Pipeliners

03.25.2005 Prime-TASS - As Russia's pipeline monopoly Transneft nears the completion of its feasibility study of an oil pipeline from the Russian city of Taishet to an outlet on the Pacific coast, state company Russian Railways has stepped up its fight to maintain control over oil shipments to China. On Monday, Russian Transport Minister Igor Levitin announced that an oil pipeline to the area would be viable only if the total oil and oil product exports to Asian countries exceeded 30 million tonnes, and until then companies should use Russian Railways. "We haven't done intensive studies on the numbers needed, but it would not surprise me if they need this kind of volume for the pipeline to be realistic," Zarko Stefanovski, oil and gas analyst at Aton Capital, said. Levitin claimed that a pipeline from eastern Siberia to the Pacific coast would be unlikely for at least another dozen years, and with current oil exports to China standing closer to 10 million tonnes annually, the figure of 30 million tonnes per year certainly seems ages away. One of the major causes of such high volume requirements for a Siberia-Pacific pipeline to be commercially viable is the state-regulated pipeline tariff system. The current tariff system employed by Transneft would be insufficient to offset the potential pipeline's multi-billion-dollar price tag, analysts said. At present, preliminary estimates of the cost of the pipeline range as high as U.S. $15 billion, part of which could come from Japan in exchange for access to the exports. "We have to wait for Transneft to finish the feasibility study to say for sure, but with the current level of transportation tariffs, the pipeline is not feasible," Steven O'Sullivan, co-head of research at United Financial Group, said, adding that Transneft is actively pushing for the government to change its oil shipment tariff regulations. On March 15, Transneft announced that it was prepared to propose for approval by the government several tax optimization schemes that would make the construction of the pipeline more feasible. Deputy Economic Development and Trade Minister Andrei Sharonov has said he is opposed to granting Transneft tax and customs concessions for the pipeline, and has stated that the state pipeline monopoly should not receive any funding from the federal budget for the project. Another obstacle for the pipeline is the question of how the pipeline will be filled. At the outset, much of the pipeline's capacity would likely be from oil diverted from the well-developed western Siberian fields. In the long run, however, Europe is a much more economically practical destination for oil exports from West Siberia, and the pipeline's supplies would mainly have to come from the essentially unexplored oilfields of East Siberia, analysts said. Estimates of the potential resources and production capacity of eastern Siberian oil fields vary radically. In late January, Sergei Fyodorov a departmental director at Russia's Natural Resource Ministry, said that further exploration could uncover another 1.5 billion tonnes of oil resources, and that the eventual oil output of the area could amount to 50 million tonnes annually. "Eastern Siberia is still an under-explored region, so we don't really know how much there is out there. Obviously, (the creation and expanded use of a pipeline) is contingent upon having enough reserves to fill it," O'Sullivan said. The exploration that has been done has not led to any massive projects, as most of the oil that is currently developed in the area is used only for local consumption, Stefanovsky said. While natural gas monopoly Gazprom (GAZP) and Russian-British oil major TNK-BP have both expressed some interest in developing East Siberia's natural gas reserves, no companies have yet stepped out of the woodwork to develop the area's oil, he said. One change that may help the exploration of the area is Russian Natural Resources Minister Yury Trutnev's recent suggestion that the government create development license guarantees for companies that discover deposits through exploration. Without this proven potential and some sort of existing development, the construction of a pipeline is less attractive for Transneft, analysts said. The Catch-22 of the situation, however, is that without a viable, efficient means of transporting oil from these fields, there is little incentive for companies to begin the arduous process of developing them. "This is slightly a chicken or the egg situation. It doesn't make as much sense to develop the fields without a pipeline there, but without development there is not much use of a pipeline," O'Sullivan said. Despite Levitin's claims to the contrary and Russian Railways' aggressive, U.S. $1.4 billion investment program to improve its transport infrastructure in order to increase oil exports to China, railway transportation is simply not on a par with pipelines and does not pack the punch to spur development of the region, analysts said. "You can't transport oil all the way to southern China by rail. It's just not feasible," Adam Landes, oil and gas analyst at Renaissance Capital, said. "Given a choice, a pipeline will always be used, the world over. The chance of accidents is significantly lower with a pipeline and the overall transport is far more efficient. If you take figures from the U.S., transport through pipelines accounts for 67% of all oil product transportation and about 17% of the total freight volume, yet only accounts for 2% of the total shipping costs," Landes said. Even though Russian Railways expects oil exports to China via its railways to top 10 million tonnes in 2005 and reach roughly 15 million tonnes in 2006, without an oil pipeline to the area, Russia's oil ties with its resource-hungry Asian neighbors will not grow as quickly as they should, analysts said. Both Japan and South Korea have offered to invest billions of dollars for the pipeline project, and recently there have been reports that North Korea is interested in connecting its railway lines with Russia's railways in order to increase Russian oil imports. It is expected that the oil from the pipeline will be exported to China, Japan, South Korea, Indonesia and Australia. At present, the Pacific port town of Nakhodka and neighboring Perevoznaya Bay are the frontrunners for the final destination of the pipeline, though Russia's Transport Ministry has denied that any final decision has been made. The pipeline is also expected to travel through the town of Skovorodino near the Chinese border, where oil could be unloaded and shipped via railways to China. An endpoint in Russia rather than in China would allow the Russian government to maintain greater control over who eventually receives the oil, a response to paranoia about China's growing strength. But even the feasibility study of the pipeline has taken a few detours, as one government deadline of March 15 has already passed, analysts said. Prime Minister Mikhail Fradkov has said that he expects the results to come by May 1, analysts said, while Transneft itself predicts they could come in July. "The Russian government should be working harder to expand (its oil ties with Southeast Asia). I can understand strategic reasons for not building a pipeline to one country (China), but it should be pushing harder, especially since Russia wants to move into the markets like China and India," Stefanovski said. "Europe is already well-supplied with Russian-type crude and the demand for its oil must be found somewhere else..