Two events coincided symbolically yesterday: Russia warned Europe of possible oil supply troubles due to a dispute with Ukraine, and the government commissioned a new oil pipeline to China. Prime Minister Vladimir Putin referred to the project as "geopolitical" in nature.
Transneft is unlikely to have intended the announcement of its transit tariffs dispute with Ukraine on exactly the same day Vladimir Putin was to officially commission the oil terminal in the bay of Kozmino – the end point of the Eastern Siberia-Pacific Ocean (ESPO) pipeline. However, Europeans remember that when it started the construction on the ESPO three years ago, Russia wanted to 'get the better of Europe,' as former Transneft President Semyon Vainshtok once said.
It turned out rather difficult to redirect 80 million tons of oil from Europe to the East. The ESPO's commissioning date was put off several times, with the project becoming more and more expensive. When commissioning the pipeline's first stage, the Russian prime minister estimated it at 420 billion roubles, or $14.5 billion, together with the port. In 2004, it was estimated to be two times cheaper – at $6.6 billion.
Diversifying Russia's oil export is a strategic project. China is entering the era of a resources shortfall. Meanwhile, resource-rich Eastern Siberia is within reach, just across the border. But until now, there were no pipelines and Russia could not start a full-scale resources trade with China: oil can be delivered by railway, but it is impossible for gas. In this sense, the ESPO is a "window to the East."
The problem is that the government is ready to sacrifice much for the sake of geopolitics – the state company, Transneft, will supply oil to China at a loss. The pipeline's first section of 2,694 kilometers runs from Tayshet to Skovorodino, from which the oil will be delivered by railway to the port of Kozmino, almost 2,000 kilometers away, to be loaded on tankers. The pipeline will reach the port only in 2012. The Federal Tariff Service has set the tariff for the ESPO at 1,598 roubles per ton. Transneft's President, Nikolai Tokarev, has said earlier that transporting oil through the route costs $130 or about 3,890 roubles per 1 ton. Denis Borisov, an analyst for the Bank of Moscow, has calculated that the company's losses can reach 29.7 to 30 billion roubles by 2010, or about 10% of its revenues.
Besides, the ESPO's first stage, with a capacity for 30 million tons, will have to be filled with oil from West Siberian fields. A system is being constructed to connect Western Siberia to Chinese consumers. However, it is uneconomic, and the oil will have to be supplied regardless since the Chinese have already paid for it: Transneft and Rosneft received a $25 billion loan from the China Development Bank in February in exchange for an annual supply of 15 million tons of oil for the next 20 years.
The government has just adopted its Energy Strategy to the Year 2030, stipulating that the Eastern market's share in Russia's oil export will grow from the current 6% to 20% or 25% and in gas export – from zero to 20%. Russia's Federal Customs Service has reported that the country exported 221.64 million tons of oil and 174.3 billion cubic meters of gas in 2008. According to the Energy Strategy, Russia will annually export 329 million tons of oil and 349 to 368 billion cubic meters of gas by 2030, with the East accounting for 82 million tons and 73.5 billion cubic meters respectively.
Hopefully, Russia won't conquer the Chinese market 'at any cost.' Gas price negotiations with China are yet to come.