation began to disturb even Eduard Rossel, who was head of the Sverdlovsk region at the time. It was he who literally handed over the management of the FF to Renova. In 2008 he claimed that a second fuel facility, built by the Lukoil company, would emerge at Koltsovo. A fuel company called Ural was even registered - it was established by Lukoil-Aero, LLC and the joint-stock company Ural Airlines. But that deal never went anywhere. A new player was not allowed to fuel planes. The airport not only refused to provide fuel storage tanks to the Ural fuel company, but even refused them to the airlines who expressed an interest in buying their own kerosene on the market and depositing it at the Ekaterinburg airport. After that, the Antitrust Agency again brought suit against the joint-stock company Koltsovo.

This complaint has already been under review for two years, and a verdict has been delayed for a number of reasons. First the Federal Antitrust Agency had to find out whether the airport was able to store additional amounts of fuel. Aleksandr Travka, the head of the territorial administration of Rosaviatsiya (the Russian air transport agency) in the Urals district, told RusBusinessNews that the airport does have this capacity (if certain safety conditions are observed) and that the administration of the regional office of the Federal Antitrust Agency had been informed of this. However, the question of whether a second operator would be allowed to fuel airplanes has not been resolved.

Yuliya Anisimova, the head of the department on restricting monopolistic behavior on commodity markets for the Sverdlovsk regional office of the Federal Antitrust Agency, explained that the delay in pronouncing a verdict is due to the fact that the joint-stock company Koltsovo is an improper defendant. It became clear over the course of this process that it is not the private company Koltsovo FF who is acting as a monopoly when they fuel planes, but a company called Aktiv FF, LLC. In addition, despite turning the fuel facility into an independent legal entity, the joint-stock company Koltsovo still held the right to enter into contracts to store fuel. Employees of the Federal Antitrust Agency are aware of who is behind this whole arrangement, but they still demanded documents showing how the management rights to the facility are transferred from one company to another. According to Yuliya Anisimova, it is clear who will provide Koltsovo with fuel and will refuel the airplanes. The market will not undergo any changes with the sale of the FF. The monopolist will still create obstacles for other competitive suppliers of kerosene.

The central office of the Federal Antitrust Agency (where TNK-BP sought permission to buy Koltsovo FF) is currently studying the situation. Aleksandr Petrov, the minister of industry and science for the Sverdlovsk region, told this columnist for RusBusinessNews that a decision has still not been made about selling the fuel facility to TNK-BP. The government of the Sverdlovsk region recently signed an agreement with the Lukoil company on social partnership. In accordance with this contract, the oil company will construct a new building for the Ekaterinburg Philharmonic, and the authorities will help the company do business in the region. There is currently no talk about building a second FF, but, as Aleksandr Petrov claims, Lukoil is the second serious contender to want to buy the Koltsovo FF.

Aleksandr Filippov, head of the public relations group for Lukoil-Permnefteprodukt, LLC, claims that the company is considering various options for entering the aviation fuel market in Ekaterinburg, which might include taking part in an auction to purchase a privatized FF. Lukoil's final decision will depend on the market conditions and a number of other factors, including political considerations.

Meanwhile, experts have no doubt that a political decision has already been made, and one not in Lukoil's favor. Aleksandr Misharin, the governor of the Sverdlovsk region, recently told journalists that "other fuel suppliers will emerge after the sale of the FF at the airport - there will be competition, and jet fuel in the Urals will become cheaper, which will affect the price of tickets." Clearly, he considers the current supplier, TNK-BP, to be the "first" one. With this statement, the leader of the region seems to indicate he has no doubts that new players will arrive at Koltsovo.

Experts believe that opening a second or even a third fuel facility will still not guarantee a lowered price for fuel, or accordingly, for tickets. The airport in Vladivostok had more than ten FFs, but no competition ever arose among them because none of them had their own tanks, laboratories, warehouses, etc. It is an expensive, lengthy process to create one's own infrastructure, which is why "alternative" FFs often turn into simple intermediaries.

Of course, major oil companies can build their own storage tanks, but again, this does not guarantee a market relationship. In the first place, the FAA's research has shown that vertically integrated companies tend to establish uniform prices on jet fuel. Second, a public-private partnership system, such as what the Russian government is trying to use to resolve social issues, does not facilitate the development of competition.

The agreements that the Sverdlovsk regional government is signing with major taxpayers could be called indulgences for the right to do business in the region. After investing in the social projects recommended to them "from above," companies reasonably expect to recoup their costs at the expense of the local market. Thus the authorities are forced to restrict other players from entering the market, effectively eliminating the competitive struggle.

In order to have a presence at Koltsovo, Renova was forced to contribute to the reconstruction of the airport. Lukoil would also like to refuel planes, but it has been recommended that they demonstrate their social responsibility. These are the economic realities in Russia - market conditions make the authorities uncomfortable because they prefer exclusive relationships with businesses and a hands-on style of management. And so, economic distortions result. In a country that produces so many raw materials, the vast majority of its citizens cannot use air transport because of exorbitant fuel prices.

Vladimir Terletsky