Oil and oil products currently account for over 20 percent of freight traffic on Russia's railway network, the second-longest in the world. But the market faces a double threat of increasing competition from pipelines and a phase-out of heavy oil product production.
"Oil makes up around 2 percent of railway transport in other developed economies ... That is where we are heading now, said Alexander Sapronov, the head of railroad freight company Independent Transport Company.
According to Russian Railways data, 188 million tons of refined oil products and 68.4 million tonnes of crude traveled by rail in 2010. The United States, which has world's biggest network, by contrast shipped only 42,000 tons of petroleum and coke that year, or 2.2 percent of total freight traffic.
Russian freight operators are bracing for a drop in demand from 2015 with the launch of three new pipeline links, including the second phase of pipeline monopoly Transneft's East Siberian Pacific Ocean Pipeline (ESPO).
By 2015-2016 pipelines will have taken away 44-50 million tons (of crude and oil products) from rail," said Dmitry Korolyov, director of Russia's rolling stock operator lobby.
Transneft currently ships 300,000 barrels per day (bpd) of crude on the first stage of ESPO, which runs in a 2,757 km arch above Lake Baikal. From there the crude is sent by rail tanker to the Pacific port of Kozmino. Once the full 4,070 km pipeline is built, rail will have nothing to carry.
Transneft's products division is also planning to build a $3 billion pipeline to carry all diesel exports from LUKOIL's
Volgograd and TNK-BP's Saratov refineries -- around 3 million tons -- to Novorossiisk on the Black Sea.
But pipelines are not likely to completely supplant rail.
"Despite the high efficiency of pipeline transport, it still has its limitations. These range from the elementary lack of (refiners') access to the pipeline in some places to the fact that certain oil products are of a different standard than the kind accepted by the pipeline," said Anna Panovko of Petromarket.
ESPO & Freight One
Even so, ESPO poses the biggest threat to Freight One, a Russian Railways subsidiary that owns the largest number of oil tankers in the country, said Igor Kurotchenko, who runs the transport division of a research institute on state monopolies.
Russia's biggest private freight operator, Globaltrans Investment , has expressed interest in buying Freight One when it comes up for sale later this year, after it dropped plans for an initial public offering. In an early move that signals the coming consolidation trend, Globaltrans is seeking to boost its current market share of just over 5 percent.
Freight One ships East Siberian oil thousands of kilometres east to Rosneft's Komsomolsk refinery on the Pacific Coast. In 2010, the refinery received around 122,000 bpd of East Siberian crude by rail, but in 2014 the plant will get all its crude from the ESPO pipeline.
"We realise that stock (rail wagons) will be freed up," said Freight One's deputy head Vladimir Sosipatorov at a recent rail conference. "We also realise that exports will fall as the government works to make sure the domestic market is supplied."
In the second big hit to the market, Moscow plans to change its oil taxation regime this summer to encourage refinery upgrades. It hopes production of more light fuels and less fuel oil will curb price volatility at the pump and prevent a repeat of recent regional gasoline shortages.
Rail tanker operators and oil producers say the tax change will undermine the viability of fuel oil, a heavy product that requires further processing to be turned into gasoline or diesel and is also a major rail export product.
"It's not a secret that refiners are moving to increase their refining depth and that there
