Russians, Chinese eye Arctic oil route

March 22, 2010
Russia's Sovcomflot oil line will undertake a trial shipment of oil to Japan this summer, reported to be the first shipment ever to sail the entire Northern Sea Route from northwest Russia to Asia.

Russia's Sovcomflot oil line will undertake a trial shipment of oil to Japan this summer, reported to be the first shipment ever to sail the entire Northern Sea Route from northwest Russia to Asia.

The decision by Sovcomflot follows earlier plans by China and Russia to begin shipping oil through the Arctic Circle, aiming to decrease sailing time and avoid piracy and terrorism along the main existing routes from Hormuz through the Straits of Malacca.

The Northern Sea route normally is open fewer than 2 months in the late summer when the ice is at its minimum. But opportunities for sailing the route are increasing due to climate changes that are melting ice for longer periods of time.

Sovcomflot trial

The Sovcomflot trial will begin at the Varandey loading terminal in the Barents Sea, 22 km offshore, operated by Lukoil subsidiary Varandey Terminal Co.

Lukoil and ConocoPhillips in 2008 completed construction of the Varandey facility, which includes an onshore tank farm, two 24-km offshore pipelines to a loading structure in 17.5 m of water.

Varandey has the capacity to export up to 240,000 b/d, most of it from the Yuzhno-Khylchuyu field, 100% owned by Naryanmarneftegas (NMNG), a joint venture company established in 2005 of Lukoil (70%) and ConocoPhillips (30%).

Oil from the Yuzhno-Khylchuyu field is processed at a central facility, then transported along a 162-km pipeline to the Varandey terminal where it is loaded into three 500,000 bbl ice-resistant double-hull Arctic Class 6 shuttle tankers, owned by Sovcomflot.

Last year, Lukoil announced plans to build a crude pipeline from its Kharyaginskoye oil field in the northern Russian region of Timan-Pechora to Varandey. At the time, Lukoil said the new line would enable it to maximize the terminal's capacity and avoid using Russia's national pipeline network to export its crude.

China prepared as well

Sovcomflot's announcement coincides with a new analyst report that claims China also is preparing for the Arctic being navigable during summer months.

"China is slowly but steadily recognizing the commercial and strategic opportunities that will arise from an ice-free Arctic," said Linda Jakobson, author of the report funded by the Norwegian government and published by Stockholm International Peace Research Institute (SIPRI).

As China's economy relies on foreign trade—with nearly half of its gross domestic product dependent on shipping—there could be much to gain if the shipping route from Shanghai to Hamburg is shortened by 6,000 km during the summer each year, the report said. "With insurance costs on the traditional route via the Suez Canal having risen more than tenfold due to piracy, the Nordic countries could become China's new gateway to Europe," the SIPRI report said.

However, in June 2009, well ahead of the SIPRI report, Lukoil's international trading arm Litasco and Sinopec's trading firm Unipec Asia Co. signed a framework agreement for the supply of oil. Litasco said the agreement foresees the sale of 3 million tonnes of Russian export blend to be delivered from any Russian port or Yuzhno-Khylchuyu blend oil to be delivered by tankers from Varandey.

According to analyst IHS Global Insight, the total volumes under the supply deal, as well as the limited duration of the contract, are "relatively minor."

However, the analyst notes that the signing of the agreement is important as it signals "the growing profitability" of Russian oil exports to Chinese consumers, even before the East Siberia Pacific Ocean pipeline spur connecting the two countries goes into operation.

The agreement between Lukoil and Sinopec underlines the growing importance of alternative trade lines to China, among them the projected ice-free sea route from northwest Russia to Asia.

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