RUSSIA FACES DELAYS IN FAR EASTERN PIPELINE

The Kremlin apparently viewed the Eastern Siberia Pacific Oil Pipeline (ESPO) as a major vehicle to promote faster growth of Russia’s Far Eastern regions. However, the major energy project appears to be taking longer than expected.

Earlier this month, the first completed 238-kilometer section of the ESPO was connected to the existing pipeline network of Transneft. Subsequently, on April 4 Russia’s Industry and Energy Minister Viktor Khristenko reiterated pledges to finish the first stage of the ESPO by the fourth quarter of 2009. On April 9, however, RBK Daily quoted industry sources as suggesting that realistically the first stage of the ESPO may be completed no earlier than mid-2010 (RBK Daily, April 9).

The talk of the ESPO delays first surfaced last fall. In November 2007 Transneft first suggested delaying the launch of ESPO’s first stage. Cost estimates of the project also went up from $11.2 billion in late 2006 to $12.5 billion in August 2007. Transneft said that the delay had been caused by extremely harsh natural conditions, as well as the decision to move the pipeline away from Lake Baikal.

During his Far-Eastern tour in February 2008, Russia’s president elect Dmitry Medvedev was told that the ESPO faced significant delays. Nikolai Tokarev, head of Russia’s pipeline monopoly Transneft, told the meeting in Khabarovsk on February 7 that the first stage of the ESPO was unlikely to be completed before the fourth quarter of 2009. Medvedev strongly described the delays as “miserable.”

Apart from construction problems, the ESPO now faces an environmental controversy in the Khabarovsk region. Transneft originally considered two ESPO routes in the Khabarovsk area: the northern route downstream from the town, and the southern route upstream. Although the northern route is shorter, Transneft picked the southern variant. Meanwhile, the Khabarovsk regional government strongly opposes the southern route (Kommersant-Khabarovsk, April 11).

The dispute was accompanied by conflicting signals from the Russian environmental regulators. On April 9 Rosprirodnadzor head Vladimir Kirillov said his agency had not requested Transneft to change the ESPO route. On April 5 Rosprirodnadzor deputy head Oleg Mitvol announced in Khabarovsk that he planned to discuss with Transneft a possible review of the ESPO route in order to protect the Tungussky freshwater deposit. Mitvol made his statements following a meeting with regional governor Viktor Ishayev (Interfax, Rosbalt, April 9). The Khabarovsk regional government’s objections are understood to have the potential of further delaying the ESPO project.

In the meantime, Transneft’s partial reliance on an imported workforce also hardly served to expedite the ESPO project. On April 15 a contract between China Petroleum Pipeline Bureau and ESPO contractors expired, although Chinese workers reportedly failed to build the 170-kilometer Tynda-Aldan section of the ESPO in time by October 25, 2007.

At the same time, the use of an imported workforce caused some domestic opposition. In December 2007 the independent trade union Profsvoboda accused domestic employers of hiring migrant Chinese workers, thus pushing local residents out of their jobs. The union also urged the Russian government to introduce a mandatory limit for the use of migrant workers and ban the use of the government’s funds for hiring foreign personnel.

The ESPO planners were also slow to make a final decision on whether to build an spur to China. Transneft head Tokarev also reportedly sent a formal request to Deputy Prime Minister Sergei Naryshkin, seeking clarity about when the government was going to make a final decision on a link from Skovorodino to China. In the meantime, Industry and Energy Minister Khristenko made it clear that the issue of the offshot to China was part of continuing negotiations over the price of Russian crude supplies to China (Vedomosti, April 11).

In 2005 the state-run Rosneft agreed to supply 353.3 million barrels (48.4 million tons) of oil to China by rail from 2005 to 2010 at a $3 per barrel discount from the Brent price. In November 2007 Rosneft managed to cut the discount down to $2.325 per barrel, but since then the Chinese negotiators have been reluctant to cut the discount any further.

The current plans stipulate construction of a 15-million-ton-per-year port facility at Kazmino and a 15-million-ton-per-year pipeline from Skovorodino to China. Skipping the offshot to China and raising the capacity of Kazmino port facility up to 30 million tons per year may involve additional expenses of up to 27 billion rubles ($1.15 billion) (Vedomosti, April 11).

Incidentally, following the April 14 meeting in Moscow of the Russo-Japanese Intergovernmental Commission on Economic Cooperation, Russian newswires have quoted Japanese government sources as voicing interest in the ESPO. Russia and Japan agreed to continue cooperation on the ESPO project, the source reportedly said (Interfax, April 14).

Therefore, the Russian government negotiators are apparently trying to revive competition between China and Japan. The ESPO discussion at the Russo-Japanese meeting appeared to be a message to warn China that its obduracy in oil price negotiations could undermine the project to build the Skovorodino-China link. Russia’s renewed pipeline game seemed, however, somewhat lacking in substance with the ESPO project now facing increasing delays.