Publication: Eurasia Daily Monitor Volume: 4 Issue: 5

As Transneft, Russia’s crude oil pipeline monopoly, rushes to build the Eastern Siberia-Pacific Ocean pipeline, Moscow has introduced additional economic incentives for oil companies to boost crude output and develop new deposits in eastern Siberia.

Now Russia pumps a mere one million tons of crude per annum in eastern Siberia, but Moscow aims at raising oil output there up to 45 million tons a year by 2015 in an apparent bid to cater to energy-hungry markets in the Asia-Pacific region. In order to achieve high growth rates of oil production in eastern Siberia, the government has come up with some economic carrots.

Notably, Moscow is now offering preferential tax treatment for those oil companies willing to venture into the eastern Siberian wilderness. From January 1, 2007, the Russian government decided not to levy a natural resource extraction tax on any eastern Siberian oil deposits producing less than 25 million tons of crude. The tax breaks could last as long as 15 years (Interfax, January 2).

Russia needs increased eastern Siberian oil production to achieve its ambitious export goals. Russian experts have estimated that the country’s total crude exports to the Asia-Pacific region could reach 140 million tons a year by 2030. Oil supplies are estimated to amount to 44 million tons a year by 2010. China is expected to consume nearly three-quarters of the crude destined for the Asia-Pacific region: 32 million tons a year by 2010 and 90 million by 2030.

But Russia’s eastern Siberian regions still lack pipelines and other facilities to transport sizable amounts of oil. Therefore, Transneft has been seen as rushing to build a major project, the Eastern Siberia-Pacific Ocean (ESPO) pipeline. This rate is expected to funnel up to 80 million metric tons a year (1.6 million barrels per day) from Taishet in Irkutsk region to Primor region, of which some 30 million tons could be delivered to China eventually.

By the beginning of January 2007, Transneft had built 530 kilometers of the ESPO pipeline, Transneft’s subsidiary, the ESPO Project Management Center, said in a statement. The construction is being done at the Taishet-Ust-Kut and Tynda-Skovorodino sections, according to the statement. Apart from the actual pipeline construction, ongoing infrastructure development would allow faster work in 2007, Anatoly Bezverkhov, CEO of the ESPO Project Management Center, was quoted as saying in the statement.

Transneft plans to build nearly 1,250 kilometers in 2007, and the company plans to spend up to $1.5 billion to finance the construction this year, according to Transneft. The first stage of the pipeline’s construction is expected to be completed by the end of 2008, while its cost was originally estimated at $11.5 billion. The ESPO pipeline would be managed by Vostoknefteprovod.

However, adding to Transneft’s financial burden, Russian President Vladimir Putin has ordered the company to build the pipeline away form the shores of Lake Baikal to protect the unique ecosystem. The altered route would include three new sections: Ust-Kut-Talakan deposit, Tynda-Aldan, and Talakan deposit-Aldan.

The construction of the section, which would connect Ust-Kut in the Irkutsk Region and the Talakan deposit in East Siberia along the left bank of the Lena River, is expected to begin in the first quarter of 2007. The 540-kilometer (336 mile) route was approved in November 2006. Last December, Russian environmental regulators approved the 418-kilometer (260 mile) Tynda-Aldan section.

As the pipeline route was moved away from Lake Baikal, its route became longer by some 580 kilometers to total 2,800 kilometers. Shifting the ESPO route to the north would require at least $1 billion in extra spending, although the pipeline would be built closer to the oil fields.

Therefore, Transneft now needs more money to fund the ambitious and capital-intensive ESPO project. Beginning January 1, 2007, Transneft raised its tariffs by an average of 8.7% and nearly half of the price hike was directly caused by growing ESPO costs. Without the need to pay interest on loans used to fund the construction of the ESPO, Transneft would have raised its tariffs by only 5 percent this year (Interfax, January 1).

Last year, Transneft’s earnings were estimated at some 180 billion rubles or nearly $7 billion. In other words, the pipeline monopoly raised its tariffs by more than $600 million this year as Transneft aimed to earn some extra cash to fund its ongoing projects, notably the ESPO.

In the meantime, experts warn that most of Transneft’s pipelines, built several decades ago, have become worn out and unsafe. The problem was highlighted by increasing numbers of pipeline leaks and other accidents. Subsequently, Russia’s state-controlled pipeline monopoly Transneft is set to spend billions of dollars not only to fund ambitious new projects like the ESPO, but also to repair and upgrade the existing pipelines.