Putin Pipeline to Send 25% of Russia’s Oil Exports East

Oil Well file photo

(Bloomberg – bloomberg.com – Jake Rudnitsky – March 7, 2013)

Russia is on course to send an unprecedented 25 percent of its crude exports to eastern markets by 2015 as rising demand from China and other Asian consumers attracts sales at the expense of Europe.

The country sent 1.1 million barrels a day east in February, or 22 percent of exports, according to Bloomberg estimates based on loading programs and Energy Ministry data. In October, before the East Siberia-Pacific Ocean pipeline was expanded, it shipped 18 percent to Asia. OAO Transneft, the state pipeline monopoly, says the ESPO line will reach its full capacity in two years.

The growth in eastern flows shows how the $23 billion ESPO link, Russia’s most expensive infrastructure project, is helping President Vladimir Putin realize the country’s aim of shifting exports away from Europe to tap the faster-growing economies of the Asia-Pacific region. Photographer: DigitalGlobe via Getty Images

The growth in eastern flows shows how the $23 billion ESPO link, Russia’s most expensive infrastructure project, is helping President Vladimir Putin realize the country’s aim of shifting exports away from Europe to tap the faster-growing economies of the Asia-Pacific region. China’s crude imports from Angola, Iraq, Venezuela and Russia grew by 14 percent to 33 percent last year, according to the Beijing-based Customs General Administration.

“Asia is a region where demand is increasing, as opposed to Europe.” Ehsan Ul-Haq, senior market consultant at KBC Energy Economics in Walton-on-Thames, England, said by phone on Feb. 27. “Producers prefer shipping east and this trend is likely to continue.”

ESPO crude was trading at $110.21 a barrel today, while the Urals grade sold in northwest Europe fetched $107.81, according to data compiled by Bloomberg. Volumes to the Pacific port of Kozmino reached a record 445,000 barrels a day in February, according to a loading program obtained by Bloomberg.

Pricing Point

ESPO oil has emerged since 2009 as a new pricing point for Russian crude, which was traditionally dominated by Urals grade exported to Europe via the Druzhba pipeline and to ports on the Black and Baltic seas. ESPO is moving toward becoming an international benchmark in its own right, Transneft President Nikolay Tokarev said in Moscow on Dec. 19.

A barrel of crude shipped from Surgut in West Siberia to Kozmino via the ESPO pipeline minus transportation fees and taxes would earn a company $46.35 a barrel on Feb. 27, compared to $42.01 if it were sent to the port of Primorsk on the Baltic Sea, according to Platts, the commodities price-reporting agency owned by McGraw-Hill Cos.

Transneft expects ESPO to operate at maximum capacity of 30 million metric tons a year, or 600,000 barrels a day, by 2015. Bloomberg calculations on the volume moving eastward comprise four components; tanker shipments from Kozmino at the end of the pipeline, crude from Sakhalin Island, oil sent to Kazakhstan and 300,000 barrels a day supplied via a separate spur to China on the ESPO pipe.

Realistic Benchmark

West-bound Russian crude supplies will fall an average 90,000 barrels a day this year, according to four of six traders and analysts in Moscow, London and Vienna surveyed by Bloomberg. Two predicted little or no change. All six people expect ESPO profit to remain higher than Urals.

Russian companies are interested in turning ESPO into a pricing benchmark, according to the Alexei Rybnikov, President of the St. Petersburg International Mercantile Exchange, which plans to add the grade to the oils and products it trades.

“The prospects of ESPO becoming a benchmark, as opposed to Urals, are much more realistic,” Rybnikov said yesterday. This could happen within five years, he said.

Of Russia’s five biggest oil companies, OAO Rosneft, TNK-BP and OAO Surgutneftegas have east Siberian oil fields along the ESPO line. OAO Gazprom Neft resumed shipments of west Siberian crude via the pipeline in December, after a 12-month hiatus.

Access Requests

OAO Lukoil (LKOH), the only one of Russia’s five biggest producers never to ship via the ESPO pipe, has applied for access to the expanded link to take advantage of the higher returns from Asian sales, said Vladimir Semakov, a spokesman for the company.

Lukoil has asked Russia’s Energy Ministry for permission to ship 600,000 tons of west Siberian crude to Kozmino in the second quarter, Semakov said by phone March 1.

“It’s an attractive proposition because there’s a cost- effective tariff and a healthy market for this sort,” he said.

Rosneft is in talks to increase supplies to China, a spokeswoman said Feb. 19, asking not to be identified because of company policy. Rosneft signed 5-year supply contracts with Glencore International Plc (GLEN) and Vitol Group, two of its biggest purchasers of Urals, for a total of 67 million tons of crude and prepayments of as much as $10 billion, the company said in an e- mailed statement today.

Superior Quality

Higher transportation costs via the link are offset by higher prices at Kozmino, partly because ESPO crude is of a superior quality, with less sulfur content and lower density than Urals sold to Europe. That translates into an advantage when taxes are applied per ton rather than barrel.

ESPO crude has about 0.5 percent sulfur content, while Urals has 1.5 percent to 1.7 percent, according to Transneft. Crude with low sulfur is considered “sweet” and generally cheaper to refine into gasoline.

“The price is $20 to $30 higher than at Primorsk, which is why companies want to ship there,” Transneft Deputy Vice President Igor Katsal told journalists at a Feb. 28 conference, referring to the price per ton at Kozmino. A ton of crude equates to about 7.3 barrels, depending on how dense it is.

After opening the Baltic Pipeline System-2 to Ust-Luga in the west, and expanding the ESPO link last year in the east, Russia has excess pipeline capacity that enables it to direct oil to the most profitable destinations, according to Ul-Haq.

Export Duty

Some new fields in East Siberia also benefit from a reduced export duty to compensate companies for the expense of investing in the region. The discounted export duty is $211.40 a ton this month, or about half of the standard rate of $420.60.

The first phase of the ESPO pipeline opened in 2009, bringing crude from fields in east Siberia to Skovorodino near the Chinese border. Before the December completion of the second phase, which doubled capacity and extended the line to Kozmino, oil was carried from the end of the line to the port by rail.

“Pricing agencies are pushing for a new Asian benchmark crude, and Russia would be thrilled to see it become ESPO,” Ul- Haq said. “The more volumes, the more interest, and not only in Asia. It is also popular in the U.S. West Coast.”

Article ©2013 BLOOMBERG L.P. ALL RIGHTS RESERVED. Article also appeared at: http://www.bloomberg.com/news/2013-03-07/putin-pipeline-to-send-25-of-russia-s-oil-exports-east.html