The initial capacity of the 1 220-mm (48 in) pipeline is 600 thousand barrels per day. By 2016 the capacity of the pipeline will be increased up to 1 000 thousand barrels per day, and by 2025 up to 1 600 thousand barrels per day.

On December 28 of 2009, Prime Minister Vladimir Putin arrived in Kozmino, Primorskiy krai to take part in the launching ceremony of the ESPO – Eastern Siberia-Pacific Ocean – pipeline. The new oil transportation route reflects Russia’s long-range goals of shifting the direction of its exports of petroleum products to the Far East. This year engineers expect to finish constructing another segment of the pipeline that would allow delivering fuel directly from Russia to China. The markets of Asia and the Pacific Rim countries hold in store great prospects for Russian energy companies. 

Focus on the Far East

The Eastern Siberia-Pacific Ocean pipeline project is only one among several initiatives that Russian petroleum companies have recently undertaken in an effort to broaden their exports. On his visit to Primorskiy krai, the Russian Prime Minister made a tour of the Zvezda shipbuilding plant, which soon stands to receive nearly USD 400 million in investments for LNG tankers and drilling rigs. Support for Russia’s domestic shipbuilding will be provided through the United Shipbuilding Corporation. Orders for new vessels would come from Gazprom, Rosneft, and Sovcomflot.

Gazprom has plans to place USD 2 billion worth of orders for ships in the Russian Far East within the next two years. The company intends to commission the production of a submersible platform and 4 LNG tankers. The company also has plans to order the construction of underwater complexes. These submarine complexes will be essential for the exploration of the Kirinsky block.

According to Gazprom the quantity of explored and preliminary estimated reserves at the Sakhalin-3 field can go up by more than a quarter to 100 billion cubic meters. The field is likely to be brought into operation by 2014.  

In the view of Gazprom executives, the gas from Sakhalin is important for supplying Russian eastern territories, such as Khabarovkiy krai, Primorskiy krai, Magadan, and Sakhalin region. At this stage, Gazprom plans to keep the offshore gas produced in Russia. The company is willing to purchase from Exxon any volume of gas originating at Sakhalin-1. Contracts for the purchase of gas are expected to be made in 2010.  

Gazprom plans to complete the building of its Kamchatka – Vladivostok pipeline in 2010. Later plans for that pipeline include building a spur to South Korea.

Russian sea carrier Sovcomflot announced that it will start supplying hydrocarbon shipments to the Far East through the Northern Sea Route in 2010. If trial shipments of hydrocarbons by sea prove successful, the passageway will soon turn into a major export route for products in the Yamal Peninsula. According to industry analysts, the Yamal Peninsula will itself be transformed into Russia’s liquefied natural gas transportation hub in the coming decade. 

Stages of construction

The initial phase of the ESPO project envisioned the construction of 2 694-kilometer-long oil pipeline from the town of Taishet, Irkutsk region to Skovorodino. The plan also called for the building of 7 oil pumping stations and a terminal at Kozmino on the Pacific coast. The pipeline’s annual capacity is now 30 million tons of oil. The Kozmino terminal will have the capability to handle 15 million tons of oil a year. Several routing adjustments were necessary during the construction of the first phase of the pipeline in order to avoid the creation of environmental hazards in the areas adjoining Lake Baikal.

The second component of the ESPO project involves constructing a pipeline from Skovorodino to the terminal on the Pacific coast. Naturally, the capacity of the terminal will also be enlarged to 50 million tons.  

The Talakan oilfield, which has been designated as one of the most important sources of hydrocarbons in East Siberia that would be transported through ESPO, is expected to yield around 6 million tons of oil per year. The field at Verkhny Chon will provide around 9 million tons of oil. The Vankor field that has been recently launched will contribute 25 million tons of oil to the system. The Siberian region also has a number of fields with vast reserves that have not yet entered production. The Sugdinskoye and the Lodochnoye field can produce up to 17 million tons of oil.

Alongside the construction work at the Eastern Siberia-Pacific Ocean pipeline, a project to build an extension from the town of Skovorodino in the direction of China is now being implemented. That branch of the pipeline will connect Skovorodino with the Chinese town of Daqing in the Heilongjiang province. The throughput capacity of the pipeline will be 15 million tons. Over the course of the next two decades, Russia will supply more than 300 million tons of oil to Chinese customers. While the Russian section of the pipeline will be relatively short (64 kilometers), the Chinese segment will stretch for some 1 000 kilometers. First shipments of fuel across the pipeline are expected in late 2010. 

Tankers

The first oil tanker chartered by TNK-BP loaded the fuel delivered by ESPO at Kozmino in early January. The very first shipment of oil through ESPO on December 29, 2009 went to Rosneft. According to Transneft officials, Rosneft chartered a 100 000-ton tanker to transport the fuel. Surgutneftegas got the third shipment of oil.  

Transneft managers estimate that 4 railroad shipments will be delivered to the terminal every day. By May of 2009, the company expects receiving as many as 9 rail shipments on daily basis.

Rosneft representatives commented that the winner of a tender for the purchase of the first oil to come out of ESPO was the IPP Oy company from Finland. The tender for the sale of oil attracted 15 companies that were each to offer a premium over the average monthly Dubai prices. The Swedish company agreed to pay USD 0.5 more per barrel than the original sale price. Russian exporters plan to revise the pricing formula for oil going through the ESPO pipeline in the future.

The buyer of the first 100 000 tons of ESPO oil purchased by TNK-BP was the international fuel trader Trafigura. The company agreed to pay the highest price for the oil. Altogether, TNK-BP has contracts to sell 500 000 tons of ESPO oil coming from Kozmino in the first quarter of the year.

Crude oil and petroleum products

According to the Russian Prime Minister, the export of crude oil brings Russian companies greater profits than the export of petroleum products. In view of that economic reality, Russian producers are now focusing their export strategies on unprocessed fuel. In a recent address, Mr. Putin specifically noted that projects for the construction of additional refining capacities should get a thorough review. While crude oil prices are higher than the price of petroleum products, giving rise to a disincentive for technological innovation, a long-term strategy for Russia makes the construction of additional refineries a key priority.

Cost for transportation

In accordance with regulations issued by the Federal Tariffs Service, the transportation cost for the oil in the ESPO pipeline will be RUR 1 598 per metric ton.

The transportation charge is uniformly set for Transneft’s pipelines, rail shipments, and subsequent terminal and seaport delivery. For Transneft, the actual cost of transporting one ton of oil to the port of Kozmino through the new pipeline will be USD 130. Whatever shortfall will exist between the actual cost of oil transportation and the price mandated by state authorities will be compensated by increases in the transportation charges for fuel going through other routes. 

Shipbuilding boost

The Russian government has prepared a plan to reinvigorate the shipbuilding industry in Russia. The plan is estimated to cost USD 5 billion over the next decade. When the United Shipbuilding Corporation begins its work in the Far East, it will be essential to establish close relationships with prospective clients to guarantee demand for the vessels that the Russian shipyards will be producing. The primary clients for the new products will be Russia’s majors, including Rosneft, Gazprom, and Sovcomflot. In an endeavor to boost the struggling shipbuilding sector in the Far East, the government in the near future will support two large investment initiatives in Primorye that would call for the overall expenditures of USD 700 million. Three quarters of the funds will be taken from Russia’s financial institutions.    

A new shipyard for the manufacture of drilling rigs will soon be commissioned at the Bay of Chahna. Contractors from Singapore have been engaged to handle the shipyard’s construction. The other project provides for the building of dry dock facilities, where tankers and LNG carriers will be assembled. This venture will be realized in cooperation with the South Korea company Daewoo.

Investments to retrofit the shipbuilding facility at Bolshoi Kamen in Primorskiy krai will total USD 400 million. A new shipyard for the construction of LNG carriers and tankers will be created alongside the old enterprise.

Currently, the Zvezda plant in Bolshoi Kamen is building a rig for Rosneft that will be utilized in the Kara, Barents, and Pechora seas. The price of this rig is around USD 700 million. In 2018, Rosneft anticipates placing another order for an arctic platform. The new rig that is being assembled will be utilized for drilling over 70 new wells on the Russian shelf within the next 10 years. The estimated volume of oil to be recovered from those wells is 500 million tons.     

Altogether, in November of 2009, Rosneft and the United Shipbuilding Corporation signed a contract for the construction of 11 boats of different types and sizes. Rosneft’s CEO Sergei Bogdanchikov noted that the company expects to allocate approximately USD 2.5 billion for the construction of 47 new oil rigs and other sea craft at Russia’s shipyards prior to 2018. 

Another Russian oil major, Gazprom, has earmarked USD 2 billion for shipbuilding orders in the Far East to be placed in 2011. The state-owned concern will commission 4 tankers for the transportation of methane gas having the capacity of 215 000 cubic meters each. The price tag for those vessels will be close to USD 1 billion. Gazprom needs to purchase the LNG tankers for the Shtokman project. The tentative project completion date is 5-6 years from now. The company also has made an order for a semi-submersible platform. The platform will be capable of operating at 70 to 500 meters below the surface of the sea. The company’s operating plan requires commissioning 11 platforms within the next decade. Gazprom will take ownership of the vessels in its own name. In all, the company will place orders for 74 vessels by 2020. Additionally, Gazprom offshore exploration plans call for the construction of submarine complexes. The first such complex should be put into use at the Kirinsky block no later than 2014. 

Company executives are worried about the high percentage of foreign parts that go into making sea-going crafts in Russia. Right now, almost half of all assembly components come from abroad. Some industry officials think that the imposition of a quota for Russian-made parts might be a good idea. 

Sakhalin projects

Gazprom is ready to purchase from Exxon Neftegas any volume of gas recovered from the Sakhalin-1 project. The company has been pursuing direct negotiations with Exxon and expects the contract to be finalized in the second half of 2010. The estimated volume of gas that the Russian gas giant plans to acquire from Exxon is 8 billion cubic meters.  

For the last few years, Exxon conducted talks on gas exports with Gazprom and with China. The Russian Energy Ministry supported Gazprom’s position in these negotiations, noting that gas from the Sakhalin-1 project is essential for meeting the demand of Russian residential and commercial customers in the Far East. In principle, Exxon executives agree to leave Sakhalin-1 gas production for the domestic market, but still insist on retaining the ability to export some volume of gas for keeping the venture profitable.

The payment of royalties and the distribution of profits of production from Sakhalin-1 and Sakhalin-2 that are due to the Russian government will be converted into gas shipments. Gazprom has already created a special organization to monitor and estimate the shipments of gas required for the Far Eastern Federal District. According to Gazprom, Sakhalin-1 is critical to maintaining the energy security of Sakhalin and Magadan regions, as well as Primorskiy and Krabarovskiy krais.

Sakhalin-1 exploration is carried out by Exxon, which has a 30-percent share in the projects. ONGC of India owns 20 percent of the venture, Rosneft owns another 20 percent, and a Japanese company SODECO owns another 30 percent. Sakhalin-1 is comprised of four major fields located on the Sakhalin shelf. Taken together, the fields of Odoptu, Arkutun-Dagi, and Chayvo have been estimated to contain 485 billion cubic meters of gas and 307 million tons of oil.

Gazprom’s recent analysis of its Sakhalin-3 field of Kirinsky shows that its reserves are  larger than originally thought. The field can contain as much as 100 billion cubic meters of gas in C1+C2 reserves. Gazprom believes that the field can be brought into operation by 2014.

The Kirinsky site will be the first offshore field explored and developed with the use of a submarine complex. The offshore projects at Yamal, where ice presents obstacles to surface platforms, will most likely also be developed by a submarine complex. Kirinsky block reserves are probably as large as 960 billion cubic meters.

The discovery of the Kirinsky field was made in 1992. Last June, the Russian government gave licenses to three Sakhalin-3 blocks to Gazprom, among them Eastern Odoptu, Ayashsky, and Kirinsky. In contrast to the two previous Sakhalin projects, Sakhalin-3 includes only Russian companies. 

Kamchatka

Gazprom’s work on building the gas pipeline from Kamchatka to Vladivostok is ahead of schedule, with the targeted completion date in 2010. Of the total 392 kilometers, more than 370 kilometers of pipe has been laid. The pipeline is expected to come online in the third quarter of 2010. Drilling work at the Kamchatka field is also being done rapidly. The gas recovered from that site will be sent to Petropavlovsk-Kamchatsky and the Kamchatenergo power plant.

The pipeline is Gazprom’s own project. There exists a possibility that the pipeline could be extended to South Korea later on.

With regards to shelf exploration, Alexander Ananenkov, Deputy CEO of Gazprom, recently said that the concern plans to begin exploratory activity at the West Kamchatka shelf this year.

Gazprom received the license to develop the West Kamchatka shelf in July of 2009. The company has set up a joint venture with Rosneft – named RosShelf – to develop Koryakia-1 and Koryakia-2 projects in the area. Rosneft, which held the license to the West Kamchatka shelf before Gazprom, will take part in geological prospecting work.

The Natural Resources and Ecology Ministry stated that the government will cover Rosneft’s expenses in surveying the shelf region once the estimates are approved by the government. Rosneft is to submit the listing of its exploration costs to the Finance Ministry and Federal Tax Service.

In accordance with the law on natural resources, a company that obtains a license to a deposit of mineral resources that some other company was working on exploring previously is obligated to pay compensation for the geological work already conducted.

Route by the Northern Sea

The largest shipping company in Russia Socvomflot intends to begin shipping hydrocarbons to the Far East by the North Sea route. At the outset, the company will make pilot shipments to test the feasibility of the new passageway. 

The goal of the new transportation route is to expand the markets for oil and gas producers. While the North Sea route has been used in the past, tankers and other vessels hauling large volumes of hydrocarbon have not sailed there before. Socvomflot managers estimate that the new passage will go north of the New Siberian Island due to draught restrictions in the Laptev and Sannikov Straits.

The new transportation route is viewed as strategically important for the development of the Yamal Peninsula. Information from the pilot voyages will also be used to make adjustment to vessel designs to create ships capable of transporting oil and gas to other destinations along passages with similar weather and climate conditions.