“Pump or pay”: The managing partner of ART DE LEX, Dmitry Magonya, commented on the principle of access to the major oil pipelines of Russia for Russian companies

In August, the minister of energy, Arkady Dvorkovich, decided that the firms using sections of in the state-owned Transneft pipeline system will pay for services, even when they are not pumping petroleum products. Transneft will draft new contracts that reflect the so-called “pump or pay” principle, and the firms will have 30 days to accept the contracts. Failure to do so will allow the government to reconsider taxes and duties for oil from those fields. This will affect the fields Rosneft, Gazprom Neft, and Gazprom have along the new transit routes to China: the Zpolyarie-Purpe pipeline, which begins in the Yamal Peninsula and goes through the Nenets Autonomous Okrug, and the Kuyumba-Taishet pipeline, which runs further to the east through the Krasnoyarsk Krai. The concern is to ensure the profitability of Transneft’s new pipelines. Originally, the “ship-or-pay” policy was the basis for Transneft’s construction of the pipelines, but not all producers accepted the plan.

Dmitry Magonya, the managing partner of ART DE LEX, commented in Vedomosti about the arrangement:

To balance the interests of the parties, that is, the natural monopolies in oil transport and the oil companies, and for the monopolies that transport oil and oil products through pipelines to domestic and foreign markets to provide access to the latest services, the government issued decree No. 218 of 29 March 2011, titled "The rules of nondiscriminatory access to services of natural monopolies.” It established the following:

In the performance of the contract, the consumer shall:

e) pay the operator for the transport of crude oil (petroleum) in the manner and within the time the contract stipulates, regardless of whether those services are consumed, except in cases of force majeure, based on the legislation of the Russian Federation, that prevented the consumer from delivering oil (oil products) for transportation through a major pipeline from the point of departure in the amount and time the contract provides (Clause 8).

Therefore, the “pump-or-pay” approach is not new to regulating the relations in the construction and use of the oil and gas infrastructure. Given the cost of constructing the pipeline, the natural monopoly should have guarantees that the money it invested will not result in an underutilized pipeline. In other words, the natural monopoly provides transportation services, regardless of the actual delivery of oil in the system. This allows Transneft to distance itself from the internal risk of oil companies.

It is important to note that services should be paid irrespective of the natural monopoly rendering them and irrespective of the oil companies consuming them. It assumes that the oil pipeline should be constructed and that it should operate.

This approach is usual for Russia and for general civil matters. Furthermore, it is common for natural monopolies. When, for example, a person buys a gym membership, he may choose whether to use it or not, and the same is true when renting an office. Once a service is paid, one can use it as one wishes.

It is not surprising that Transneft resorted to such a protective measure. A year ago, it learned that companies will reduce the amount of product flowing through the Kuyumba-Taishet pipeline. Furthermore, the firms working the Yurubcheno-Tokhomskoye and Kuyumba oil fields in Krasnoyarsk expect dramatically reduced production. By 15 September 2014, Rosneft, Gazprom Neft, and Gazprom will inform the Ministry of Energy and Transneft about their updated timetables for petroleum delivery for the Zapolyarie-Purpe and Kuumba-Taishet pipelines for the 2015-2125 period. The president of Transneft, Nikolay Tokarev, informed Dvorkovich that declines in projected output will affect the expansion of the Eastern Siberia-Pacific Ocean pipeline (BCTO in Russian and ESPO in English) and indicate a lower amount of oil production in Russia. There is the possibility, however, that oil fields in Western Siberia will fill the gap. In the meantime, only Gazprom Neft is ready to sign a contract for the Kuyumba-Taishet pipeline; other companies have not announced their intentions.