Russian oil pipelines set for expansion

Russia's existing national oil pipeline network contains 46,800 km (more than 29,000 miles) of trunk pipelines, 395 pump stations, and 868 storage facilities with total carrying capacity of up to 12.7 million cu m. Transcontinental routes are generally 3,500-4,000 km (Fig. 1).

The average pipeline diameter is 860 mm (33 in.)-almost twice as large as the international average-and results in higher maintenance costs per kilometer.

According to long-range development plans (to 2010), new oil pipelines in Russia may reach 9,000 km. At the same time, 10,000 km-more than 20% of the total existing network-may require some degree of refurbishing.

State-owned AK Transneft operates, services, and is responsible for developing the system. Transneft classifies its pipelines into three major groups: export, interregional, and intraregional.

Export pipelines have the highest throughput, often reaching 101-103% of capacity. In contrast, the current average load of Transneft's other (nonexport) pipelines is only about 56% of capacity.

The company must ensure the transportation of crude oil by appropriate volumes and routes specified in the transportation (export) schedule produced by the Russian government's InterAgency Commission.

The schedule is based on annual transport contracts the producing companies draw up with Transneft that specify the amount and quality of crude to be carried, starting and final points of shipment, route, and terms and schedule of payment.

Quarterly and monthly allotments and quotas are calculated from the oil companies' certificates of their own annual production. (Companies dissatisfied with their quotas can apply for additional incremental shipments on a carrying availability basis. Producers who find themselves with surplus capacity can lend, transfer, or sell allotments.)

This system would be what the government and Transneft officials cite as their goal-a system of transparent and fair (nondiscriminatory) access rules-if it were not for conflicting interests of certain government-backed programs, oil majors, medium-size companies, and joint ventures.

The companies now have the legal right to export one third of their total production, but the fight for additional export quotas goes on.

Interest in access to export pipelines is a major concern to Russian oil producers because of the disparity between global and internal Russian market prices. The gap has closed in the last decade but lower domestic demand and mandated deliveries to domestic refineries keep Russian oil prices below global levels.

Transneft is creating new and further developing existing economically viable export routes. It is also soliciting investment in Russia's oil sector to help Russian and foreign oil producers move crude to export markets (Fig. 2).

In developing such projects, Transneft is faced with the following issues:

• The degree of compatibility with existing routes.
• Economic feasibility, based on current and future developments with a view to bringing additional taxes to federal and regional budgets.
• The ability to attract investment for future upstream development in Russia.

Interregional trunk pipelines are vital to the domestic market because of their strategic importance for rerouting crude flows.

Intraregional networks are important for local producers and refineries. These pipelines are concentrated mostly (although not exclusively) in the Volga region-within republics such as Bashkor tostan and Tatarstan-where large oil deposits coexist with fairly large populations.

The low average operational rate of the whole system today is due in part to the continuing decline of oil production in the traditional oil-producing regions of Russia. Eventually, export-route development will depend on the development of new oil fields in the northern European part of Russia (the Komi Republic and Archangelsk Region), Tyumen Region, and Eastern Siberia.

Development will also depend on oil transit from Kazakhstan, Azerbaijan, and Turkmenistan via Russia.

Another key factor affecting the development of new export routes is the scarcity of marine terminals in Russia.

Optimization program

Transneft is responsible for the maintenance, operation, and profitability of the system. With the current overall decrease in loading capacity, improving efficiency of the system is imperative.

The low carrying efficiency of regional pipelines is difficult to improve under present conditions. With continuous flow from the oil fields to refineries, it is technically impossible to reduce the number of pump stations. And in the long run, it is not feasible to reduce the capacity of such regional pipelines.

Maintenance-especially the introduction of advanced technologies that permit continuous operation-is vital to operating efficiency, cost savings, and environmental protection.

This new approach so far has resulted in the decrease of failures in a number of categories, from 0.27/1,000 km in 1991 to 0.06/1,000 km in 1997 and 1998.

Transneft is developing programs to maintain its pipelines' current reliability levels. The most important is entitled "Comprehensive program on diagnostics, major repairs, and reconstruction of trunk pipelines."

The program is based on the ratio between the projected system load and required system capacity. The total load for the system-designed to pump more than 500 million tonnes-for the year 2001 was 304.7 million tonnes.

By 2005, it will reach 305.9 million tonnes/year (tpy). The 2010 projection is 310 million tpy.

These estimates do not include the transit of Tengiz oil (up to 15 million tonnes), Timan-Pechora region production (up to 12 million tonnes), and eastern Siberian projected production of up to 16 million tpy.

The company is concentrating on the performance of its older pipelines. Half the trunklines have been in service for 30 years or longer, often surpassing their projected service life of 33 years.

Typically, breakdowns are caused by corrosion (both interior and exterior) and technological, construction, or hook-up defects. Transneft specialists now view sectional pipe replacement as a low efficiency, high-cost approach.

The company also pays more attention to organizational (personnel) and technological improvements. Regional operating subsidiaries are also developing plans to harmonize their existing capacities with load volumes where possible.

Specifically, these plans include selective decommissioning of excess capacities. The objective is to cut maintenance costs and redirect the extra financial resources toward further modernization.

In 2001, Transneft built and replaced 1,346 km of trunklines, reinsulated 500 km of pipe, and decommissioned some 800 km of trunklines, including two pump stations. Also, nine previously decommissioned stations were put back into operation.

For 2002, it plans to build and replace 1,044 km of trunklines, reinsulate 510 km of pipe, and commission seven pump stations.

As for pipeline servicing problems, Transneft has set up the Center for Technical Diagnostics (Diascan), which is responsible for pipeline monitoring.

The current maintenance programs which rely on control and monitoring systems for pipelines and tanks include:

• Pipeline leak-detection sensor systems.
• Interior pipe control systems (intelligent pigs, profilometers, magniscan, and ultrascan devices).
• Physical acoustic equipment.
• X-ray based technologies.

Pipeline-construction work, as well as defects in hook-up welding, lower considerably the overall quality and service life of Russia's pipelines. Construction and hook-up work account for the bulk of defects in circular welds, corrugations, dents, and scratches.

About 27,000 defects have been found along the 1,563 km of trunk pipelines already tested. The following defects were the most common:

• Fusion (unwelded pieces, fracture-type defects), 73%.
• Edge displacement, 13%.
• Inclusions or freckles, 4%.
• Over-welding, 1%.
• Other defects, 9%.

Pipeline diagnostic systems monitor the technical conditions of the pipeline system-identifying geometrical defects, slug inclusions, rates of corrosion, and transverse cracks-and select the most appropriate repair methods.

Technologies to help improve maintenance efficiency are in demand.

A total of 6,340 km of pipelines were examined between 1997 and 2000, with priority given to export pipelines. The results of this first systematic inspection of Russia's 40,000 km of oil pipelines showed 15% with interior corrosion at depths of 10-40%.

Exterior corrosion defects are unevenly distributed on the pipelines. The Irtysh-Torgili section, examined in October 1996 and again in April 1999, showed that the depth of corrosion defects grew from 1.4 mm to 3 mm during 21/2 years.

The estimated corrosion rate is about 0.43 mm/year. The preliminary forecast is that corrosion defects will continue to develop, reaching critical dimensions on certain sections.

Accidents caused by subpar longitudinal welding are most common. This requires far more intensive use of interior pipe monitoring, including intelligent pigs, magniscan, and ultrascan devices.

This brief analysis shows that many parts of the Transneft system are approaching obsolescence. Half the pipelines have reached the end of their service life. The only feasible way to maintain the system is by continuous monitoring.

The information from pipeline monitoring will allow Transneft to schedule repairs better and cut costs, increase future pipeline reliability and safety, and better manage the trunklines' capacities.

Starting in 2001, Transneft stopped imports of the most frequently needed equipment. Nevertheless, the company is interested in and will continue to import welding equipment, oil accounting systems, and maintenance equipment, such as pipe benders and pipe cleaners.

Trunkline design

Giprotruboprovod Trunkline Design Institut (GTP) is a design subsidiary of Transneft actively developing the following:

• National and regional trunkline development programs.
• Trunkline feasibility studies.
• Standard designs for trunkline facilities.
• Technical standards and requirements.
• Technical design standards.
• Computerized design systems.

The institute played the key design role in developing more than 70% of the 65,000-km trunk pipeline system in the former Soviet Union, including the 5,000-km Druzhba trunkline and the 1,020-1,220 mm pipelines in Western Siberia.

Recently, it has planned a number of projects, including the routing and development of pipeline transportation to 2005, the Timan-Pechora fuel and energy complex, and a pipeline from the Tengiz oil field via Guriev-Astrakhan-Grozny.

Currently, GTP is working for Trunk Pipelines JSC, another subsidiary of Transneft. GTP also has worked for other non-Transneft pipelines in Russia and the Commonwealth of Independent States (CIS), such as the Caspian Pipeline Consortium (CPC).

GTP is researching transportation costs in Russia, Belarus, Poland, and Germany for supplying additional crude to Polish and German refineries. It is also studying opportunities to use the port of Gdansk to export Russian oil.

Romania has also attracted the attention of Russian producers CPC partners and the Azerbaijan International Operational Co. regarding construction of a pipeline to Romanian territory.

Finally, GTP has been conducting a feasibility study for moving oil from Russia to China. The preliminary results show high transportation costs, but the project retains enough potential for the studies to continue.

Financing sources

To finance its projects, Transneft usually combines its own resources with external sources. Sberbank (Russia's major savings bank) and private Alfa Bank have become its principal domestic creditors.

Transneft also cooperates with international financial institutions, including the European Bank for Reconstruction & Development (EBRD), Standard Bank London, and Raiffeisenbank Austria. The latter, for example, provided syndicated credit amounting to $150 million to finance Phase 1 of the Baltic Pipeline System (BPS).

Breaking through

The main limiting factor for the Russian oil industry is access to international markets. Currently, Russia is supplying about 4.3 million b/d of crude and refined products, mainly to Europe and the US. If Europe maintains its pace of energy-sources diversification, this market in 10 years will grow for Russian exporters by only 300,000-800,000 b/d.

Given the fact that the average production cost of Russian crude is $9/bbl (compared with OPEC's $6), markets for Russian oil in the long run will be limited to Europe and Southeast Asia, with major emphasis on China.

This means a relatively new drive towards developing fields in central and eastern Siberia as well as assessing the feasibility of different export routes leading to China, Japan, and Korea.

According to some analysts, in 2010 Russian oil exports to China could grow from today's 30,000 b/d to 900,000 b/d. This is based on the estimated growth of the Asian consumer markets (including China) that by 2010 will reach 16 million b/d, surpassing the North American market.

In terms of exports, 10 years from now Russia may reach Latin America's estimated export level of 5.2-5.5 million b/d and soon after become the third biggest exporter after the Middle East and Africa.

Addressing these strategic challenges, Transneft is developing four basic export routes:

Southern route (Black Sea-Caspian Sea).

• Atyrau-Samara pipeline upgrade (with Kazakhstani participation) by 5 million tpy.
• Upgrade of Tikhoretsk-Novor ossiysk trunkline by 5 million tpy.
• Link with CPC pipeline.
• Construction of the Burgas-Alexandropoulis pipeline.

Northern (Baltic Sea).

• Baltic Pipeline system (BPS) (first stage completed).
• Timan-Pechora regional pipeline development.

Central European.

• Modernization and expansion of the Druzhba pipeline; integration of the Druzhba-Adria pipelines.
• Western pipeline system, including the expansion of Novopolotsk-Mazheiku-Butinge line capacity.

Eastern.

• Sakhalin-Khabarovsk-Vladivostok lines (as part of an eventual export trunkline to China, Japan, Korea).
• Sakhalin-Hokkaido line.
• Pipeline infrastructure development at the Kovykta field in eastern Siberia, with a long-term export trunkline to China.

It is clear that major work will continue to focus on redefining flow through the existing pipelines (by creating alternative routes) or by opening new export routes.

Two "bypass battles" were recently fought on the "Southern Front." The Chechen Republic bypass pipeline made transportation safe for about 7 million tpy of early Azeri oil, en route to the Baku-Tikhoretsk trunkline, by adding a section bypassing the politically unstable territory of Chechnya.

While the issue of bypassing Chechnya received a lot of attention (even being called a war for oil), it was for Transneft a purely commercial and technical issue.

As one Transneft official commented, "The Chechen section of the pipeline in 1998 was more of a colander type: At one point the 3-day-long trip from Baku resulted in no crude at all at the other end." The $170 million construction project was completed mid-2000.

Another $190-million undertaking by-passed Ukrainian territory by adding the 259-km Sukhodolnaya-Rodionovskaya section to ensure a cost-effective southern export route through the Novorossiysk terminal.

For Russia, the imperative for the project has come from uncompensated siphoning of oil (as much as $70 million annually) which Russia currently exports through Ukrainian lines, the high transit costs via Ukraine, and lack of flexibility shown by the Ukranians.

Ukraine's current transit tariff (for the 350-km Sukhodolnaya-Lisichansk-Rodionovskaya section) is $2.35/100 tonne/km. After the completion of the bypass, Transneft imposed a temporary tariff of $1.95/100 tonne/km that will be in force until the project's costs are recovered.

The investment pay back will be accrued through the tariff differential and will take about 8 years. The pipeline reached its full 36-million-tpy capacity last December.

Pipeline upgrades

There are plans for further upgrades of the Atyrau-Samara transit trunkline (its current capacity is 15 million tpy) to 17.5 million tpy. Much of the additional work will involve drag reducing agents (DRAs) to move more crude through a line.

The Kazakhstani firm Kaztransoil is expected to finance the bulk of the project.

The Tikhoretsk-Novorossiysk project involves 80 km of looping and the upgrade of pump stations to increase the pipeline's capacity by 5 million tpy.

This would bring total capacity to 37 million tpy during Phase 1 of the project; 46.5 million tpy with Phase 2; and 52 million tpy with Phase 3.

A new terminal in Novorossiysk's port is also planned.

The Caspian Pipeline Consortium (CPC) project, a 1,580-km pipeline linking giant Tengiz oil field in western Kasakhstan with the terminal at Novor ossiysk (Russian Black Sea coast), was finally commissioned last October.

The initial design allows transport of up to 28.2 million tpy. Capacity will then be increased after four consecutive upgrade stages to reach the nominal maximum throughput capacity of 67 million tpy by 2014.

CPC's infrastructure includes five pump stations, a tank farm near Novorossiysk with four storage tanks (100,000 cu m each), and a weather-reliable marine terminal with two single-point moorings with a loading capacity of 12,700 cu m/hr.

A facility for smaller auxiliary vessels to support tankers on the Black Sea was added as well as new pump stations and maintenance facilities in Kropotkin, Komsomolskaya, and Atyrau.

The existing 753-km pipeline from Tengiz to Komsomolskaya is going through massive refurbishing. Ten pump stations will be added to the Russian and Kazakh sections by 2006, including additional tankage at Novor ossiysk. The current tariff is $26.32/tonne.

Russia has repositioned itself on the "Northwest Front" after a decade of having no direct access to the Baltic export terminals.

Baltic Pipeline System

Russian officials view the Baltic Pipeline System (BPS) as having strategic importance for the country because it opens up a new export route via the Baltic Sea port of Primorsk.

The project combines a 2,700-km pipeline from Kharyaga in the Nenetsk Autonomous District with an export terminal in Primorsk on the Baltic coast, which has a stationary dock for tankers up to 150,000 dwt.

Construction on the first $590-million stage of the project (Kharyaga-Usinsk-Ukhta-Yaroslavl-Kirishi-Primorsk) started in March 2000 and was completed in December 2001. It included a new pipeline from Kirishi to Primorsk, upgrades of the existing pipeline from Yaroslavl to Kirishi, a storage capacity of 500,000 cu m, and a throughput of 12 million tpy.

The second stage will increase throughput to about 18 million tpy by adding additional pipe, expanding the Primorsk terminal loading capacities, and adding a missing section from Usinsk to Kharyaga.

Transneft intends to complete the second stage by 2003. Further upgrades may increase total pipeline capacity to 30 million tpy.

Baltic and Finnish ports, which have handled more than 60% of Russian oil exported to northern Europe, will be the most affected by the commissioning of BPS. For Russia, the new route will create savings of $5/tonne in export costs and a $27 million gain in revenues.

BPS must address the challenge of an independent CPC pipeline and the export needs of Kazakh producers. Viewing CPC as a competing export route from Kazakhstan, Transneft has already acknowledged that its launch will cost it up to $70 million in lost revenues. These losses, however, apply mainly to high-quality Tengiz crude or so-called "CPC blend."

In reality, Transneft-with its BPS system in place-is now offering Kazakh producers of lower-quality crude an important alternative route to the northwest, with the resulting Primorsk blend being potentially higher in quality than that at Novorossiysk.

Also, Transneft's Atyrau-Primorsk route may offer more advantageous conditions (in terms of transportation costs and quality) to Kazakh exporters.

Beyond the political possibility that Turkey might restrict tanker transit through the Bosporus, BPS's new export route will offer a number of purely economic benefits to Russian exporters. They include at least a 249,000-b/d increase in the country's overall export capacity and will help lower overall transportation and loading costs.

A similar development is taking shape in the north. Northern Gateway-a 440-km pipeline across Nenets Autonomous District linking Timan-Pechora fields with an ice-free Barents Sea offshore terminal at Varandey-will enable the local operators OAO Lukoil, Conoco Inc., BP PLC, and Severnaya Neft to export oil independently without concern for state-imposed export quotas.

Preliminary cost estimates for Phase 1 (start-up, early oil transportation) are $850 million. Commissioning will be in 2003. The pipeline will reach 200,000- b/d capacity by 2005, and 600,000 b/d by 2010. Total project cost will be more than $1 billion.

Latvian export corridor

Regardless of the BPS launch, there are several proposals to link and expand pipeline systems of the CIS countries to supply northwestern Europe. The World Bank views the Latvian oil transit corridor via Ventspils as the most economically feasible.

The Latvian oil transit corridor is a multimodular system. It includes a pipeline system, railroad access, oil terminals, and the Ventspils marine terminals capable of servicing tankers of up to 120,000 tonnes.

Ventspils is probably the best shipment center for the Baltic area because of its location and modern facilities. Transit through this ice-free port is also one of the shortest routes to Western markets.

Ventspils' terminals now allow movement of up to 55 million tpy of oil and petroleum products. Currently one of the major constraints for Russian crude delivery via Ventspils remains the existing pipeline's low capacity.

The construction of a new pipeline is generally viewed as a better solution compared to plans to upgrade the existing one. The Polotsk-Ventspils route may be the most viable.

Central European options

Russian pipeline planners have two options: northern and southern routes. The development of the northern route would increase crude supply to Polish and German refineries. It would also move Russian and Kazakhstani oil to the northern European market via Gdansk.

A feasibility study done jointly by GTP and Texaco Inc. argued for the Samara-Gdansk trunkline upgrade.

The development of the southwest route involves linking the Druzhba pipeline to the Adria pipeline and increasing its capacity to 15 million tpy from 5 million tpy.

The project would increase delivery of Russian and Caspian crude to refineries in the Balkans and the Mediterranean via the deepwater Omisalj terminal in Croatia. The terminal can handle tankers up to 500,000 dwt. Adria's Sisak-Omisalj section would be reversed (OGJ, Mar. 4, 2002, p. 64).

The consortium created for this project includes companies from Russia, Belarus, Ukraine, Hungary, Slovakia, and Croatia. A unified tariff of $0.64/100 tonne/km has been agreed upon for all crude transported from Samara to Omisalj.

Transneft has begun pushing for a new route to the south linking west Siberia with Chardzhou in Turkmenistan (this pipeline physically exists but needs to be upgraded), then by rail to Iran, and finally to a terminal in the Gulf.

There are also plans to transport Russian oil to China. Yukos Oil Co., Transneft, and China's National Petroleum Corp. have completed a preliminary feasibility study for a 600,000-b/d pipeline. The 2,400-km pipeline would connect a number of oil-bearing structures north of Lake Baikal with Beijing and would cost some $l.7 billion.

A section going south to Irkutsk would link the pipeline with west Siberian oil fields through the existing trans-Siberian trunkline. By 2005, when the pipeline would be operational, Russia's exports could increase by some 30% and reach Japanese and Korean markets.

Yukos is now exporting about 1.5 million tonnes to China, mainly by rail. To support the project, China's Daqing Oil Field Corp. signed an agreement with Yukos and Rosneft to develop jointly oil fields in the Irkutsk and Sakha regions.

Other players in the region are Slav neft JSC and Russia Petroleum, plus BP with its equity interest in the latter. This project in the long run would involve additional exploration and development in eastern Siberia and the Far East plus a large and expensive infrastructure.

Although Transneft is already participating in this preliminary stage of the Chinese project, its "bypassing" temptations are becoming stronger. Indeed, its recent successful maneuverings to bypass Ukraine or Latvian Republic are now tempting Transneft to bypass China.

It would obviously be more advantageous for Russia (and Transneft in particular) to build a pipeline east to Nakkhodka marine terminal on the Pacific coast instead of going to the southeast and allowing a huge section to cross northeastern China.

In other words, Transneft would definitely prefer to extend its existing Surgut-Tomsk-Irkutsk trunkline further to the east along the Baikal-Amur railroad to Komsomolsk on Amur, thus establishing a link with Sakhalin. It could then turn south to Khabarovsk and then along the Trans-Siberian railroad to Vladivostok and Nakhodka.

The project would cost at least $5 billion and face strong opposition from the Chinese.

In the meantime, international consortia operating in Sakhalin are moving forward with their plans to build a trans-Sakhalin oil pipeline and an independent export terminal for 260,000 b/d of crude to be exported by 2005.

So far, Transneft is abstaining from these projects.

The author

Nick Mikhailov ([email protected]) is an energy specialist for commercial service in the US Department of Commerce's International Trade Administration. His responsibilities include market analyses relating to the upstream and downstream petroleum sectors, power generation and distribution, and machine-manufacturing industries. Before joining the Department of Commerce in 1992, he worked for OrenburgGazprom State Enterprise (Moscow Commodity Exchange). Mikhailov holds an MA in linguistics from Maurice Thorez Foreign Languages College in Moscow.