By the year 2012, Russian government and company forecasts indicate that Russian oil output will increase to a total of 11.5 million barrel a day. 7 million barrel will be exported, requiring a doubling of the today?s pipeline capacity.
Russian oil companies have shown increasing interest in exporting oil and gas to Asian markets. This coincides with the Russian government?s determination to pay more attention to the country?s neglected eastern region. This balances the Russian government?s long-standing ?European emphasis? with a recognition that China is a rising political and economic force that poses important challenges in Russia?s East. Russian oil and gas companies also understand that the Asian emerging markets may be their main future source of profit.
There exists a strong desire in Asian countries to diversify away from the oil in the Middle East. This will encourage Asian buyers to look in the direction of a closer neighbor like Russia. However, first a greater level of trust has be established between countries like Japan and China on the one hand and Russia on the other hand.
In May, the Russian government will publish its Energy strategy up to 2020. A core of this report will be the decision on which variant of several proposed pipeline projects will be realized.
,The pipeline to Dacqing
China is very interested in oil imports, because the country's economy continues to grow. In 1994, China imported 4 million tones of oil. By 1999, this figure was 35 million tones. 50 percent of China?s oil demand is satisfied by countries from the Middle East and shipped by supertankers to China. Therefore, China is anxious to diversify its supply sources and Russia is an obvious choice.
The proposed Russian pipeline project would lead from Angarsk in Siberia to Daqing in China, covering a distance of 2?400 kilometer and costing an estimated $ 1.9 bn. Under a 25-year deal, the Angarsk-Daqing pipeline would supply China with 400?000 barrels a day, starting in 2005. This would amount to 26 percent of China?s imports.
Among Russian oil companies, Yukos is the biggest supporter of this pipeline variant as it has an advantageous position in Eastern Siberia. The largest oil reserves in this region (Krasnoyarsk, Irkutsk, Sakha) belong to Yukos.
As China is very interested in the project, China?s National Petroleum Corporation (CNPC) has agreed to finance 800 kilometer of the pipeline on its territory, including the extension to bypass Mongolia which is politically considered insecure by the Chinese government. CNPC may also agree to lend Yukos further funds to complete the pipeline on the Russian territory.
Transneft, Russian?s pipeline monopoly company criticized the project because Russia would be dependent on good relations with China and on CNPC, as it would be the monopoly purchaser of the whole oil deliveries.
The pipeline to Narkhodka
Transneft?s vision is to extend its pipeline network coast to coast by building a 3?800 kilometer pipeline from Angarsk to Narkhodka in Japan. The estimated cost would be around $ 5.2 billion.
Transneft claims, that the pipeline, despite its high cost has the political benefit of not being dependent on China?s goodwill. Although the pipeline from Angarsk to Nakhodka is expensive, it is the only feasible route for Transneft. The company believes that political problems between the two countries could at any time derail all pipeline projects directly linking them. The opportunity to ship crude from Narkhodka would give Russian producers a bigger choice of Asian buyers and also access to US markets.
Japan, like China, has also shown some willingness to finance the pipeline project. It is not clear however, if the pipeline will ever operate profitable but Japan is committed to secure its energy demand at very high price.
The pipeline to Murmanks
At the end of 2002, Lukoil, Yukos, TNK, Sibneft and Surgutneftegaz signed a declaration on their intention to construct the Western Siberia Murmansk pipeline. Two possible construction routes were proposed: Western Siberia - Ukhta - Murmansk (3,600 kilometers) or Western Siberia - Usa - Murmansk (2,500 kilometers). The estimated cost for the projects is $ 3 bn - $ 5 bn.
The funding for the construction will come from private sources, without financial assistance from the Russian Government. The completed pipeline will be operated on market terms as a private venture. As Transneft is not able to finance the project, the government is expected to allow commercially owned pipelines for the first time.
Murmansk has two major technical advantages that make it extremely attractive as a terminal for Western Siberian oil. First, as a deep water port, which is capable of handling large supertanker with their significantly lower operating costs Furthermore, despite its location north of the Arctic Circle, the port does not freeze over in the winter, and so it can be used year-round
Politically, a pipeline to Murmansk allows exporting oil to the West and the U.S. by bypassing the bottleneck at the Bosphorus. This is important as the Turkish government has recently shown its reluctance to allow the number of oil tankers passing the Bosphorus strait to rise.
Last Friday, the Russian government surprisingly announced that it would allow Russian oil mayors to build and own the pipeline privately. This step will help to ease the capacity problem and will raise additional budget revenues.
Conclusions
The postponement of the decision until May which pipeline project should be realized increases the likelihood of a compromise. Both pipelines could be realized at the same time but this requires a great amount of oil, around 70 million tons. Recoverable reserves in eastern Siberia are estimated by Yukos to total 2.3 billion tons, but to develop the oilfields and to lift this oil will take many years.
On pure economic terms, it would therefore be more viable to build first the pipeline to Daqing and then, depending on oil exploring results the extension to Nakhodka. From a political side of view, Narkhodka however, would offer more political gains as it would allow diversifying the supply routes.
The Murmansk option depends strongly on the willingness of the U.S to buy Russian oil and to modify the technology of their refineries in order to process it However, as it will be a private venture, an the Russian oil companies, highly determined to proceed with it, the realization seems not unlikely.
Author: Andreas Wild
