Washington slaps sanctions on independent Russian producer

7 June 2017, Week 22, Issue 934

The US government has added Independent Petroleum Co. (NNK) to its sanctions list, claiming the mid-sized Russian firm has been supplying North Korea with oil products from its refinery in Russia’s Far East.

In an announcement on its website, the US Treasury Department noted on June 1 that NNK had a contract to supply crude to North Korea and had shipped oil products worth over US$1 million to the reclusive state. Primornefteproduct, which is NNK’s distribution arm for oil products manufactured at its Khabarovsk refinery, was also placed under US sanctions. The measures prohibit US nationals and companies from owning stakes in the sanctioned entities or doing business with them.

“The [US] will continue to target individuals and entities responsible for financing and supporting North Korea’s nuclear weapons and ballistic missile programs, and will continue to increase pressure on this hostile regime,” said John Smith, the director of the US Treasury’s Office of Foreign Assets Control (OFAC). The US government also accused NKK of being involved in a scheme designed to circumvent existing US sanctions against Pyongyang, which has recently conducted a number of missile tests deemed a threat to regional security.

NNK’s owner Eduard Khudainatov responded to the latest US sanctions by denying any commercial connection to North Korea. “I am absolutely shocked,” he told Russian news agency TASS last week. “I was especially struck by the US administration linking my company to the North Korean nuclear programme – I would not have had the imagination to invent such a thing,” he said, adding: “I regard this as a political order, the purpose of which is to destroy a strong market competitor [and] break negotiations with investors.”

In February, reports surfaced of Khudainatov’s intention to sell a stake in NNK, with interested parties including state-controlled Russian oil giant Rosneft, where he previously served as chairman. Russian daily Vedomosti quoted unnamed sources close to the negotiations as saying earlier this week that the Qatari sovereign wealth fund, Qatar Investment Authority (QIA), was close to acquiring a 25% interest in NNK.

The fuel supplies cited by the US Treasury would have come from NNK’s Khabarovsk refinery, which is its only downstream facility. The plant lies in Russia’s Far East, operating with a total throughput capacity of 5 million tpy (100,000 bpd) of crude. Production is typically marketed to the surrounding Russian regions of Primorsk, Khabarovsk and Kamchatka as well as the Asia-Pacific region, including China.

 

Imperfect timing

NNK’s Khabarovsk facility recently returned to profit, generating net income of 3.1 billion rubles (US$54.8 million) for the first quarter of 2017. The plant recorded a net loss of 580 million rubles (US$10.3 million) for the same period of last year. Analyst Sergey Vakhrameev from Moscow-based GL Asset Management told Vedomosti that the company had been unprofitable since 2012 owing to the slump in oil prices, which have squeezed refinery margins since late 2014.

The improved figures come on the back of a 4.5% year-on-year jump in processing volumes to 1.2 million tonnes (24,000 bpd) in the first three months of this year. The Khabarovsk plant was connected in July 2015 to the Eastern Siberia-Pacific Ocean Pipeline (ESPO) under a contract to supply up to 5 million tpy (100,000 bpd) of crude to the refinery.

NNK’s parent company Alliance Oil, which is understood to be under the majority control of Khudainatov, also recently returned to profit in 2016 but is saddled with debts of around US$2 billion, the bulk of which are linked to NNK. The company is looking to shed upstream assets to reduce its debt pile, raking in 40 billion rubles (US$707.3 million) from the sale of Western Siberian producer Kondaneft to Rosneft last month. Khudainatov said last week that NNK was currently calculating the financial impact of the US sanctions on the group’s future performance.

Joseph Murphy

Edited by

Joseph Murphy

Editor

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