FOREIGN FUNDED PIPELINES KEY TO RUSSIAN FAR EAST OIL, GAS

Eugene M. Khartukov
East-West Center
Honolulu

The realization of oil and gas development and export plans in the Russian Far East (RFE) greatly depends on pipelines and transportation facilities built with foreign investment due to the lack of national capital.

Beyond 2000, current and planned resource developments can substantially increase the RFE's self-sufficiency in crude oil, help the region become a marginal exporter of light products (gasoline and jet fuel), and provide massive supplies of natural gas to the neighboring Pacific countries.

EXISTING SYSTEM

The vast undeveloped territory of the RFE, most of which is in permafrost, the complex terrain, and severe climate hold back development of infrastructure for the region's hydrocarbon industry.

In turn, the poor infrastructure and sparse transport network inhibit the economic development of the region. In addition, the existing infrastructure does not permit advantage to be taken of the geographical location of the RFE for promoting economic relations with Asia-Pacific countries.

Consumption of natural gas and, to a large extent, crude oil is generally local. Only two of the RFE's seven administrative areas, Sakhalin and Yakutia, produce oil and gas which, in turn, are processed and/or consumed only in the Khabarovsk Territory, the Sakhalin Region, and the Sakha (Yakutia) Republic.

Remoteness of the producing areas from the consuming centers and several other reasons prevented the emergence of a solid oil and gas transportation system in the RFE (Fig. 1(214041 bytes). On the other hand, the underdeveloped transport system restrains oil and gas production (especially in Yakutia) because it is limited by a lack of local markets for hydrocarbons.

With the poor oil and gas pipeline network, a vital role in RFE logistics is played by rail and sea transport. Remote areas (the Sakhalin, Magadan, and Kamchatka regions) are supplied with oil products exclusively by sea-via the Maritime Territory. As a result, reliability of oil product supplies greatly depends on efficiency of the sea transport and seaport facilities.

Oil and gas pipelines in Sakhalin are operated by the Administration for Oil & Gas Trunklines, headquartered in Okha, and subordinate to the regional petroleum company, Sakhalinmorneftegaz.

Gas trunklines in Yakutia are run by Yakutgazprom, based in Yakutsk and under the national oil and gas company, Sakhaneftegaz.

Oil product pipelines are operated by regional distribution companies that are also in charge of managing local tank farms. All regional distributors, except Sakhalinnefteprodukt, which joined the vertically integrated Siberian & Far East Oil Co. (Sidanco) in May 1994, belong to the state holding enterprise Rosneft.

CRUDE OIL

The oil infrastructure of the RFE is peculiar in that all oil-refining capacity is located in the Khabarovsk Territory. This determines the principal transportation routes of crude oil in the RFE.

Most crude moves from West Siberia with the remainder coming from the Sakhalin Region.

The only existing oil trunkline, Okha to Komsomolsk-on-Amur, was built to deliver oil from Sakhalin Island to the Komsomolsk refinery. The length of this twin pipeline is 624 km (387.5 miles).

The first line (325 mm OD; out of operation today) was commissioned in 1962. The second line (529 mm OD) was put into operation in 1970 (Table 1(18620 bytes).

The pipeline starts from Okha and Sabo and goes to Komsomolsk-on-Amur. Working pressure is 5.5 MPa; throughput capacity, 3.5 million metric tons per year (mty).

In addition to the existing pipeline system, rail transport is used to deliver (,rude oil to the refineries in Komsomolsk-on-Amur and Khabarovsk.

The Khabarovsk refinery is fed only by crude oil from West Siberia, whereas the Komsomolsk refinery uses both West Siberian and Sakhalin crudes. West Siberian crude is delivered first to Irkutsk through Pipeline, then rail moves it from the Meget railway station to the refinery in the Khabarovsk Territory.

The length of the railway from Meget to the Khabarovsk refinery is 2,416 km; to the Komsomolsk refinery, 2,760 km. Small Volumes of crude (about 0.5 million mty) are delivered to the Khabarovsk refinery from the Kaimonovo railroad station in the Irkutsk Region (3,100 km away).

As for crude-oil export infrastructure, the only existing export outlet for Sakhalin crudes lies in the northern part of the island - at the port of Moskalvo which, in addition to three bulk cargo terminals, has an oil pier capable of receiving small tankers of up to 5,000 dwt with a maximum draught of 5 in.

There are no storage tank farms there, and crude oil is pumped into tankers directly from a pipeline connected to the neighboring Nekrasovo field. Larger oil tankers, which cannot approach the shallow-water pier, may be loaded by shuttle light tankers.

The port of Moskalvo is open for navigation for only 5 months a year, usually from the end of May until the end of October.

OIL PRODUCTS

The logistics of refined products in the Russian Far East are specific in that their insufficient indigenous production concentrates in the Khabarovsk Territory with the oil product deficit being covered by import supplies (mainly from East Siberia).

As mentioned previously, due to the poor infrastructure, the Sakhalin, Magadan, and Kamchatka regions are supplied with products through the Maritime Territory by means of sea transport.

The bulk of oil products going to these RFE areas is produced in the Khabarovsk Territory. Yakutia and the Amur Region are predominantly supplied with oil products from East Siberia.

Oil products are shipped to the Sakhalin, Kamchatka, and Magadan regions for export through seaports of Nakhodka and Vladivostok in the Maritime Territory.

Available product transshipment capacity of Nakhodka is about 5 million mty, including 3.8 million mty for light products. The respective capacities in Vladivostok are 2.8 million mty and 1.6 million mty.

At present, debottlenecking of the Vladivostok and Nakhodka ports is being considered and is discussed later.

Refined products are delivered to Sakhalin through the ports of Korsakov, Poronaisk, and Moskalvo. Then they are transported by road to tank farms and subsequently to final users.

The Kamchatka region receives oil products from the Maritime Territory bv sea through the port of Petropavlovsk-Kamchatsky (about 90% of the total product deliveries). Small-tonnage tankers take oil products to other Kamchatka ports from which they move by truck to tank farms.

The Magadan region receives oil products mainly via the ports of Magadan, Anadyr, Porvidenia Bay, Schmidt Cape, and Pevek.

As for the Magadan port, diesel fuel, gasoline, and kerosine move from there through a twin product pipeline Magadan to Palatka-Atka which supports road traffic on the Kolyma highway and provides fuel for local aircraft.

The product line enables the region substantially to reduce product transportation cost and improve the reliability of supplies. The pipeline is 202 km long, 219 mm OD, and has throughput capacity of 0.4 million mty.

Additionally, road transport brings a part of required oil products from the ports to local tank farms.

Along with the product pipeline Magadan to Palatka-Atka, the RFE has small product lines supplying aircraft with jet fuel.

Thus, a 40-km product line connects Petropavlovsk-Kamchatsky and the nearby Yelizovo airport. Another product line connects Khabarovsk with the local airport.

NATURAL GAS

Current use of natural gas is generally local. Only two of the RFE's seven administrative areas produce gas - Khabarovsk Territory and Yakutia. The gas supplies are in turn consumed only in the Sakhalin Region, though other areas need them as well.

Remoteness of the producing areas from the consuming centers and other reasons prevented the emergence of a common gas transportation system in the RFE.

On the other hand, the underdeveloped transport system restrains gas production (especially in Yakutia), as it is limited by a lack of local market for gaseous hydrocarbons.

The existing gas mains are relatively short and cover only a small part of the RFE territory. The interregional gas flows are limited to gas deliveries from Sakhalin to the Khabarovsk Territory.

Natural gas has been used in the northern part of the island (at Okha power plant) since 1963 when the gas pipeline Tungor-Okha (26 km) was put in operation. Later, gas supplies to Okha were built up as a result of commissioning new lines between Sabo and Tungor (1966) and Kydylani and Sabo (1982).

Consumers in the Nogliki District of Sakhalin use associated gas from the Dagi field which is delivered through a gas pipeline built in 1976 (Table 2(28718 bytes).

Natural gas destined for the mainland is collected at the Kydylani and Dagi areas and moves by pipeline to the Mongi field which is connected by a gas trunkline with Komsomolsk-on-Amur.

The gas pipeline route coincides with the route of the oil pipeline Okha-Komsomolsk except its Sakhalin section. The 445 km, 720-mm OD trunkline was commissioned in 1987.

Its current annual throughput is slightly more than I bcm of natural gas. The pipeline has no compressor stations and operates with the available formation pressure (5.4 MPa).

The original project, however, envisioned installation of compressor stations to support working pressure at 7.4 MPa, which would result in throughput of 4.5 bcmy.

Gas production at the Ust-Vilyuiskoye field in the central Yakutia started in 1968. In the same year, the first gas pipeline Tas to Tumus-Yakutsk (278 km) was completed with a later (1969) extension to the town of Pokrovsk.

In the mid-1970s, with depletion of gas reserves at the Ust-Vilyuiskoye field, production was initiated at the Tolon-Mastakhskoye and Sredne-Vilyuiskoye fields, and a gas line Mastakh to Berge to Yakutsk (370 km) was built to be later extended to the settlement of Kysyl-Syr (88 km).

Since 1985, the town of Mirnyy has received gas from the Sredne-Botuobinskoye field through the gas line Tas-Yurakh to Mirnyy (172 km). It should be noted that Yakutian gas lines have no compressor stations and work on formation pressure.

FUTURE DEVELOPMENTS

The absence of adequate transportation infrastructure is the main impediment to further development of the region's hydrocarbon sector. Not surprisingly, realizations of all the major oil and gas projects in the RFE are tightly linked with and heavily depend upon construction of new long-distance trunklines (Fig. 2).

CRUDE OIL

The existing oil pipeline network will be extended with development of oil and condensate fields off northeastern Sakhalin.

Thus, gathering and delivering crude oil and gas condensate from the offshore fields earmarked for commercial development within the most advanced Sakhalin-2 project (Piltun-Astokhskoye and Lunskoye) and the Sakhalin-1 project (Odoptu, Chaivo, and Arkutun-Dagi) will require the construction of a network of subsea and coastal pipelines which will feed onshore production facilities at Katangli and Val.

Each of the projects envisions an oil trunkline laid southward to an export terminal at Prigorodnoye (near the port of Korsakov). Besides, in the case of the Sakhalin-1 project, which will also provide oil (and gas) for domestic market, an extension of the existing Sakhalin/mainland pipeline system may be needed.

In particular, throughput capacity of the Okha to Komsomolsk-on-Amur Pipeline is to be increased to 7 million mty and a new 260 km, 529-mm OD oil pipeline is planned to connect Komsomolsk-on-Amur and Khabarovsk (Table 3(31564 bytes).

As far as Yakutia is concerned, after 2000, an oil pipeline may possibly be built in Yakutia to transport oil from the Sredne-Botuobinskoye field via Verkhnechonsk (Verkhnechonskoye oil field) to the Kaimonovo railroad station (the Irkutsk Region).

Besides, Verkhnechonsk may be crossed bv another, larger pipeline which will connect the Talakanskoye oil and gas field with the Angarsk refinery (near Irkutsk).

In turn, the Talakanskoye field is also considered (for two different projects) as a source of crude oil for a small refinery at the town of Lensk, some 300 km north of the field.

In addition, the refinery now under construction at Lensk may receive its feedstock via an oil pipeline to be laid from the Sredne-Botuobinskoye field.

The largest project, which can substantially reshape the existing oil-transportation system of the RFE, envisions the construction of an ambitious 20 million mty crude-export pipeline from Angarsk (East Siberia) to Tikhookeansky, the site of the region's biggest naval fuel terminal about 70 km from the port of Nakhodka (Maritime Territory).

The planned 4,750-km line, which will run along the Trans-Siberian railroad, will be fed by an existing trunkline carrying West Siberian oil to the Angarsk refinery.

According to a 2-year feasibility study completed last summer, the proposed pipeline will take about 5 years to build and cost approximately $5 billion. The project is promoted by a group of major Russian oil companies (Sidanko, Yukos, Rusia Petroleum and East Siberian) and was recently backed by Russia's Security Council.

OIL PRODUCTS

Before 2000, the existing product pipeline Magadan-Palatka-Atka is to be extended along the Kolyma motor road to the town of Susuman.

Separately, it has been suggested that the seaports of Nakhodka and Vladivostok be used exclusively for oil-product exports and that domestic supplies (to the Sakhalin, Kamchatka, and Magadan regions) be shipped through the Vanino seaport located southeast of Komsomolsk-on-Amur.

This proposal would require construction of an oil-product pipeline from Komsomolsk to the seacoast and an oil terminal in Vanino with a capacity of 4-5 million mty. This change in product transportation routes would shorten by around 1,500 km the delivery distance of products from the Komsomolsk refinery.

NATURAL GAS

Future development of the RFE gas-pipeline system hinges on further development of inland gas use and on implementation of major international projects for tapping the resources of Yakutia and Sakhalin.

The most advanced is a relatively small project in Western Yakutia which envisions extension of the existing gas line from the town of Mirnyy to diamond-mining centers Aikhal and Udachnyy. Construction of the new 530 km, 529-mm OD pipeline is now under way with completion set bv 2000 (Table 4(28803 bytes).

New pipeline projects in Sakhalin include the two previously mentioned production-sharing schemes being developed in tandem by the Sakhalin Energy Investment Co. (Sakhalin-2) and Sodeco/Exxon (Sakhalin-1).

Each of these projects envisions the laying of more than 600 km of trunkline to Prigorodnoye (near Korsakov) where a 6 million mty LNG plant is to be constructed, in each case, after 2000.

The Sakhalin-2 project, which is in a more advanced planning stage, aims at first gas flow in 2001 and first LNG shipment by the end of 2002.

In turn, the Sakhalin-1 project, which will provide up to 5.5 bcmy for domestic market (via the existing Okha to Komsomolsk gas line) and 13.7 bcmy for export (via the projected Val-Prigorodnoye trunkline), is expected to start its gas deliveries 2 years later.

Although at present these projects are planned as separate ventures, by 2015 their possible combined development can increase aggregate deliveries of natural gas to the Khabarovsk Territory to 8.5 bcmy and those of LNG to 9 million mty.

No doubt any of these projects, which until recently were suspended by the lack of clear-cut production-sharing legislation, will be difficult to accomplish due to numerous (technical, economic, and political) problems. Not surprisingly, less technically sophisticated alternative schemes are still considered by Russian engineers.

Thus, a plausible alternative to the LNG plans could be the construction of an export pipeline along the route Lunskoye to Komsomolsk-on-Amur to Khabarovsk to Dalnerechensk to Russia's state border with North Korea. The length of the pipeline up to the state border could be about 1,700 km x 1,020 mm OD with working pressure of 7.4 MPa and throughput capacity of 12 bcmy.

It is noteworthy that in 1991 a concept of a large-scale, export-oriented development of the Yakutian and Sakhalin gas was worked out in the then U.S.S.R. (the Vostok project).

This scheme envisioned the construction of a vast pipeline system from western and central Yakutia, and from Sakhalin, to the Amur Region, the Khabarovsk and Maritime Territories, North Korea, South Korea, and Japan.

The projected pipeline network was to be 6,735 km long with annual throughput of various sections to vary from 25 bcm to 16 bcm and 1,420 to 1,020 mm OD.

This pipeline system was expected fully to satisfy domestic gas requirements and to facilitate export of up to 20 bcmy of gas by 2005. Lack of internal financial resources, however, and apathy of potential foreign investors had indefinitely shelved this ambitious project.

Currently, a smaller gas-export scheme (dubbed Sakhagas) is being considered by a consortium of South Korean and Russian companies. Unlike the Vostok project, it envisions exports of up to 15 bcmy of only Yakutian gas and exclusively to South Korea.

Although a joint feasibility study is incomplete, some Russian experts favor combined development of Yakutian gas resources with explored gas potential of the nearby Irkutsk Region and Krasnoyarsk Territory.

This would mean connecting gas fields of the western Yakutia by trunklines going south (with the Dulisminskoye, Yaraktinskoye, Markovskoye, and Kovyktinskoye fields in the Irkutsk Region) and west (with the Baikit oil and gas region of the Krasnoyarsk Territory).

In particular, the Siberian and Far East Oil Co. (Sidanco), which masterminds exporting up to 15 bcmy of gas from the giant Kovyktinskoye field (with about 900 bcm of explored reserves) to the northeastern China (and, perhaps, further to South Korea and Japan), also appraises a pipeline linkage between this and Yakutia's fields which would facilitate both the Sakhagas and Sidanco's projects.

IMPLICATIONS

At present, Russia's Pacific outpost is able to cover less than one-fifth of its crude-oil requirements and about two-fifths of its total oil-product demand with the remaining liquid fuels having to be imported from West and East Siberia.

It is noteworthy that two of every three eastbound railway cars which travel thousands of miles, from Siberia to the RFE, are loaded with badly needed fuel.

This is a wasteful, noneconomic solution to the region's energy problems which was only possible under the former system of non-market distribution and all-embracing Moscow-centric political control.

According to a recent study of the RFE's hydrocarbon sector, however, under the most probable circumstances (base case), current heavy dependence of the region upon outside supplies of crude oil (79% in 1993) is likely to decrease to 37% by 2000 and decline further to 11% by 2010.

In this case, the RFE net import of crude oil will shrink from 123,000 b/d in 1993 to less than 80,000 b/d in 2000 and to only 30,000 b/d in 2010.

The region's projected deficit in main oil products (excluding lube oils, bitumen, and LPG) will decrease from 219,400 b/d in 1993 to some 200,000 b/d in 2000 and to less than 160,000 in 2010.

As for natural gas, by 2000 the region will have a sizable and sustainable exportable surplus of 950 MMscfd which will be further developed beyond 2005, to 1.4 bscfd by 2010 (Table 5 (31776 bytes).

All in all, while emerging as a major natural gas exporter, the RFE will overall remain dependent on import of crude oil and oil products.

It does not mean, however, that no oil will actually be available for export from the region. Most likely, some of the region's requirements in crude and products will still be satisfied by supplies from West and East Siberia whereas some RFE oil will be acquired by foreign investors in compensation for their participation in upstream and downstream projects.

This can result in the region's gross exports of up to 70,000 b/d of crude and 20,000 b/d of products by 2000 and up to 140,000 b/d of crude and 50,000 b/d by 2010.

Still the RFE energy future and, first of all, implementation of its export-oriented plans of tapping the region's gas potential, greatly depend upon participation of interested foreign investors.

Consequently, the foreign trade component of the RFE's fuel balances is extremely sensitive to other countries' involvement in the region's energy resources development. Only close cooperation with other countries of the Pacific Rim will bring about exports sufficiently high to influence the existing Asia-Pacific market.

Japan, the U.S., and South Korea are now key players, but the Peoples Republic of China, Taiwan, Australia, and Canada could have important roles to play in developing these resources and/or providing market outlets.

Such cooperation seems unlikely, however, without radical improvement of the region's investment climate which has been highly destabilized by the nationwide economic chaos and the long federal/regional dispute over ownership and management of the RFE's hydrocarbon resources.

At the same time, the troubled tone of negotiations between Moscow and independent-minded Sakhalin and Yakutia (the Republic of Sakha), on the one hand, and between those same regional administrations and potential foreign investors, on the other, clearly reflects the current status of the RFE's energy problems and prompts their possible solutions.

And it would be safe to assume that the region's political and economic choice between fairly distant and rather poor relatives in Russia and much closer and certainly richer neighbors in the Pacific will depend upon a clear answer to the very important question: "Who will provide the Russian Far East with the missing oil supplies?"

The political dissolution of the former U.S.S.R. (as well as of the Russian Federation itself), dwindling oil supplies from Siberia, and energy price decontrol definitely favor the RFE's "Pacific choice."

Any resulting economic intimacy between Russia's Pacific outpost and its developed neighbors of the Pacific Rim will inevitably embed the RFE into the Pacific energy flows matrix, with more natural gas (and hard coal) flowing from Yakutia and Sakhalin and, in turn, some crude or products being imported to supplement the insufficient indigenous production.

If the Russian Far East dares (or is compelled) to cut the umbilical cord of its oil dependence on Moscow and throws wide its doors to foreign investment, this will surely facilitate not only economic but also political solutions to the region's energy security problems.

A virtually unavoidable U.S.-Japanese-Korean rivalry over their influence on an independent RFE will offer the region wider choices of concerned and well off benefactors.

Now that the long awaited Sakhalin developments are actually regarded as a litmus test for Russia's real interest in foreign investments into its ailing hydrocarbon sector (like Tengiz for Kazakhstan) and that the central Russian authorities are evidently determined to demonstrate their hospitality towards foreign companies, the slated export-oriented projects in the RFE are likely to go ahead.