Russia Completing Baltic Pipeline System Construction, Reducing Druzhba Pipeline Flow

Russia is set to start crude oil exports through the Baltic Pipeline System’s second trunkline, BPS-2, with its Ust-Luga maritime terminal at the Russian end of the Baltic Sea. The BPS-1 trunkline is already operating since 2009 with its Primorsk maritime terminal. The oil is shipped on tankers via the Baltic Sea and North Sea to European consumer countries along that route, with Rotterdam as a major final destination.
 
The BPS system enables Russia to reduce oil export volumes through the overland Druzhba pipelines, which run via Belarus and Ukraine toward central Europe; and correspondingly to increase Russian exports through the BPS system and the maritime tanker route. This shift has been ongoing piecemeal since the opening of BPS-1 and Primorsk in 2009. The process can now accelerate somewhat with the launching of BPS-2 and Ust-Luga in March of this year.
 
Russia’s objectives are to reduce its reliance on overland transit countries; to connect directly with West-European countries by the maritime route; to de-value Druzhba pipeline sections in neighbor countries through under-utilization, possibly in preparation for Russian takeover bids; and to have total pipeline capacities available in excess of Russia’s exports, potentially enabling manipulative changes to the export flows and playing off various customers against each other.
 
Those goals are similar to Russia’s policy on natural gas exports to Europe. As he does with respect to gas pipelines, Vladimir Putin personally supervised the construction of BPS-1 and BPS-2 by the oil pipeline monopoly, Transneft, during Putin’s presidency and prime-ministership, respectively. Both trunklines carry oil from Russia’s interior, with some inputs from Kazakhstan, to the two Russian Baltic terminals.
 
The BPS-2 pipeline is designed for a total capacity of 50 million tons annually. BPS-2 is planned to carry 20 million tons in 2012, followed by a 10 million ton capacity increase in 2013 and a further 8 million tons in 2014, for an export capacity of 38 million tons. Another 12 million tons are set aside per year for delivery to SurgutNeftegaz’s giant Kirishi refinery in Leningrad oblast. The BPS-2 trunkline is 1,000 kilometers long (998 exactly, not including the 170 kilometer branchoff to Kirishi). It cost some $4 billion to build from 2009 to date. Oil exports are scheduled to start as trial runs in March and full-fledged from April onward, the volumes already included in Transneft’s export schedule for this year’s second quarter.

Construction of the Ust-Luga maritime terminal was declared completed on February 21 (slightly delayed by technical issues). RosNeftBunker and Gunvor built the terminal with Transneft’s assistance. Gunvor is the oil trading company controlled by Putin’s billionaire friend, Gennady Timchenko. The RosNeftBunker, formerly controlled by state-owned Zarubezhneft, was sold three years ago to Gunvor (https://www.bts2.ru; Interfax, February 17, 21, 23).
 
BPS-1 was built also by Transneft from 2008 to 2011. The trunkline and its maritime terminal, Primorsk, have by now reached their design capacity of 75 million tons annually (Primorsk operated slightly below-capacity at 70 million tons in 2011). BPS-1 and BPS-2 run from Russia’s interior westward to the Belarusian border, turn northward at the Unecha junction to circumvent Belarus, and continue northward to the maritime terminals Primorsk and Ust-Luga, respectively (https://www.transneft.ru; https://www.bts1.ru).
 
The Druzhba pipeline system, dating back to the 1970s, runs westward, from Russia via Belarus and Ukraine into European Union territory. The main trunkline splits from Belarus into three branches: northward to Latvia and Lithuania (shut down by Russia in 2003 and 2006, respectively, as punitive measures); westward to Poland and Germany; and south-westward to Ukraine, Slovakia, Hungary, and the Czech Republic. The commissioning of BPS-1 diverted some oil volumes from the Druzhba pipelines toward Russia’s Baltic terminals. BPS-2 will almost certainly divert additional volumes.
 
In 2011, Russia sold 24.5 million tons of pipeline-delivered oil to Poland, down year-on-year by 15 percent (offset only in part by tanker deliveries to the port of Gdansk). It sold 3.9 million tons of pipeline-delivered oil to the land-locked Czech Republic, down also by 15 percent year-on-year; and 6.2 million tons to Hungary, down by 6 percent year-on-year, according to Transneft’s figures. Deliveries through the Druzhba pipeline to Germany, however, went up by 8.5 percent year-on-year at 19.5 million tons, and to Slovakia up by 15 percent year-on-year to 6 million tons in 2011, according to Transneft’s figures (Interfax, January 23, 2012).
 
In these circumstances, Ukraine and Belarus experienced a net decline in the transit of Russian oil through their pipelines in 2011. These pipelines constitute nationally-owned sections of the Druzhba system, functionally integrated with the latter. Ukraine’s oil pipeline operator, Ukrtransnafta, reported 17.8 million tons of Russian oil in transit to Slovakia, Hungary, and the Czech Republic during 2011, down by 11.6 percent year-on-year (Interfax-Ukraine, January 23, 2012; Kommersant, February 17).
 
Since the oil flow to those same countries passes through Belarus first, Belarus is similarly affected, although the impact is partly offset by the increase in Russian deliveries to Germany. The Belarusian government is concerned about its transit pipeline being de-valued through under-utilization and is looking for possible buyers: “not just Russians,” according to President Alyaksandr Luksahenka and First Deputy Prime Minister Uladzimir Syamashka (Belapan, February 17; Interfax, February 18). The Ukrainian government hopes to provide transit service for Azerbaijani oil to Poland and Slovakia, using the Odessa-Brody pipeline and Druzhba pipeline capacities left un-utilized by Russian oil exporters (Interfax-Ukraine, January 23; PAP, February 5; Kommersant, February 17).