Pipelines in vogue as Russia considers options

Oct 12, 1999 02:00 AM

by David Flanagan

The recently held Transneft/CWC conference in Moscow on pipeline projects in the former Soviet Union went ahead as planned, but with a change of one of the keynote speakers.
The new head of Transneft, Semyon Vainshtok, drafted in from LUKoil-West Siberia only a couple of weeks ago, stood in for Dmitri Savelyov. Vainshtok conveyed the impression that it is business as usual at Transneft.
To celebrate the 60th anniversary of the establishment of Transneft subsidiary Giprotruboprovod, a pipe construction and project implementation enterprise, the conference looked at the myriad of planned oil delivery links. Easily the most significant of these is the Baltic Pipeline System (BPS), a two-stage plan to link Kirishi with Porvoo in Finland and then to develop links east of Kirishi. Throughput of 12 million metric tons per annum will rise in the second stage to 30 million metric tons. The scheme has already secured backing from the European Bank for Reconstruction and Development (EBRD).
Along with this flagship project, various other Russian oil and gas pipeline proposals have come onto the agenda. Among them are Gazprom's Goluboi Potok (Blue Stream) projects, a Yukos/Transneft plan to export crude from East Siberia to China and a mammoth potential undertaking to link Irkutsk with Chinese customers to supply gas and possibly electricity. The Sakhalin region is looking into developing pipeline facilities for the export of gas to Japanese power companies, while Janaf, through the "Druzbadria" project, has set its sights on a target market of Spain and Italy.
In Central Asia, Russia is interested in offering a service to Kazakh producers and others active in Caspian crude and getting some of the financial benefits. Hence Transneft's keen interest in Caspian oil projects. The Caspian Pipeline Consortium (CPC) has chosen various Russian companies or joint ventures involving a Russian interest for elements of construction and development, such as Starstroi.
Many of these projects of course have merit in their own right, and it could come to pass that more rather than fewer are ultimately completed. In a sense, they are not actually competing for business, as much of the time they may ultimately target different markets. But they are competing for funds.
While attracting finance is of course a key element in the development of the projects, there does arise a far more fundamental question -- namely ensuring that the volume of fuel that will actually go through these new routes is sufficient to let producers and exporters make a profit and maximise their revenues.
First, the routes will obviously raise funds by selling space in the pipeline. So the greater the volume of future crude production Russia can earmark for export, the better for cash flow. It is therefore vital for Russia that its major projects -- the Northern Territories, Timan-Pechora, restructuring of Samotlor and others -- are brought on stream as quickly as possible. The two areas of development, namely pipeline construction and upstream evolution, are entirely interdependent.
But possibly even more important for pipeline projects in the long term is the issue of the role of petroleum products in Russia's export balance. As discussed in last week's FSU Oil and Gas Monitor, the fuel oil export ban has been lifted, and such a policy may well be dropped for good.
Petroleum products, naturally, would be a more lucrative commodity for Transneft's pipeline projects. It is well known that refining capacity in Russia is in excess of usage, and Russia may plan to employ this excess capacity for boosting product exports. Eastern Europe is a widely expected to note a strong growth in demand for jet fuel and gasoline, as vehicle ownership and air travel expand. Exporting crude rather than products could come to represent a substantial opportunity cost to Russia.
Financiers may be more responsive to plans that envision versatile pipelines -- i.e., links that can carry products as well as crude. However, this is of coursea long-term prospect for Russia, as the current pipeline structure and export system are geared towards crude and have been for years.
And what of Russian petroleum products' quality? On this point, many refiners are very active in developing cleaner products. LUKoil, as well as TNK (which owns the Ryazan refinery) and Sibneft (which owns the Omsk refinery, are all attempting to increase output of high-quality and more environmentally friendly fuels. So they will stand to gain if the focus of exports shifts from crude to products.

Source: NewsBase
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