Russian oil flowed east. What about Friendship?
Władysław Sokołowski, February 22, 2010
When, at the end of the last year, Russian Prime Minister Vladimir Putin opened the Eastern Siberia-Pacific Ocean (Vostochnaya-Sibir-Tikhiy-Okean, WSTO) pipeline, the first Russian oil tube running not to the West, but to the East, first Siberian oil flowed from the terminal in Kozmino to Hong Kong, following a contract that Rosneft had concluded with China. Thus, Russia has initiated a battle for eastern markets, in a fierce competition with the Persian Gulf countries.
Russia’s weapon in this battle is the mentioned pipeline network Eastern Siberia-Pacific Ocean (Vostochnaya-Sibir-Tikhiy-Okean, WSTO), which connects the oil reserves in Western and Eastern Siberia with the sea ports of Primorsky Krai to ensure exports to the markets in the United States and the Asia-Pacific region. The construction works, decided by the Russian Government on 31st December 2004, were carried out in two stages: the first one (WSOS-1) included the construction of the section Tayshet–Ust-Kut (Irkutsk Oblast) – Lensk – Altan (Yakutia) – Skovorodino (Amur Oblast) with a length of 2694 km, a capacity of 30 million tons per year, 7 pumping stations and a loading terminal in Kozmino (15 million tons per year). The completion of the first stage costed 360 billion rubles (120 billion USD), while the total investment will amount to 420 billion rubles (140 billion USD). The second stage (WSTO-2) involves building the section Skovorodino-Kozmino with a length of 2100 km and 8 pumping stations, and further development of the Kozmino terminal. For the time being, oil on this part of the pipeline is carried by tanker depots with 4500-4800 tons of weight. This entailed lucrative contracts. "Uralvagonzavod", a leading Russian tank manufacturer situated in Nizhnt Tagil (Sverdlovsk Oblast) received orders to produce 23500 tanks, transporting the crude oil from Skovorodino to Kozmino, which gave employment to 11000 people. "Izhorsky Trubny Zavod" in Kolpino, a company which delivers pipes for the Baltic Sea pipeline, was awarded a contract worth 250 million USD for the supply of large diameter pipes.
Russian oil destined for the Asia-Pacific countries is sold under the brand name "WSTO” (Vostochnaya-Sibir-Tikhiy-Okean). According to Mikhail Barkov, Vice-President of Transneft, the Kozmino terminal is to operate 1200 million tons of oil per month, while the value of exports is expected to increase to about 15 million tons by 2010. Apart from the already mentioned Rosneft (contracts with Vitol Group, Mitsubishi Corp., Malaysian Petronas and Crudex International for 1800 million tons in the first quarter of this year), the oil is also sold by Gazprom Neft, THK-BP, and SurgutNieftieGaz. Ten tankers with a displacement of 120 000 DWT should leave Kozmino every month. The coordination of the combined transport by rail and by sea is difficult, especially in this cold winter.
The second part of the Siberian oil (15 out of 30 million tons) will be delivered to China through an underground pipeline with a length of 64 km. Deliveries are due to be launched in 2011 and will continue for the next 20 years by way of repayment of the loans amounting to 25 billion USD, that Rosneft and Transneft received from China. However, representatives of the Chinese CNPC required that the size of the oil supply via WSOS chain was doubled. According to the previous agreement, 15 million tons of oil were to be processed in the Russian-Chinese refinery in Tianjin. Now, due to the country’s growing demand for oil, the Chinese side is planning to use the contracted 15 million tons of oil for other purposes, and demands additional supplies to be delivered to the mentioned refinery. The Chinese threaten that otherwise the refinery will be forced to turn to the Middle East or other foreign markets, which will result in a substantial decrease of the profitability of the investment, while strengthening the position of the Middle East and the Asia-Pacific region exporters.
Leaving aside the complicated conditions of contract and financial dealings of Russian companies with their Chinese partners, it must be said that the Russian oil is very much in demand in the region, which poses a real, though quantitatively small at this point, challenge to other exporters. Increasing of the competitiveness of the Siberian oil through maintaining a zero-rate customs duty has recently become an object of dispute in the Russian government. Everything seems to point to the fact that the arguments of those in favour of this solution will eventually outweigh.
Russian experts say that increasing of the East Siberian oil supplies to China by 15 million tons would be possible within 7-10 years, supposing that the preferential customs duty rates are maintained, and that the WSOS transmission potential goes up to 80 million tons, 30 million of which would go to China, another 30 million to Kozmino, and 20 million to the refinery which is to be built by Rosneft in Primorsky Krai. Otherwise, it would be unreasonable to proceed with the second stage of the WSTO. Such is the opinion of Mikhail Krutikhin, editor-in-chief of the Russian Energy Weekly, who chaired the session "Perspectives of the Russian energy security – challenges until 2030", organized by Lotos Group as part of the North European Energy Security Forum, Gdańsk, 18-19 February 2010. He actually claims that it is possible to drop the idea of building a refinery in Primorsky Krai, and instead, boost deliveries to China which, in 2007, declared its willingness to purchase as much as 45 million tons of the Siberian crude oil. The problem is that currently there are no sufficient oil reserves in the Eastern Siberia, and it would have to be moved from the Western Siberia at the expense of reducing supplies to Europe. And this would affect interests of the EU member states, including Poland insofar as it is one of the transit countries for Russian oil.
According to The Wall Street Journal, the Persian Gulf countries have taken up the gauntlet in the oil battle and have come to change their strategy of supply and pricing policy. There is no doubt for exporters that the battle for the economic future of the world will be fought in fast-growing and relatively stable Far East markets. One can already notice the declining interest in exporting oil to the U.S. For example, Saudi Aramco decided not to lease oil tanks in the Caribbean Sea, and signed a contract for oil storage in Japan. A few days ago, Saudi Arabia cut the prices of Arabian Light Crude for the Asian countries. Iraq and Iran have also joined the battle for the Chinese market, changing the financial conditions of supply out of fear of cheaper Russian oil which is closer to the potential customers. It will be truly competitive when Russian companies attain the sales ability two months prior to the loading.
The information about the launching of new export routes for Russian oil coincided with the announcement that the oil transport to the Gdansk terminal through the Druzhba (Friendship) pipeline is not planned in the first quarter of this year. The same applies to the south leg of the pipeline. The matter is being addressed by the European Commission. What about Friendship?
