Russia launches ‘geopolitical’ oil pipeline to Asia

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The new East Siberia-Pacific Ocean (ESPO) oil pipeline is expected “to strengthen Russia’s position on the global raw materials market,” writes Wojciech Kono?czuk, an analyst at the Warsaw-based Centre for Eastern Studies, in a recent paper.

“On 28 December, [Russian Prime Minister] Vladimir Putin officially inaugurated the first section of the new East Siberia-Pacific Ocean (ESPO) oil pipeline, the most expensive and one of the most important projects in Russia’s energy sector. Its main objective is to diversify Russia’s oil exports by significantly increasing sales on Asian markets at the expense of Europe. The other key task of the ESPO is to accelerate the development of oil fields in Eastern Siberia and the economic development of the Far Eastern region.

Although these objectives are feasible, they will be attained no sooner than 2020, once the second section of the pipeline becomes fully operational. It is expected that the ESPO will experience a deficit of oil, and so during the first few years it will not operate at full capacity, and will have only a limited impact on the Russian oil sector.

Features of the ESPO

After many years of discussions, the construction of the pipeline started in April 2006. The ESPO was supposed to connect Tayshet (in the Irkutsk oblast) with the Kozmino port on the Pacific Ocean. The new oil pipeline is intended to stimulate the development of a new oil production centre in Eastern Siberia, which is particularly important in view of the expected decline in production from the Western Siberian fields and in the Urals-Volga region. The ESPO’s total length will be 4857 km and it will have an annual capacity of 80 million tons. The first section between Tayshet and Skovorodino (Amur oblast) has a capacity of 30 million tons.

Initially, oil will be transported from Skovorodino to Kozmino by rail. The second phase of the project (to 2014–2015) will see the construction of the pipeline section to the terminal in Kozmino (50 million tons) and the expansion of the first section’s capacity to 80 million tons. Moreover, a branch connecting the ESPO with China’s Daqing has been under construction since April 2009; it is expected to start transporting 15 million tons a year in 2011 (with an option of extending the capacity to 30 million tons).

Diversification of exports

Under the Energy Strategy to 2030 approved in late November 2009, the share of the Asian direction in Russian oil exports is to increase from 6% to 20-25% over the next twenty years. The Kremlin’s objective is to limit the importance of the European markets, which currently receive over 90% of Russian oil exports. The strategic reasons for the construction of the ESPO were identified by Vladimir Putin during the pipeline’s inauguration: the PM said that “this is not just a pipe” but rather “a geopolitical project”.

However, the diversification of export markets which the ESPO is expected to achieve will take many years, due to problems with ensuring a sufficient supply basis for the pipeline. The development of oil fields in Eastern Siberia is still in the initial phase, and during the next few years, the new pipeline will be supplied mainly by the Vankor field in Western Siberia. Of the 15 million tons to be transmitted via the ESPO in 2010, Vankor will supply around 11 million tons. According to optimistic forecasts, the Eastern Siberian fields will only reach production two levels of 70–80 million tons a year around 2030. Consequently, when the second section of the ESPO is launched, it will operate at reduced capacity. It is also possible that its construction may be delayed in connection with the oil supply problems.

The ESPO’s cost: The end justifies the means

The ESPO is the most expensive project in Russia’s energy sector. The construction of the first section and the oil terminal in Kozmino cost around US$15 billion, and the estimated cost of the second section is another US$15 billion. It will also be exceptionally expensive to operate the new pipeline; Transneft, the state-owned pipeline operator, has set the transport tariff at US$55 per ton, whereas the real cost of transporting a ton of oil via the new route is US$130.

This year alone, the export of 15 million tons of oil will generate a loss of around US$1 billion for Transneft. This means that in order to limit the dominance of the European direction in Russian oil exports Transneft is prepared to bear the extra cost of exporting oil to the Asian markets for some time. This will probably entail an increase in the export tariff for the Western direction (currently US$30–33 per ton of oil), to be borne by all Russian oil companies.

The enormous cost of constructing and operating the new pipeline, and the expected difficulties in ensuring a supply basis for the new route, demonstrate that the Russian authorities are determined to push for the implementation of strategically important economic projects irrespective of the cost. The ESPO pipeline is expected not only to stimulate the development of a new oil extraction centre in Russia and promote economic development in the Far East, but also to strengthen Russia’s position on the global raw materials market.”

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