US-Russia oil supply ties deepen with cargo to Texas

Aug. 5, 2002
The first direct oil shipment from Russia to the US was lightered last month from a supertanker to ExxonMobil Corp. refineries in Baytown and Beaumont, Tex., in a pilot program by OAO Yukos aimed at developing new markets for its rapidly increasing oil production.

The first direct oil shipment from Russia to the US was lightered last month from a supertanker to ExxonMobil Corp. refineries in Baytown and Beaumont, Tex., in a pilot program by OAO Yukos aimed at developing new markets for its rapidly increasing oil production.

The landmark development reflects burgeoning efforts between the US and Russia to deepen ties on oil supply-an initiative underscored recently by a new cooperation agreement signed by the presidents of both countries.

Yukos shipping

Yukos officials said they plan to ship "five or six" more spot market cargoes of oil to the US, "primarily to the Houston area," this year as they evaluate the financial feasibility of direct sales to US refiners. Bruce K. Misamore, chief financial officer and deputy chairman of Yukos's management committee, is already talking of slashing transportation costs by building an offshore loading terminal for supertankers in the Black Sea or by constructing a pipeline outlet on the Adriatic that would provide more direct access to the Mediterranean.

An offshore loading terminal for Russian oil could be built in the Black Sea "in 3 or 4 years," said Misamore. "We need to develop a deepwater port" possibly "in the Mediterranean or up in the Adriatic." But for now, he said, "We're testing the economics without those facilities."

OAO Yukos officials Michail B. Brudno, left, and Bruce K. Misamore outlined a pilot plan, at a recent press conference in Houston, to evaluate the financial feasibility of selling the company's rapidly increasing crude oil production directly to US markets.
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The energy cooperation pact signed by US President George W. Bush and Russian President Vladimir Putin at their May summit meeting in Moscow "hastened our coming to the US," said Misamore. But he also emphasized, "We're testing this on a purely economic basis."

The real stimulus, said Misamore, is the rapid increase in Yukos's oil production that is forcing it to seek new markets. The largest publicly traded Russian oil company, Yukos increased its oil production by 17.2% to 1.1 million b/d last year. It plans another increase to a targeted average production of 1.4 million b/d in 2002, which will likely require a jump to 1.6 million b/d for the last half of the year, said Misamore.

Yukos already accounts for 17% of Russia's total oil production and plans to increase its annual output to 546-582 million bbl by 2005. "We're looking for incremental markets for our oil. The US is looking for incremental supply sources," Misamore said. "It's a win-win deal for both."

The traditional export market for Russian oil has been through pipelines to central and western Europe. "There are just two ways for Russia to provide oil to the US: either by putting more oil into the European market and pushing out western oil that would then flow to the US or by selling directly to the US," said Misamore.

Michail B. Brudno, first vice-president of refining, marketing, and trading for Yukos, said ExxonMobil bought all of the first cargo of Russian oil and is one of two purchasers of the second cargo. As a matter of policy, ExxonMobil officials would say little about the unique transaction last week, other than that the company buys oil from many suppliers, based on quality, price, and availability.

While Yukos is willing to rely on spot sales as it evaluates the potential US market, Misamore said, "Ideally if we could set up a long-term arrangement with a major refiner, that would be preferred."

The pilot program is a learning experience for most Yukos executives.

"We have to learn how to compete in a world marketplace and how to serve the US market," said Misamore, who was treasurer and senior vice-president of finance at the former PennzEnergy Co. and its predecessor Pennzoil Co., Houston, before joining Yukos in 2001. Prior to that, he was with Houston-based Marathon Oil Co. for 17 years, serving as treasurer of its UK operations.

"While many logistical challenges remain, we believe that these pilot shipments will put us on the path to creating an efficient system of providing a stable source of non-OPEC crude oil for the US," Misamore said.

Cargo logistics

The initial shipment of 2 million bbl of Russia's Urals export blend was transported first by pipeline to the port cities of Novorossiisk, Theodossia, and Kavkaz on the Black Sea, then by smaller, conventional tankers through the restricted Bosporous Straits to be loaded aboard the Astro Lupus very large crude carrier in the Aegean Sea near Greece.

That VLCC, owned and operated by Athens-based Kristen Navigation Inc. under contract to Yukos for this project, anchored more than 25 miles off Galveston, Tex., at the mouth of the Houston Ship Channel in the early morning of July 3. Conventional tankers continued transporting the oil to ExxonMobil refineries in four lighterings-three to Baytown and one to Beaumont-through July 15.

Reducing costs

In an effort to reduce transportation costs, Yukos officials also are looking at funneling their oil through the Louisiana Offshore Oil Port (LOOP), the only deepwater US facility accessible to supertankers, or through other import facilities on the East Coast.

But for now, Misamore said, "We just want to get the ball rolling with this and additional shipments. This is really our first delivery in the Western Hemisphere. We want to see if this works before we think of expanding it to other parts of the hemisphere."

Even before the Russian oil began its long trip to Texas, some Yukos officials were describing it to wire service reporters as a "largely symbolic" move, because it is "still far too expensive" to ship large amounts of crude to the US.

Yukos CEO Mikhail Khodorkovsky was quoted in late May as saying that crude shipments to the US would be profitable only in periods of high oil prices and that the largest profits might be obtained through swap deals.

All previous purchases of oil from Russian producers by US refiners have involved swaps of Middle Eastern oil, Yukos officials said.

Russian alternative

Yet in a visit to Houston earlier this year, Khodorkovsky said Russia would like to be viewed by the US and other consumers as a secure alternative (to the OPEC) supplier. But only "if the US doesn't change its mind in midstream and say, 'We'll take Saudi Arabia at $10/bbl.' In that case, there would be only Saudi Arabia 3 years down the road," he said (OGJ Online, Feb. 11, 2002).

Misamore said, "To be regarded as a stable business partner, we have to be able to deliver oil even in periods of low market prices. Fortunately, Russian oil companies have some of the lowest production costs in the world. Even with higher transportation costs, we could still supply oil to the US market when other countries cannot." Yukos's production costs are $8-10/bbl, he said.

In the interim, Tyumen Oil Co. (TNK), Russia's fourth largest producer, and state pipeline company Transneft, which almost fully monopolizes Russia's crude oil shipments by pipeline, reportedly are discussing the possibility of connecting existing pipelines with one in Croatia in order to move Russian crude to the Adriatic port of Omisalj for loading onto VLCCs.

Landmark observed

"It's fitting that the first direct shipment of Russian crude oil to the US comes via the Port of Houston. This is the eighth largest port in the world and is home to a $15 billion petrochemical complex that is the largest in the nation," said James T. Edmonds, chairman of the managing Port of Houston Authority, at a press conference.

Responding to reporters at that conference, US Rep. Kenneth E. Bentsen Jr. (D-Tex.) said possible government incentives to promote imports of Russian oil "make sense." He said, "It's to our benefit to take part in the development of Russia's economy."

Both Bentsen and US Rep. Nick Lampson (D-Beaumont) applauded the opportunity for refiners to buy Russian oil as a means of reducing US dependence on other, "risky" sources.

According to American Petroleum Institute statistics, the US imported nearly 60% of its crude and oil products during the first quarter of this year. Of those oil imports, 9.5% was from Canada, 7.7% from Saudi Arabia, and 7.3% from Venezuela.

Imports from all Persian Gulf producers totaled 13.2% of US oil imports (OGJ, July 1, 2002, p. 26).

Russia's pilot program is a "prime example of how two nations can work within the ever-changing marketplace in order to strengthen the economies of both countries," said Michael Smith, US Department of Energy assistant secretary for fossil fuels, at the Houston meeting. "The president's National Energy Policy recommended more dialogue between energy-producing and consuming countries."