Russia: China Pipeline Is Good Politics But Not Necessarily Good Business

Courtesy of The Financial Times and Energy Daily, news that Russia’s plan to reorient its energy trade towards the east has taken a leap forward with the start of oil exports through a new pipeline to China.  As the articles note:

“…The pipeline, running from Skovorodino in east Siberia to Daqing in north China, is an offshoot of a new oil export route Russia is building to the Pacific Ocean, providing the world’s top oil producer with a strategic window on the energy-hungry markets of Asia. When it is completed in 2013, the 4,070km pipeline can carry up to 1.6m barrels a day of oil, about one third of Russia’s current exports.

Russia began commercial oil deliveries through the new pipeline to China on new year’s day consolidating increasingly close energy ties with the world’s fastest-growing oil consumer.

China lent Russia $25bn in 2009 to help fund the project and pledged to import 300,000 barrels a day through the new pipeline for 20 years.

Rosneft, Russia’s state oil company, has been supplying about 300,000 b/d of oil to China by rail, but the new pipeline will streamline supplies providing a direct link between new oilfields in east Siberia and the Chinese frontier on the River Amur.

Russia inaugurated the first section of the East Siberia Pacific Ocean (ESPO) pipeline running to Skovorodino in December 2009 and opened a new port at Kozmino to handle its oil exports to the far east. High quality east Siberian crude delivered by rail from Skovorodino to Kozmino is commanding high prices, competing with Middle East supplies in premium Asian markets.

But while there is more money to be made in Asia than in sluggish European markets, the ESPO project is not without critics.

To the dismay of Russian oil producers, Transneft, the state oil pipeline monopoly, has increased tariffs on all export routes to help foot the $23bn bill for the ambitious project that will eventually be the world’s longest pipeline.

Although there is a commercial logic in buyilding an oil pipeline to China, the biggest market, it would have been cheaper to connect the east Siberian fields to the existing west-oriented network.

Russia does not really need additional export capacity per se as its oil production hit a post Soviet record of 10.1m barrels a day last year and is not expected to increase much further in the coming decade. But, Moscow wants to diversify – politically as well as economically – and building links with China is the best way to do it.

This entry was posted on Thursday, January 6th, 2011 at 2:57 pm and is filed under China, Russia.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

Comments are closed.

Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.