Transneft's new Caspian pipeline: All dressed up and no place to go

Jul 31, 2000 02:00 AM

by Jennifer DeLay

The Russian state oil pipeline operator Transneft has gone to quite a bit of trouble over the past year to set up a new transport route for oil producers in the Caspian Sea region.
In late November of 1999, it began work on a 312 km bypass pipeline around Chechnya. Then in March of this year, it announced that a 17 km branch line would be built to link the bypass line, which is serving as the new mid-section of the Baku-Novorossiisk trunk line, to the Dagestani port of Makhachkala. The bypass line was completed in late March of this year and the branch line from Makhachkala in early May.
The cost of laying these two new pipelines came to at least $ 160 mm, and Transneft has so far not found it easy to foot the bill. The pipeline operator initially hoped that Russian oil companies would volunteer to help carry out the work and provide some financing.
However, the companies failed to step forward. Furthermore, rumours that Transneft had managed to cover the costs of the project with its own funds or secure outside sources of funding -- such as a loan from the European Bank for Reconstruction and Development (EBRD) -- never panned out. The Russian government finally had to step in and order a tariff increase, saying that part of the proceeds of a hike in oil transportation charges would be used to finance the new pipelines.

Presumably, Transneft had hoped that the benefits of making Russian export routes more attractive and competitive for producers in the Caspian would offset the costs of construction several times over. The new bypass pipeline is able to handle at least 5 mm tpy of crude oil, and Azerbaijan was supposed to send at least 2 mm tons of crude to the Black Sea terminal of Novorossiisk this year.
Moreover, Russian officials have said they hoped the 17 km Makhachkala link would be able to carry 3.0-3.5 mm tons of oil in its first year of operation. In theory, this ought to be enough to generate the funds needed to start paying for the new pipelines.
However, Transneft had to announce that it would not be able to pump Kazakhstani or Turkmenistani oil through the Makhachkala branch line. According to the pipeline operator, the heavy crude that is being shipped across the Caspian by those two countries is of such high viscosity that it would damage the pipe.
Transneft has tried to alleviate the problem by building a new oil treatment facility in Dagar, near Makhachkala, that can upgrade the Central Asian crudes so that they are compatible with Russian Urals-grade crude. However, the producers have complained about the $ 7 per metric ton cost of processing their oil at Dagar, saying that adding this charge to the pipeline tariff makes it to expensive to export crude to Novorossiisk along this route.

As such, Transneft has found itself with practically no customers for its fancy new pipelines. Kazakhstan and Turkmenistan are not sending their oil to Makhachkala, and Azerbaijan has been reluctant to send any significant quantities of oil through theBaku-Novorossiisk pipeline ever since an alternative pipeline to Supsa was commissioned last year.
It would seem, then, that the Russians are lagging behind in the race to establish export routes for oil producers in the Caspian Sea region. Yet this is not entirely true. The Caspian Pipeline Consortium (CPC) said recently that it expected to finish its own conduit -- a 1,480 link that will run from western Kazakhstan to Novorossiisk -- in mid-2001, slightly ahead of schedule. There has even been talk of expanding the CPC line, which was designed to have a peak throughput capacity of 67 mm tpy of oil.

Why are these two oil transport projects faring so differently? There are at least two possible reasons.
First, the CPC has already secured financing for its project. Eight of its 11 members are international oil companies or corporate alliances, and these eight have agreed to bear the cost of building the pipeline. The other three members -- the governments of Russia, Kazakhstan and Oman -- have agreed to provide land for the pipeline and, in Oman's case, advisory-type services rather than cash. As such, the pipeline builders are not being forced in this case to scramble around for funds.
Second, the CPC will probably not have to struggle with the issue of crude grades so much. Most of the oil and gas condensate that will be loaded into the Tengiz-Novorossiisk line will be from the same general area and (presumably) of broadly similar quality. The CPC will therefore not have to worry, as Transneft will, about how to ensure that Azerbaijani, Kazakhstani and Turkmenistani oil all conform to standards for Urals-grade crude.
The trouble is that Transneft has so far not been willing to pursue a CPC-style solution for Caspian crude. That is, it has proposed again and again to upgrade and expand the Baku-Novorossiisk pipeline. But its proposals have not called for the establishment of an international consortium to carry out the modernisation and expansion work.
Neither have they adequately addressed the issue of how to deal with a wide variety of crude grades in one node of the transport network. So unless some other solution can be found, it appears that the Russian company's new pipelines will remain empty for a while.

Source: NewsBase
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