Putin: ESPO Pipeline Only Weeks Away from China

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Researched by Industrial Info Resources (Sugar Land, Texas)--Earlier this month, Russian Prime Minister Vladimir Putin announced that Transneft AK OAO (Moscow, Russia), a state-owned oil transportation firm, is only weeks away from extending the East Siberia-Pacific Ocean (ESPO) oil pipeline to the Chinese border. This section of the pipeline is scheduled for commissioning in 2010 and the infrastructure would be used as collateral for the loan obtained by Transneft from China earlier this year.

According to an agreement signed between Russia and China in February this year, Russia will ensure sustained supply of crude oil to China for 20 years while China will lend $25 billion to Russia's state-owned oil and gas firms, Rosneft NK OAO (MCX:ROSN) (Moscow) and Transneft. Under the agreement, the China Development Bank (Beijing) will lend $15 billion to Rosneft and $10 billion to Transneft at a low interest rate of 6%. In exchange, Rosneft will supply 15 million tons per year of oil to China for 20 years between 2010 and 2030, while Transneft will extend the ESPO pipeline from Skovorodino, about 70 kilometers north of the Sino-Russian border, to China.

The 4,700-kilometer long ESPO oil pipeline, expected to be the longest in the world, begins in Taishet in East Siberia, passes through Kazachinskoe, Skovorodino and Perevoznaya in Russia, and will eventually be routed to a Pacific port at Kozmino Bay. The 67-kilometer pipeline spur will connect Skovorodino to the Chinese-Russian border, from where another section of 960 kilometers would run through Mohe to Daqing in the Heilongjiang province of northeast China.

Russia and China have been engaged in discussions pertaining to energy supplies since the early 1990s. However, the countries disagreed on interest rates and state guarantees, with Russia demanding that the interest rate be fixed at 7%, while China was keen on a floating interest rate based on the London Interbank Offered Rate.

In October 2008, Transneft and China National Petroleum Corporation (CNPC) (Beijing) entered into an energy deal to develop the pipeline spur. In March 2009, Transneft President Nikolai Tokarev said the firm expects to receive the first tranche of its $10 billion loan immediately after it commences construction of the pipeline spur in April 2009. The pipeline is scheduled to commence transportation of crude oil to China by January 2011.

Upon completion of the pipeline spur, Transneft will develop a 1,963-kilometer section from Skovorodino to Kozmino Bay with a transportation capacity of 367.5 million barrels per year. The annual capacity of the 2,757-kilometer Taishet-Skovorodino section will also be increased from the initial 220.5 million barrels to 588 million barrels.

The ESPO pipeline, being developed with a transportation capacity of 30 million tons per year, will tap into the oil fields in Tomsk Oblast and Khanty-Mansi Autonomous Okrug for crude oil exports to China, Japan and Korea. This would open up new export markets for Russia and reduce its dependence on European demand for crude oil. The ESPO pipeline will also be linked to the existing Omsk-Irkutsk pipeline in Taishet to source crude oil from the fields in East Siberia.

The Taishet-Skovorodino link, being set up under the first phase of the ESPO pipeline project, is scheduled for commissioning later this year at an estimated cost of $14 billion. The second leg of the pipeline, the Skovorodino-Kozmino Bay section, is scheduled for commissioning by 2013-14 at an estimated cost of $16 billion. Tenders for the second leg are expected to be issued in the first half of 2009 and construction is likely to begin in the second half of the year.

China, the world's second largest consumer and the third largest importer of crude oil, relies heavily on the Middle East and Africa for oil supplies. However, oil from the Middle East is shipped through the Strait of Malacca, which connects the Indian Ocean with the Pacific Ocean, leading to concerns about the presence of a U.S. naval base en route. In a bid to bypass regions under American influence, China has been scouting for diverse supply options by developing oil and gas fields and pipelines in collaboration with Iraq, Kazakhstan and Russia.

The Atasu-Alashankou-China oil pipeline, connecting the Aktobe, Kashagan and Kumkol oil fields in Kazakhstan with China, signifies China's first direct oil import pipeline. The pipeline commenced operations in May 2006. MunaiTas NWPC CJSC (Almaty, Kazakhstan), a joint venture between CNPC and KazMunayGaz Razvedka Dobycha AO (KAS:RDGZ) (Astana, Kazakhstan), is the developer and operator of the pipeline. The pipeline is also linked to the Omsk-Pavlodar-Shymkent-Türkmenabat pipeline at the Atasu oil terminal in Kazakhstan, allowing transportation of crude oil from West Siberia by JSC Gazprom Neft (MCX:SIBN) (Moscow) and TNK-BP Holding OAO (RTB:TNBP) (Uvat, Russia).

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