Classical mechanics
§ 1

Velocity is a characteristic of motion

There is motion across the whole of Transneft: oil flows through the pipelines, and tankers exporting black gold and petroleum products depart from the port berths. Also on the move are Transneft’s people, so that the system does not stop for a single minute. By moving oil, Transneft contributes to accelerating regions’ development: it helps build houses, schools, hospitals and other infrastructure facilities.

The volume of oil and petroleum products transported in 2019 increased by 0.7%, and oil exports increased by 3.6%. The Company brought the Eastern Siberia — Pacific Ocean pipeline system to its maximum capacity: up to 80 and 50 MTPA within the Tayshet — Skovorodino and Skovorodino — Kozmino sections.

Once again, the velocity. The project was completed 11 years ahead of the plans: the importance of export to the countries of Asia and the Pacific was considered. Transneft Group’s financial revenues grew by 8.6% in 2019, reaching one trillion rubles for the first time

Velocity is the distance covered over a specific unit of time. Usually, the unit of time is a second or an hour, but in our case it is a year. Metres and kilometres are not enough to describe the distance Transneft covered in 2019. For that, one would need percents, tonnes and rubles.

A constant velocity ensures smooth motion: the international rating agency Moody’s raised the long-term outlook of Transneft from positive to stable. Analysts attribute the Company’s high credit quality to the resilient business model, the diversified customer base, the moderate levels of debt and the strong liquidity profile.

Velocity is a vector quantity. The vector of Transneft is towards meeting the needs of oil producing and refining companies in transportation of oil and petroleum products. At the same time, it is necessary to prevent the ageing of the pipeline system from outstripping its renewal, therefore, the priority now is revamping and upgrade of the system. Transneft is a state-owned company that moves along the same vector as the country: it aims to develop Russia and maintain the well-being of its population.

Medium is a substance that fills a certain space

Let’s consider a situation where the substance is oil or petroleum products and the space is the territory of Russia. In 2019, Transneft transported 83.1% of Russian oil. The Company’s share in transportation of petroleum products produced at Russian refineries was about 29%.

In transportation of petroleum products, pipeline transport competes with the air and land medium, i.e. rail and road transport, and the water medium, namely, marine transport. Comparing the medium properties, we find out that pipeline transport has certain advantages: deliveries are carried out within the shortest periods, it is possible to store petroleum products and create reserves, and weather conditions have minimal impact on transportation.

Analysis of the medium properties helps predict how the industry will develop. Based on the analysis of the major trends in the industry forecast, Transneft plans to maintain its market share of oil and light petroleum products transportation through the trunk pipeline system in the medium term.

Let’s compare homogeneous mediums — leading world companies in oil and petroleum products transportation. The analysis conducted by the KPMG international consulting company shows that Transneft maintains a consistently low level of specific operating expenses. The Company’s transportation costs are almost 4 times lower than the median value in the study for oil and 1.5 times — for petroleum products.

Energy is the ability of a body or a system of bodies to perform a certain amount of work

The Transneft system operates continuously, providing services of oil and petroleum products transportation via trunk pipelines.

In mechanics, one distinguishes between potential energy, which is determined by the relative position of bodies, and kinetic energy, which is determined by their motion. Transneft’s potential energy is its operational assets: 51,000 km of oil trunk pipelines, 16,400 km of petroleum products pipelines, 412 oil pumping stations (PS) and 99 petroleum products pumping stations (PPPS), as well as more than 1,500 tanks.

Transportation of oil and petroleum products triggers kinetic energy — the energy of motion. In 2019, the oil turnover in accordance with routing orders executed increased by 2.5%. The total oil intake into the oil pipeline system amounted to almost 485 million tonnes, exceeding the previous year’s level by 0.9%.

The law of conservation of energy states that energy can neither disappear, nor be conjured up from nothing; it can only be transformed from one form to another.

There are different types of energy: light, thermal, nuclear and others. Let’s talk in detail about electrical energy. Transneft R&D has developed a methodology for studying the energy efficiency of pipeline transport facilities, which allows to identify companies’ internal reserves and use them to reduce energy consumption. Application of this technique helped the International Association of Oil Transporters (IAOT) members reduce their average specific electricity consumption by 12% in the span of three years.

Vector is a directed segment

The vector of Transneft’s development is the Company’s Strategy, whose aim is to fully meet the demands in transportation of oil and petroleum products both within Russia and for exports. Effective operation, technical upgrading and modernisation of the trunk pipeline system are the means of achieving the goal.

Let’s consider the concept of a sum of vectors, as the general course of the Company’s development is made up of several directions.

Vector A is reliability and safety. In 2019, Transneft ensured a reduction in accident rate at its trunk pipelines and plans to improve its performance. The Company pays great attention to anti-terror security of its facilities. It is not only pipes that Transneft is taking care of; the Company strives to protect its main capital — employees — by developing social guarantees.

Vector B is efficiency. The Company reduced its operating costs and specific electricity consumption for oil transportation. Capital expenditures went down by RUB 4 bn.

Vector C is ecology. The specific air pollutant emissions in oil and petroleum products transportation via trunk pipelines were reduced by 6.9%. The discharge of insufficiently treated wastewater into water bodies was completely stopped.

Vector D is innovation. The Company’s Innovation Development Programme was highly praised by independent experts — 98.7%. Transneft is effectively implementing its import substitution plan: by the end of 2019, the manufacture of 25 types of equipment out of the 26 declared was mastered.

Reference System

A reference system is required to determine the position, direction and speed of a moving body. It includes a reference body, a coordinate system and a timekeeping device.

Let’s measure time with the calendar and consider the 2019 part. Transneft will be the reference body, so that the spatial position of other bodies is determined in relation to the Company. Let’s see where the Company’s indicators are in the coordinate system of the International Financial Reporting Standards (IFRS) and how their position changed as compared with the previous year.

In 2019, Transneft’s revenues exceeded RUB 1 trillion. They increased by 8.6%, mainly due to the revenue growth from oil transportation services and the inclusion of NCSP Group and NFOT in Transneft Group’s consolidated indicators. Petroleum products transportation generated less revenue than in the previous year due to reduced volumes and changes in freight flows. Revenues from export oil sales under the contract with China National United Oil Corporation also decreased, as oil prices fell, and the US dollar exchange rate rose.

Operating expenses increased by 14.3% as pension accruals and labour costs rose, and so did the cost of sales of oil and petroleum products on the domestic market. Additionally, the indicators of Novorossiysk Commercial Sea Port (NCSP) and the fuel oil terminal were included in the operating expenses.

In the coordinate system of the Russian Accounting Standards (RAS), Transneft’s net profit grew 7.5 times in 2019, exceeding the level of RUB 76 bn. Return on equity amounted to 39.05%, which is 7 times more than in the previous year.

In conclusion, let’s consider Transneft’s development in the tax system of coordinates of the Russian Federation. In 2019, Transneft Group paid about RUB 97 bn in taxes* to budgets of different levels throughout the country — from Novorossiysk to Nakhodka.

Space is an infinite substance serving as a scene for various processes and phenomena

Many processes in the space of Transneft are aimed at following the principles of sustainable development. By the UN definition, sustainable development meets the needs of the present without compromising the ability of future generations to meet their own needs. To achieve its sustainable development goals, the Company increases the level of industrial and environmental safety, reduces the negative impact on the environment and pays attention to social support of the population in the regions of its operation.

Let’s consider the properties of Transneft’s space. The space is continuous; so are the Company’s environmental protection activities. Transneft cares about the climate and reduces greenhouse gas emissions into the atmosphere. It is planned to reduce energy consumption by 0.5% annually until 2024. Transneft is implementing innovative projects in environmental protection: the water condition in the water areas of the ports is monitored with the help of mariculture, measures are taken to restore and plant forests, clean up banks, replenish the populations of animals and birds.

The space is homogeneous: all Company employees are to observe the principles of professional ethics and basic rules of professional conduct. Transneft’s values are the rule of law, priority of Russia’s state interests, financial transparency, integrity, zero tolerance towards corruption and a strong social focus.

The space is three-dimensional, and Transneft has three axes of coordinates in the regions of operation: economic development, construction of infrastructure facilities and implementation of social projects. The reference point is safe and secure operation of pipelines. The Company provides charitable support to schools, hospitals, sports institutions and cultural facilities. In 2019 Transneft completed its three-year school education development programme: 171 schools across Russia received charitable support. Transneft was recongised the best socially oriented company in the oil and gas industry in the competition held by the Ministry of Energy of the Russian Federation.

Control radius

A radius is a line segment that connects the centre of a circle or sphere to any point on its perimetre/surface. Even in the largest sphere, each point is equidistant from the centre and connected to it through the radius. The sphere of Transneft covers 64 constituent entities of the Russian Federation. The Company is successfully functioning due to the effective connection of all its points to the centre — the system of corporate governance.

The interests of the Russian Federation, which owns 100% of the voting ordinary shares of Transneft, are at the centre of the sphere. Transneft’s supreme governing body is the General Meeting of Shareholders. Strategic management is carried out by the Board of Directors, and current operations are managed by the President of the Company. The President is also the Chairman of the Management Board, a collegial executive body.

The Latin «radius» translates as «spoke of a chariot wheel». Spokes are needed to lighten the entire construction. The wheel of Transneft’s corporate governance system rotates freely thanks to the openness, transparency of information, anti-corruption activities, internal and external control. In 2019, the Company established a business unit for interaction with shareholders and investors, which made it possible to establish a regular dialogue. In the reporting year, the Corporate Governance Code and the Regulations on Information Preparation and Disclosure were approved, an anti-corruption division was established, and the Anti-Corruption Policy and the Regulations on Internal Audit were updated. KPMG assessed the quality of Transneft’s internal audit and concluded that it met the International Standards for the Professional Practice.

The number of radii in any circle is infinite, almost like the number of ways Transneft talks about its activities. The Company discloses information in publications on its website, publishes the Oil Pipeline Transportation magazine, updates pages in social networks, prepares videos for the corporate TV service, as well as provides comments at the request of media, shareholders, investors and other interested parties. The Annual Report is also an element in ensuring the openness and transparency of information on Transneft.

Impulse is a vector quantity which describes the force over a time interval

For Transneft, instructions of the President and the Government of the Russian Federation, which give impulse to the development of the Company, are of absolute force.

The country and Transneft have the same vector for import substitution. The Company is constantly working to reduce the dependence of the Russian fuel and energy sector upon imports of equipment and software, as well as upon use of foreign companies’ services. As part of following the order to develop domestic production of the most important imported goods, the Company has mastered the manufacture of 25 types of products for pipeline transportation of oil and petroleum products.

Construction of the Transneft Synthesis drag-reducing agents plant was completed in Tatarstan. The production capacity of Phase I of the plant is 3,000 tonnes of products per year, and it can be increased up to 10,000 tonnes, so that the plant can meet the needs of both Transneft and other Russian companies. Transneft has developed and is implementing an energy efficiency enhancement programme. Information on the Company’s performance in the energy saving field is published on the Federal Agency for State Property Management website. Lower electrical energy costs are part of the set of measures to reduce operating expenses by at least 2-3% annually. The Company also optimises its procurements, reduces fuel consumption and cuts down spending on maintenance services.

In accordance with the relevant instruction of the Government, Transneft has developed the Innovation Development Programme for the period from 2017 to 2021. The document has been approved by three Russian ministries: the Ministry of Energy, the Ministry of Science and Higher Education and the Ministry of Economic Development.

The law of conservation of momentum states that in a closed system, the momentum of all bodies remains constant. The efforts that Transneft directs towards implementing instructions of the authorities and developing its operations in the same direction with the country are constant.

§ 1
Company Profile
§ 2
Situation in the Industry
§ 3
Operating Results
§ 4
Development Strategy
§ 5
Financial Overview
§ 6
Sustainable Development
§ 7
Corporate Governance
§ 8
Appendices