Russia completes Asia oil link as Europe frets

Vladimir Soldatkin
Reuters Middle East

* Putin to officially launch oil link to Pacific

* May cut oil supplies to Europe

* Analysts question ability to fill new pipeline

MOSCOW, Dec 24 (Reuters) - Russia has completed its largest

infrastructure project since the Soviet Union by expanding its

eastern oil pipeline to the Pacific Ocean as it seeks to carve

out a bigger share of the Asian market.

It took 6 years and more than $25 billion for oil pipeline

monopoly Transneft to build the East Siberia -

Pacific Ocean (ESPO) link to the port of Kozmino, which had

formally relied on a rail link.

By completing the 4,200 km (2,600 miles) line, Russia has

created a powerful leverage for oil flows switches from East to

West and visa versa, sending a warning signal to the European

Union, which is heavily dependant on energy supplies from its

former Cold War adversary.

Transneft has said Japan bought almost a third of ESPO

exports this year followed by China with 24 percent and the

United States with 22 percent.

President Vladimir Putin has urged oil and gas companies to

increase their share in lucrative Asian energy markets. He was

expected to formally open the pipeline in the early hours of


"This gives us an opportunity to efficiently work on the

fastest-growing market in the world, on the Asia Pacific

market," Putin said last week.

The project has been in the Russian limelight since its

start, and opposition activist Alexei Navalny has accused

Transneft of a $4 billion embezzlement connected to the

construction of the pipeline.

Transneft denied the allegations.

Analysts say that Europe's fear of less Russian oil is

justified, although exporting companies will decide themselves

on eastern or western routes on the basis of profitability.

"Of course, there is a risk of oil flows cuts to Europe. And

ESPO blend sells with a premium to Dubai, it speaks in favour of

the Eastern route," Alexander Kornilov, a senior analyst with

Alfa bank, said, citing the Asian market benchmark grade.

A first-quarter loading schedule has showed that Russia

would cut Europe-bound oil supplies with the biggest fall, of 20

percent, expected in its Baltic port of Ust-Luga.

Russia launched the first stage of the ESPO link to

Skovorodino at the Chinese border in 2009, and in January 2011

started pipeline deliveries at 300,000 barrels per day to China.


Russia is the world's largest oil producer, at around 10.5

million barrels of oil per day, trumping Saudi Arabia while the

kingdom holds back some output to prop up crude prices. But most

of Russia's 50,000-km oil pipeline network is concentrated in

West Siberia and runs toward Europe.

Moscow has been steadily diversifying its oil exports by

shifting away from the Druzhba pipeline, built in the 1960s to

supply the Soviet Union's Eastern European allies.

It built the Ust-Luga oil terminal this year on the Baltic

and has drastically reduced flows via Druzhba, forcing some East

European refineries to seek other options.

But with the ESPO pipeline in place analysts have questioned

Russian ability to stick to its commitment of keeping steady

supplies to both east and west.

In 2013, Russia will deliver some 18 million tonnes (360,000

bpd) via the ESPO-2 pipeline to Kozmino and ship up to 4 million

tonnes there by rail. Long-term, it looks to increase that to 1

million bpd.

"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," Julius Walker, energy markets

strategist with UBS in New York, said.

The Vankor oilfield, controlled by Russia's top crude

producer Rosneft, has been the main contributor of oil

to the pipeline. Vankor's production is expected to increase to

500,000 barrels per day next year.

Russia has also offered tax relief for some East Siberian

fields, including scrapping exports duty - the largest single

tax item for oil companies.

According to VTB Capital projections, East Siberia fields

will produce 45 million tonnes (900,000 barrels per day) by

2020, up from 15 million tonnes this year.

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