As a New Year begins with renewed hopes, aspirations and indeed fears, competition seems focusing on Asia — China to be specific. Voices in the US, clamoring to diversify away from the energy rich Gulf as far as possible, for their energy needs, have been gaining strength in recent months and years. And with Europe too endeavoring, one way or the other, to look for sources other than Russia, a battle to grab optimal share of the growing Chinese pie seems intensifying. As geo-political considerations continue to play the usual big role in the selection of energy supplier(s), Moscow seems focused on developing infrastructure that could provide it long-term customers and security. What more can a supplier ask for?
Russia is already a major player. It has played its cards rather deftly in recent years. At times it tends to play to both the tunes — cooperation and competition — with the OPEC (Organization of the Petroleum Exporting Countries).
Using the high oil prices for the last couple of years, Moscow has succeeded in reinvigorating its energy infrastructure. It is now ahead of even Saudi Arabia, as far as crude production is concerned. While Riyadh had to restrain its output under OPEC quota requirements and indeed market dictates, Moscow capitalized and raised its production to 10.02 million barrels/day in November, gaining 2.6 percent year on year and, according to the president of Russia’s national oil pipeline operator Transneft, Nikolai Tokarev, the Russian production is expected to grow to 11 million bpd after 2012.
And Moscow is taking long-term measures to ensure it retains the edge. It is endeavoring to capture markets on a long-term basis — that could provide it with some sort of demand security — that OPEC has been clamoring for long — yet has not been successful in its efforts so far.
Last week the Russian Prime Minister Vladimir Putin opened a new oil export terminal that would serve as a key gateway for Russian energy exports to Asian markets. According to the Russian premier, “It is a strategic project, which enables us to enter the growing markets of the Asia-Pacific region.” And indeed it is proceeding with a bang.
Inaugurating the huge infrastructure, the Russian premier clicked on a computer mouse to fill a tanker at the terminal in the far eastern port of Kozmino, built at a cost of 60 billion rubles (about $2 billion). The terminal is the destination point of a new pipeline that will pump crude from oil fields in eastern Siberia.
The pipeline’s first 2,750-km (1,700-mile) section linking Taishet in eastern Siberia with Skovorodino near the border with China was completed last month, but exports to the energy-hungry economic giant are expected to start only in 2011 after the two neighbors’ pipeline systems are linked. It cost 360 billion rubles (about $12 billion) to build the Taishet-Skovorodino pipeline, which was completed quickly thanks to a deal with China in February that provided $25 billion in loans to Russian state energy companies in exchange for oil supplies for the next 20 years.
The second leg stretching from Skovorodino to Kozmino, another 2,100 km (1,300 miles) east, is still being built, and until its completion in 2012 the oil will be carried there by rail.
And all the efforts are already paying off. Rosneft has signed a 20-year contract with CNPC for the delivery of 300,000 bpd from Skovorodino, and supplies to China through the pipeline could increase beyond this in the future. The contract envisages total oil deliveries of 300 million mt (close to 2.26 billion barrels) over 20 years. Russia’s deputy Prime Minister Igor Sechin estimated the contract between Rosneft and CNPC to be worth at least $100 billion.
And yet there is another twist to the game plan too. Through this emerging infrastructure, Moscow has also made efforts to introduce the ESPO Blend crude, named after the East Siberian-Pacific Ocean (ESPO) pipeline, capitalizing on the window that the newly built infrastructure opened for it to export the grade to Asia. With the ESPO blend hitting the market, some analysts maintain the rules of the game in Asia may change — at the expense of Middle East competitors.
Exports of the diesel-rich, medium-heavy sweet ESPO grade could ultimately rise to 600,000 barrels per day (bpd) over the next few years, from 250,000 bpd in the first quarter, targeting refineries in China, Japan and South Korea, traders and analysts say.
Provided refiners are content with the grade’s quality, the new supply may force Gulf producers to review their export strategies, crude pricing and even consider offering a competing grade blended from different crudes to match the ESPO quality. Analysts say that ESPO Blend could turn out to be ideal for Asian refiners because of their ability to handle higher amounts of sulfur and based on initial assessments for the grade’s exceptional yield of middle distillates. “It could change the demographics of the region’s crude buying. I mean, how the Venezuelan crude could compete with an Espo that is directly pumped in when they have to be shipped halfway across the world?” said Al Troner, president of Asia Pacific Energy Consulting. “It could force Gulf producers to lower their prices to Asia to stay competitive and not lose market share,” he added.
Asian markets are heavily dependent on imported oil and the role of Russian oil has been growing in recent years. The East Siberian-Pacific Ocean pipeline offers the perfect vehicle for Russia to further increase oil exports to the growing economies in Asia, especially when the link to China comes online within two years, analysts therefore think.
This has been an interesting move by Moscow on the energy chess board.
With the Gulf OPEC producers, also focusing on China, in medium to long-term, as the destination for most of their crude, can OPEC check mate the move?