Wednesday, June 19, 2013

Russian Energy Flows Move East

In a move with major geopolitical ramifications, Russia is diverting increasing amounts of energy from the European market to the Asian.  Economically, it makes sense that Russia would want to be less dependent on the stagnating European economies, and the growing economies of Asia are a strong alternative.  "Russia has been losing its interest in Europe where oil consumption is stagnant.  It's looking increasingly to the East," said energy analyst Valery Nesterov.

The East Siberia-Pacific Ocean (ESPO) pipeline, originally opened with a branch line to Daqing (15 million tons delivered in 2012) has now expanded.  In January 2013 ESPO 2 opened to the Pacific Ocean.  ESPO oil flows are scheduled to increase from 30 million tons in 2012 to 80 million tons.   Bloomsberg estimates that in February 2013, Russia sent 1.1 million tons (22 percent of total oil exports)  in an easterly direction, up from 18 percent in October 2012.  By 2015, when ESPO reaches full capacity, Russia is scheduled to send 25 percent of its crude exports to eastern markets.

In addition to ESPO, which traverses only Russian territory, there is the possibility that Russia could sell additional oil to China via Kazakhstan.  Kazakh Energy Minister Sauat Mynbayev reported he was in negotiation with Russia to begin the sales as early as 2014.  The oil would reach China via the Kazakh Atasu-Alashankou pipeline. (Russia shipped oil to China through this pipeline until 2010.)   Kazakhstan would deliver 7 million tons of oil to China, and Russia would give Kazakhstan an equal amount in a "swap operation."  Such a move would be opposed by the Russian pipeline operator Transneft, who believes they would lose $1.5 billion in transshipment revenue.  Transneft CEO Nikolay Tokarev opined that the deliveries could proceed if the the lost revenue was compensated in the budget.

In March 2013, Rosneft and the China National Petroleum Corporation (CNPC) signed an agreement to increase oil exports to China.  In return for the agreement, China reportedly agreed to make an advance payment of $8-10 billion.  In addition, China Development Bank agreed to extend an additional credit line of $2 billion to Rosneft for the duration of the contract.  Russian Energy Minister Aleksandr Novak implied the delivery would be via the Kazakh swap mechanism.  No date was given for the signing of the contract.

As for natural gas, the situation is more complicated.  Russia already has agreements to send China 68 billion cubic meters (bcm) annually.  Deliveries have not begun, however, because of an inability to agree on price.  In March 2013, Gazprom and CNPC signed another memorandum of understanding in which the Russian company agreed to supply 38 bcm per year for 30 years, beginning in 2018. Price remains an issue.  Gazprom chairman of the board Viktor Zubkov was optimistic that an agreement could be reached by June, and hoped the price could be pegged to the cost of oil.  He admitted, however, that "the Chinese side probably believed there were other parameters that prices could be pegged to."