China wants reduced rate for Russia's ESPO crude

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, Sept. 13 -- Chinese officials believe their country’s imports of Russian oil via the recently launched East Siberia Pacific Ocean (ESPO) pipeline spur should be purchased at a lower rate due to the shorter distance it travels.

The ESPO line currently extends 2,700 km between Taishet in Eastern Siberia and Skovorodino near Russia’s border with China. A 2,000-km extension of the line is planned from Skovorodino to Kozmino on Russia’s Pacific Coast. East Siberian crude is now piped to Skovorodino, where it is transferred to rail cars for onward transport to Kozmino.

The Chinese say they want a lower rate because Russia’s ESPO blend travels just 67 km to China from the terminus of the main line at Skovorodino, while ESPO blend sold at Kozmino is carried by railcar some 2,000 km beyond Skovorodino.

"We believe it would be fair to purchase the oil from Rosneft at a price lower than that offered at Kozmino," an official of the state-owned China National Petroleum Corp. told Russia’s Interfax news agency. “The distance from Skovorodino to Kozmino is about 2,000 km, but just 60 km to the Chinese border.”

Russia’s Prime Minister Vladimir Putin last month launched the 67-km Russian section of the ESPO pipeline, saying its implementation “means stabilization of supplies and energy balance for China and for us it creates entry to new challenging markets (OGJ Online, Sept. 6, 2010).”

The Chinese segment of the ESPO, which will extend 1,000 km from Mohe on the Russian border to Daqing, is still under construction. But deliveries of ESPO blend crude are due in January 2011.

Up to now, the sale price was to be determined monthly based on the price of oil at Kozmino, with adjustments for any differential in quality.

Chinese objections over the pricing of the oil coincided with reports that Russia's OAO Gazprom Neft recently sold Sinochem International 100,000 tonnes of medium-sour ESPO crude for October loading from Kozmino.

Industry sources said that Sinochem paid a record-high premium for the oil, at 85-90¢/bbl to Platts Dubai front-month crude assessment, fob, after netback from the CFR price.

That price topped the earlier high achieved last month when Russia’s OAO Rosneft and Surgutneftegaz sold ESPO blend to Warly International and Glencore, respectively, at Platts Dubai crude plus 73¢/bbl, fob.

Russia’s first crude exports left Kozmino on Dec. 28, 2009, and have now reached 10 million tonnes, two thirds of the 15 million tonnes planned for 2010. Kozmino Port Authority officials said the terminal handles 9-13 tankers per month, with 14 expected in each of the months of November and December.

Meanwhile, in an effort to ramp up supplies even more, Russia's state-owned oil pipeline operator Transneft expects to sign an agreement this month with TNK-BP, Lukoil and Gazprom Neft to jointly finance the construction of a 240,000 b/d pipeline that will link additional oil fields to the ESPO line.

Transneft Pres. Nikolai Tokarev said the companies will set up a joint venture to finance the project, which is expected to cost $1.95 billion. To compensate the companies, Transneft will offer a discounted oil transportation fee.

Tokarev said the pipeline would extend from Zapolyarnoye in the northern Yamal Nenets region to Purpe. From Purpe, a further 430-km extension of the pipeline will be built to Samotlor in the Khanty-Mansiysk region, site of TNK-BP’s Samotlor oil field, one of the largest in Russia.

The Purpe-Samotlor link is scheduled to be launched in 2012 and will eventually carry crude from the Yamal-Nenets region into the ESPO line, for eventual supply to China and other markets in Asia-Pacific.

TNK-BP is likely to be the largest beneficiary of the pipeline project, according to analyst BMI. It said the Moscow-based firm “is expected to significantly ramp up its investment in Siberian mega projects now that its co-owner BP has shifted its emphasis to Russia following the disastrous accident in the deepwater Gulf of Mexico.”

Contact Eric Watkins at hippalus@yahoo.com.

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