Tuesday, January 15, 2013

Russia Accelerates Oil Sales to the East

With the December 2012 opening of the second leg of the East Siberia-Pacific Ocean (ESPO) pipeline, analysts have begun to focus on Russia's turn to the Pacific Basin--and what it means to Europe.  Russia's interest in its oriental frontier is not new, however;  it was the whole purpose behind building ESPO in the first place.  "We will have a future of accelerated growth when we have two strong legs:  not just one in Europe, but one in Europe and the other in Asia," said Igor Shuvalov, the Russian first deputy prime minister for economic affairs.  Then-Prime Minister Vladimir Putin in August 2010 said the project created "notable competition" to European deliveries.

The first leg of ESPO began shipping East Siberian oil to the Chinese city of Daqing in January 2011, but the last leg of the Russian pipeline--to the port city of Kozmino on the Pacific Ocean--was delayed.  Oil shipments to the Pacific had to complete the last leg of their journey aboard railroad cars.  In January 2011, however, Russia began sending ESPO oil to the United States when the Trans Alaskan pipeline was shut down after developing a leak.  To make up the shortfall of product to their West Coast refineries, BP contracted the tanker Nelga Spirit to take 100,000 metric tons (700,000 barrels) of oil to the United States.

With the opening of ESPO's Daqing connection, the transfer of oil sales to the East was felt almost immediately in Russia's major oil port, Novorossiysk.  Chris Weafer, chief strategist at UralSib Financial Corporation, said "Investors are shy of Novorossiysk stock right now because there is uncertainty over how long the gap between losing oil and picking up other cargos will last.  Jonathan Kollek, vice president of TNK-BP for sales, trading and logistics, said the Black Sea route would probably bear the brunt of falling crude flows as ESPO came on line.  Elena Sakhnova, a transportation analyst at VTB Capital, predicted that oil volumes at the port would probably decline at a rate of between 3 and 6 percent for a couple of years before stabilizing (presumably at the lower level.)

The pipeline has a tremendous capacity.  Oil exports can be increased from the current level of 15 million tons annually, to 50 million tons.  The total estimated capacity of Russian oil exports to the region is 80 million tons, according to Vladimir Feigin, general director of the Institute of Energy and Finances.  The question becomes, from where will the oil come?  Until now, ESPO oil has come primarily from Rosneft's Vankor oil field, but production there is only expected to increase next year from approximately 80,000 metric tons to 90,000 metric tons.  "It would be quite a challenge for Russia to fill the pipeline.  And some of the east Siberian fields have not been performing as expected,"  said UBS oil expert Julius Walker.

Without easy access to sufficient East Siberian oil, Russia is turning to the West Siberian fields that send oil to Europe.  The Moscow Times reports that a first-quarter loading schedule shows that Russia will cut Europe-bound oil supplies, with the biggest decline (20%) expected at the Baltic port of Ust-Luga.  "There is just enough East Siberian for the existing pipeline," said Sberbank analyst Valery Nesterov.  "But expanding this pipeline further would be impossible without West Siberian oil - and that oil is already meant to go west."  Alfa Bank senior analyst Alexander Kornilov added, "Of course, there is a risk of oil-flow cuts to Europe."  The cuts could be based on economics, or on political considerations as remarks from Transneft CEO Nikolai Tokarev demonstrate."We do not owe a single EU country a thing, and we are certainly not obligated to account for ourselves,"  he said.  "If they want to hold a normal proper conversation, they should change their approach to such a dialogue." 

Tokarev outlined who the main customers for the new oil flow would be, and led off the list with the United States.  "The American market will receive 35 percent of Kozmino oil.  Around 30 percent will go to Japan and 28 percent to China.  The rest will go to Singapore, Malaysia and South Korea."

Tokarev's predictions do not take into account the effect of the fracking revolution in the United States.  Oil production in the United States for the week ending 4 January 2013 is up almost 15 percent over the same time a year ago, and the country met 83% of its energy needs in the first 9 months of 2012 from domestic production, according to the Washington Post.  As a result of the increase in US production, the International Energy Agency is predicting that the US could surpass Saudi Arabia as the world's leading oil producer by 2020.  Should Russia divert its oil shipments to the Pacific, it might find its markets have been flooded already with cheap, American product.