Russia’s Eastern Siberian Oil Pipeline Becomes More Expensive

Russian officials have insisted that the construction of the Eastern Siberia Pacific Oil Pipeline (ESPO) remains on track despite growing costs, crisis-related concerns, and doubts about the project’s economic viability amid falling crude prices.

Russia’s pipeline monopoly Transneft conceded that the ESPO project faced significant cost overruns. The head of Transneft, Nikolai Tokarev, announced that the cost estimate for the first stage of ESPO was up to 390 billion rubles ($12.1 billion) or 21 percent above the 322 billion-ruble ($1 billion) budget planned earlier. Transneft plans to disburse 95 billion ($2.9 billion) rubles in 2009, including 10 billion rubles ($304 million) to build the Skovorodino-Daqing section connecting the pipeline with China, Tokarev said (Interfax, ITAR-Tass, RIA-Novosti, January 13).

Last October Transneft opened the 1,100-kilometer (684-mile) completed section of ESPO in a reverse, westward direction to pump oil from Talakan to Taishet. The first stage of ESPO would have a capacity of 30 million tons per year and the second stage 80 million tons. Transneft also reaffirmed its intention to finish the construction of ESPO’s first stage, Taishet to Skovorodino, by the end of 2009 and start the second stage, Skovorodino to Kazmino, in December 2009.

ESPO’s first stage was 83 percent done, the pumping stations 65 percent, but Kazmino port only 27 percent completed, Tokarev said. The project was already affected by the crisis, he conceded, but Transneft had no plans to lay off staff and he asserted that the first stage would be finished by December 25, 2009 (Interfax, RIA-Novosti, January 13).

During his Far Eastern tour in February 2008, Russian President Dmitry Medvedev was told that ESPO was lagging behind schedule. He subsequently criticized the delays as "miserable" and in June ordered Transneft to proceed with ESPO without delay. The company claimed that the holdups had been caused by difficult terrain and harsh weather conditions.

There have also been concerns that Eastern Siberia may not have enough oil to fill the pipeline, as production would have to reach more than 50 million tons of crude a year by 2020 and be maintained at that level. Russia’s state-run Rosneft has promised to supply ESPO with 25 million tons of crude from the Vankor oilfield, while two million tons are expected from Rosneft/TNK-BP’s Verkhnechonsk field, two million tons from Surgutneftegaz’s Talakan field, and around one million from Urals Energy’s Dulismin deposit.

Meanwhile, some oil executives have argued that Eastern Siberian oil projects could become uneconomical under the current conditions. In December TNK-BP Vice-President Jonathan Kollek stated that the Verkhnechonsk field would become unprofitable with the current transit tariffs and oil prices. Apparently addressing these concerns, Transneft insisted that Russia’s total crude oil production would go up in the coming years. Russia’s crude oil production would be up by 62 million tons a year by 2012, Tokarev claimed, adding that the ESPO project was supposed to funnel surplus oil eastward (Interfax, RIA-Novosti, January 13). In 2008 Russia’s total crude output amounted to 488 million tons or 0.7 percent down from the previous year.

In the meantime, the prolonged negotiations over the ESPO’s spur to China appeared to remain inconclusive as Rosneft and the China National Petroleum Corporation (CNPC) remained divided over oil export volumes and prices. Russian and Chinese companies tentatively agreed on the ESPO spur when then-President Vladimir Putin visited China in March 2006. In May 2008 Medvedev announced ahead of his trip to Beijing that Russia and China had agreed to build the pipeline section to link ESPO with China.

Talks on loan agreements among China’s CNPC, Rosneft, and Transneft required a political decision, Tokarev said earlier this month (Interfax, RIA-Novosti, January 13). In October 2008 both sides signed a memorandum of understanding (MOU) on possible Chinese loans of up to $15 billion to Rosneft and up to $10 billion to Transneft in exchange for future crude supplies to China and the construction of the Skovorodino-Daqing pipeline. However, both sides have reportedly struggled to agree on interest rates; and the agreement was tentatively expected in February 2009, with the MOU expiring in March.

As a decision about financing the project has yet to be reached, the Skovorodino-Daqing pipeline section would be built no earlier than 2010, Tokarev said. Transneft officials also indicated that the company could consider using possible Chinese loans to build some other oil pipelines in Eastern Siberia (Interfax, RIA-Novosti, January 13).

The ESPO has been seen as an important element of Moscow’s policy to reorient some of its hydrocarbon exports to Asia. The Kremlin has intended to deliver up to one third of its total oil exports to the Asia-Pacific region by the year 2020 compared with the current level of about 3 percent. These plans may, however, prove slow to materialize amid falling oil prices.