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Not enough oil for the pipe

Date of publication: 24 December 2019

The production of oil companies lags behind the pace of oil pipeline construction.

The Transneft’s largest export route Eastern Siberia – Pacific Ocean has reached the full capacity of 80 MTPA. Today this is the only route totally filled with crude oil. The supplies of companies for other oil pipelines, such as Zapolyarye – Purpe and Kuyumba – Tayshet, are still way below the planned levels. Yet this situation is seen as inevitable on the market, since too many factors affect the plans of oil and gas sector’s players.

Late in November Transneft brought to the planned capacity the biggest export oil pipeline in the Eastern Siberia – Pacific Ocean pipeline system (ESPO PS). Now the Company will be able to pump 80 MTPA over the Tayshet – Skovorodino (ESPO-1) section, and 50 MTPA over the Skovorodino – Kozmino (ESPO-2) section. The ESPO oil pipeline was built to transport crude oil from the oilfields of Eastern and Western Siberia to the refineries of Russia’s Far East as well as to Asia Pacific markets.

Initially the construction was to be completed by 2030, but in view of the route being in high demand it was decided that the oil pipeline was to be laid much earlier. The oilfields of Eastern Siberia will be the main source of crude for the pipeline. As the Head of the Company Nikolay Tokarev explained, this is the only export route where there is no surplus capacity, since it is in high demand.

Nevertheless, the load of some other routes of Transneft remains way lower than their planned capacity. For instance, the Company had to correct its plans of pumping crude oil over the Zapolyarye – Purpe oil pipeline in 2019 from 16.6 million to 10.0 million tonnes. Transneft explained the cutback of its plans by the fact that some oil companies failed to deliver on their preliminary commitments. It’s noteworthy that problems with filling the oil pipeline Zapolyarye – Purpe, which is part of the Zapolyarye – Purpe – Samotlor system, allowing to pump crude from the new oilfields of Yamalo-Nenets Autonomous Area and the north of Krasnoyarsk Territory to oil refineries and for export (mainly to Asia Pacific markets), arose as early as in the process of construction.  Its delivery capacity is 45 MTPA and the cost is around RUB 211 billion.

Transneft agreed to finance the pipe construction on the security of guaranteed supplies from oil companies. The reserve base for this route is the crude from the Urengoy group of Gazprom oilfields; Suzun, Tagulskoye, Russkoye and Russko-Rechenskoye oilfields of Rosneft, Messoyakhskoye and Vostochno-Messoyakhskoye oilfields of Rosneft and Gazprom Neft JV as well as the Pyakyakhinskoye oilfield of LUKOIL. Yet the said companies had started correcting their crude delivery plans prior to the pipeline commissioning.  Transneft tried to demand penalties for the failure of those high-profile companies to deliver on their commitments to load the Zapolyarye – Purpe pipeline, but to no avail.  For now, the requested amounts for 2020 come to 16 million tonnes.

A similar situation has evolved on the Kuyumba – Tayshet route where crude oil is delivered from the new oilfields of Krasnoyarsk Territory – Kuyumbinskoye (developed by Slavneft) and Urubcheno-Tokhomskoye (developed by Rosneft). The oil pipeline construction is carried out stepwise: at the first stage its capacity amounted to 8.6 MTPA; the second phase anticipates the capacity to reach 15 MTPA. So far the crude transported over the oil pipeline cannot ensure its full-scale operation. As per the requests, it is planned at the level of 6.5 million tonnes in 2019 versus 2.6 million tonnes a year before.

Besides undersupplied crude, Transneft also faces problems with its offtake downstream. Thus, as reported by the Company, a number of Russian oil refineries take a lot less crude, than was planned initially. For example, Komsomolsk Refinery run by Rosneft, which could take in about 8 million tonnes from the system, actually takes only 3 million tonnes right now. For crude to be delivered to this particular refinery, Transneft built a 300-km offshoot from the ESPO, worth RUB 50 billion, which has been ready for being connected since May 2018. Yet Rosneft failed to timely finish a supply oil pipeline from the point of connection to the offshoot from ESPO, and then Transneft had some complaints about the facility. Comprehensive testing of the section led to the monopoly detecting defects; this resulted in delayed commissioning.  Deliveries commenced only in July 2019.

Transneft estimated its losses caused by the pipe downtime at RUB 1.5 billion, but that was a preliminary assessment. In late October the parties agreed to reflect the pipeline company’s losses in the price of crude pumped to Komsomolsk Refinery. In 2020 Transneft expects to deliver up to 6 million tonnes of crude to the refinery, informed First Vice President of the pipeline monopoly Maxim Grishanin. The offshoot will presumably start being exploited to the full of its capacity not sooner than 2021 after Rosneft has completed an essential tank farm in the territory of Komsomolsk Refinery.

Deliveries to Khabarovsk Refinery (owned by Eduard Khudaynatov’s Neftegazholding) are also behind the schedule. The refinery that can take in about 6 million tonnes of crude actually takes not more than 5 million tonnes from Transneft’s pipeline. Yet for now the oil refining capacity in Russia’s Far East cannot fully meet the demand for winter diesel, which causes fuel prices to grow. Deputy Head of FAS Anatoly Golomolzin told Interfax that starting in 2020 a mechanism would supposedly be launched, whereby the logistics coefficient, implying a deduction for refineries supplying winter diesel to the Far East, may apply to deductions from the railway tariff instead.  The deduction amount is to ensure competitive terms of supply to the Far East and to align the terms of fuel supply with other regions of Russia.

Experts point out that similar problems with the filling of new infrastructure projects are almost inevitable, given that oil companies are unable to accurately figure their needs because of the market fluctuations. Thus, now petroleum production in the Russian Federation is restricted by the terms of the OPEC+ deal, whereas prior to that the sanctions imposed on the industry by the West also affected the development of new oilfields. This said, Transneft has to build surplus capacity, proceeding from the maximum amount that can potentially be requested by oil companies, to preclude future buildup of oil pipelines’ capacity if potential supplies exceed those planned.  Furthermore, as noted by analysts, all routes will stabilise within the prescheduled pumped volumes, whereas the losses caused by their underperformance are not critical for Transneft and can be reflected in the tariff.

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