2 Mar '09
Oleg Kouzbit, Online News Managing Editor
A branch line to China from Russia’s massive 4,130km Pacific (VSTO) pipeline is now on a fast track, made possible by $25bn worth of Chinese credit to Russia’s Rosneft and Transneft. A big concern is the huge drop in oil prices which has put a strain on East Siberian producers’ ability to develop their fields to fill China’s enormous demands. But with the new deal now signed, Rosneft has promised to start pumping new crude by January 2011.
The best laid plans
The VSTO project was first put on the table in May 2003 when two long-range pipeline projects were merged. One was the Angarsk–China’s Datsin pipeline, masterminded by YUKOS, Transneft and China’s CNPC; the other was Angarsk–Nakhodka conceived by Transneft.
According to Kommersant, the original concept was that the main pipeline would run from Angarsk to the port of Nakhodka and have a branch to Datsin. The then Prime Minister Mikhail Fradkov endorsed the slightly revised VSTO Taishet – Perevoznaya project on December 31, 2004.
But in April 2006 President Vladimir Putin, responding to environmental reports about potential pollution to Lake Baikal, asked project developers to come up with a new pipeline route. As a result, another 500 kilometers were added to the overall length of the project and the town of Kozmino was selected to be the final point.
Gradually moving forward
So far 2,450 kilometers of the pipeline from Irkutsk Region’s Taishet via the Talakan oil field in Yakutia to Amur Region’s Skovorodino have been laid. The section’s throughput capacity is 30 million tons of oil a year.
According to news agency Rosbalt, an oil-loading terminal in Kozmino Harbor on the Pacific coast is now 27% complete; including railway infrastructure to move the crude by tanker trains to the port.
The project will include seven oil-transfer stations, most of which are already at various stages of completion.
Yakutia will host the longest section of the pipeline, 1,458 kilometers. Of the 1,500 people working on the VSTO, Yakutia residents account for 75%.
The project’s first stage was supposed to be finished by December 2008, but the deadline has been moved to December 25, 2009. Alexei Sapsai, the CEO of VSTO Management, also announced on February 25 that construction would cost another $1.9bn from original $10.9bn estimate. He attributed the increase to the ongoing crisis and inflation.
During the second stage of construction pipe is to be laid from Skovorodino to the Kozmino oil-loading terminal, making the total length of the project 4,130 kilometers by 2015. Throughput capacity by that time will be boosted to 80 million tons of oil a year, Rosbalt reported. Most of the oil will come from East Siberia oil fields.
Hyundai eyed as a partner?
Korea’s Hyundai Corporation may also be an investor in the construction of VSTO’s second stage, which is scheduled for completion in 2015.
In early February, according to the Transneft website, the company had extensive talks with Hyundai’s executives and discussed possible involvement of the Korean firm in VSTO project completion.
The deal is signed
Within the past two weeks, word finally came that lengthy discussions between Russia and China had resulted in an agreement on construction of a VSTO branch off Skovorodino to China.
Mr. Sapsai estimates that Transneft’s investment in construction will be about $278m. RIA Novosti quoted Deputy Prime Minister Igor Sechin as saying work could kick off in April 2009.
A contract was inked in Beijing on February 17 for $25bn worth of Chinese 10-year loans to Transneft and Rosneft in exchange for 15 million tons of oil a year for 20 years, Finmarket.ru said. The loan is reportedly being given at just 7%. Rosneft has officially announced that it will start sending oil to China under the new contract by January 2011.
KEA Consulting’s Ekaterina Struchkova believes the agreement was a “predictable event.”
“The parties were in talks long before the New Year but reached a consensus only now. It is generally good news: Russia receives sizable credit at a good interest rate and China gets Russian oil. A 20-year supply guarantee is a much better condition compared to earlier ones set by the Chinese. Originally the Chinese wanted to set up their own oil rigs in Russian fields.”
There is concern about the ability for East Siberian oil fields to deliver the massive quantities promised to the Chinese. Currently oil companies are strapped for cash due to the sagging price of oil and have cut back on exploration and infrastructure development.
“But now, with the Chinese money, Transneft can step up VSTO construction and Rosneft can resume its work in East Siberia,” she said to the Oriental Pipe portal.