03-12-09 The Asian markets are heavily dependent on imported oil and the role of Russian oil has been growing in recent years. The Eastern Siberian Pacific Ocean pipeline will enable supplies from the Eastern Siberian fields to supply some of the rapidly growing energy needs in Asia.
Russia's crude oil production rose to 10.02 mm bpd in November, gaining 2.6 % year on year and, according to the president of Russia's national oil pipeline operator Transneft, Nikolai Tokarev, is expected to grow to 11 mm bpd after 2012.

The start of the ESPO crude exports will be a major step for Russia's oil export infrastructure, which is currently heavily focused on moving oil west toward Europe. The initial stage of the ESPO pipeline, which runs for 2,757 km from Taishet in East Siberia to Skovorodino in the Amur region Russia's Far East, near the border with China, has a capacity of 600,000 bpd.
Capacity is slated to grow to 1 mm bpd by 2012 in the second stage of the project, and potentially to as much as 1.6mm bpd at a later date.

From Skovorodino, 300,000 bpd will be transported by rail to a new export terminal at Kozmino on the Pacific coast, and eventually another 300,000 bpd will be delivered to China, after an offshoot from Skovorodino to the Asian country is completed at the end of 2010. The offshoot from Skovorodino to Daqing will be built by CNPC, with only 64 km to the border to be constructed by Transneft.
Rosneft has signed a 20-year contract with CNPC for the delivery of 300,000 bpd from Skovorodino, and supplies to China through the pipeline could increase beyond this in the future, according to Rosneft. The price at Skovorodino for deliveries into China will be equal to the FOB Kozmino price, with no premiums or discounts being applied, sources involved in negotiations told.

Russia's deputy Prime Minister Igor Sechin estimated the contract signed between Rosneft and CNPC to be worth at least $ 100 bn. The contract envisages total oil deliveries of 300 mm tons (close to 2.26 bn barrels) over 20 years. Equipment testing at Kozmino, the final point and the loading terminal of the Eastern Siberia Pacific Ocean crude pipeline, was completed November 24.
The Kozmino testing was done following the filling of the port installations with technical crude oil. The port has received 102,500 tons of the crude, equating to more than 750,000 barrels. The technical oil, oil which remains within the system for operational purposes, belongs to Transneft and will not be sold in the market, remaining on the company's balance sheet, the port authority said.

The terminal at Kozmino will have initially a tank farm with capacity of 350,000 cm (close to 2.6 mm barrels) and a loading capacity of 300,000 bpd. The first rail tanks with crude oil for export left Skovorodino pipeline delivery station in Russia's Amur region November 30 for the port of Kozmino, carrying 4,890 tons of crude oil in 82 carriages, according to Vostoknefteprovod. Vostoknefteprovod, a company affiliated with Transneft, was created to operate the new Eastern Siberia Pacific Ocean oil pipeline.
The Skovorodino delivery station has a storage capacity of 80,000 tons and a loading installation for 82 rail tanks, with a current loading capacity of 35,000 tpd, which is expected to increase to 43,000 tpd (close to 323,000 bpd) in the near future. Physical exports along the ESPO route are set to start in late December.

Russia's Rosneft sold on November 23 the first ESPO cargo through a tender auction, with the buyer emerging as International Petroleum Products at a 50 cents premium to average Platts Dubai prices published for December. Rosneft awarded the tender to IPP for 100,000 tons of ESPO crude loading FOB Kozmino basis.
A total of 15 companies participated in the tender, with two companies bidding at positive differentials, according to industry sources.

Transneft estimates the cost for the first stage of the ESPO pipeline at RUB 420 bn, or $ 14.4 bn. The company expects the second stage of the pipeline, which would expand capacity from the initial 600,000 bpd to 1 mm bpd, to cost around RUB 350 bn, or $ 11.97 bn. Beyond the second stage, capacity could be extended further to 1.6 mm bpd.
When the route is expanded to the planned maximum capacity, 300,000 bpd will go to China, 400,000 bpd will be sent to a new refinery Rosneft plans to build near Kozmino, and around 200,000-300,000 bpd will be sent through the route to existing Far Eastern refineries in Komsomolsk-on-Amur and Khabarovsk, according to Transneft. This implies that the remaining 600,000-700,000 bpd will be exported from the terminal at the Pacific Coast, although it is not currently clear when the route might be expanded to this maximum capacity.

For 2010, Transneft's transportation schedule projects deliveries of 15 mm tons or 300,000 bpd via the route. However, Transneft has not ruled out some changes at the initial stage when the new transportation system is tested.
Rosneft has said it expects to export some 4-6 mm tons of oil from Kozmino in 2010, while TNK-BP expects to export a total of 2.0-2.2 mm tons. Russia has also not ruled out sending additional volumes of West Siberian crude to the ESPO pipeline if there is not enough crude produced in East Siberia to fill the line. Russia's energy minister Sergei Shmatko, however, said that he believes that 100 % of East Siberian crude would be exported.

The Russian government announced late November an exemption from crude export duty for East Siberian crude, to be implemented from December 1. The exemption is designed to stimulate development in the remote oil province. The long-awaited zero rate will be applied to crude with a density of between 694.7-872.4 kg/cm at 20 degree Celsius (equivalent approximately to API gravity of 30-70 at 15.5 degrees Celsius) and with a sulphur content of between 0.1 % and 1 %, according to the document signed by prime minister Vladimir Putin.
A total of 13 separate fields in East Siberia are currently eligible for the zero rate. They are Vankor, Yurubcheno-Tokhomskoye, Talakan -- including the East Block, Alinskoye, Srednebotuobinskoye, Dulisminskoye, Verkhnechonskoye, Kuyumbinskoye, North Talakan, East Alinskoye, Verkhnepeleduyskoye, Pilyudinskoye, and Stanakhskoye. The fields are owned by several entities including Rosneft, Surgutneftegaz, TNK-BP and Gazprom Neft. Russia is said to be considering expanding the number of East Siberian fields eligible for the zero rate to eighteen.

In late October, energy minister Shmatko said the zero rate was likely to last a minimum of five to seven years, but the government has yet to make a firm decision on this. Russia's Federal Tariffs Service has proposed a through transportation fee for crude deliveries via the new export oil pipeline across East Siberia towards the Pacific Ocean of RUB 1,600/t ($ 52.630/t or $ 7.20/barrel).
The fee is yet to be approved by the service's board, but this is widely expected to happen before the official launch of the pipeline. The fee will include services for crude deliveries via the pipeline, by railroad, and for crude re-loading at terminals including at the Kozmino sea port for onward exports.