Transneft Formally Launches First Leg of ESPO Pipeline

An Opening to the East

After years of diplomatic negotiations and billions-of-dollars'-worth of construction, Russia’s dream of an eastern oil export outlet is finally a reality. The Eastern Siberia-Pacific Ocean (ESPO) oil pipeline, born of strategic government policy decisions to diversify Russia’s oil export options and target consumers in China and the Asia-Pacific market, is now operational, with the first cargo of oil loaded at the port of Kozmino on Russia’s Pacific coast. Senior Russian government officials gathered in the Far East of the country to celebrate the occasion of the pipeline's launch and the loading of the first 100,000-tonne oil cargo.

The launch of ESPO—actually the first leg, running from Taishet in Eastern Siberia to Skovorodino near the Chinese border, from where oil is being sent by rail to Kozmino until the second stretch of the pipeline is completed—is a monumental achievement for Transneft, the state-run Russian oil pipeline operator that was tasked with carrying out the project. After several years of wavering by the Russian government on whether to build an oil pipeline to China or to the Pacific Coast—where Russia variously fell under the influence of heavy lobbying by both China and Japan—the government made the strategic decision to combine the competing pipeline proposals into one massive project. Hence, the 4,000-km ESPO pipeline project was born, with Transneft left to turn the multi-billion-dollar idea into reality.

Over the past few years, the Russian pipeline operator has worked to fulfill the government’s vision, overcoming both environmental objections to the pipeline (then-president Vladimir Putin famously conceded to environmentalists in agreeing to divert the route of the pipeline around Lake Baikal, albeit refusing to cancel the project altogether) and financial hurdles. The launch of the 600,000-b/d-capacity Taishet-Skovorodino section of ESPO is one year later than initially envisioned, and Transneft (together with Rosneft) was forced to turn to China for financing help in a US$25-billion "loans-for-oil" deal (see Related Articles). Nevertheless, the Russian pipeline firm has now completed its mission (or at least Phase I of it) with the commissioning of ESPO and the start of oil exports from the Kozmino terminal.

Outlook and Implications

Russian oil firms are starting to line up cargoes for loading and export via Kozmino, and the launch of the pipeline—together with the cancellation of export tariffs on crude oil produced in Eastern Siberia—should provide incentives for additional investment in exploration and production (E&P) from that frontier oil province. This, in turn, should help push Transneft along in its construction of Phase II of ESPO, which will connect the first stretch from Skovorodino to Kozmino, increasing the overall transport capacity of the 2,757-km pipeline to 1.6 million b/d. Construction of a 300,000-b/d-capacity cross-border pipeline, running from Skovorodino to Daqing, China, is expected to be completed by the end of next year as well.

Indeed, despite having to rely on China’s financial assistance under the "loans-for-oil" deal, Transneft and the Russian government have been careful to co-ordinate the launch of the first leg of ESPO with the start of oil exports from Kozmino, demonstrating that Russia can deliver oil by rail to the Pacific Coast and will not be solely dependent on China as an export market for Eastern Siberian crude. The idea for ESPO was always to diversify Russia’s oil export options and serve as the catalyst for development of Eastern Siberia’s untapped oil reserves, not merely to supply oil to China. Thus, by co-ordinating the start of oil shipments from Kozmino with the launch of the first leg of ESPO, Transneft and the Russian government are keeping their focus on the strategic "diversification of markets" rationale for the pipeline, rather than treating the pipeline simply as an instrument of growing Russian-Sino co-operation in the energy sector.

Related Articles

• Russia: 1 December 2009: TNK-BP Eyes Mid-January Start to Oil Shipments from Russian Pacific Coast
• Russia - China: 18 November 2009: Rosneft Announces Asian Oil Export Tender as ESPO Nears December Launch
• Russia - China: 24 August 2009: Russia Launches Arctic Oilfield, Targets Chinese Market
• Russia: 21 July 2009: Russian Government Suspends Oil Export Tariffs on Key Eastern Siberian Oilfields
• China: 16 July 2009: PetroChina Prepares Liaoyang Refinery for Russian Oil
• Russia - China: 29 April 2009: Construction of ESPO Spur Pipeline Begins in Skovorodino, Russia
• Russia - China: 21 April 2009; Russia, China Finalise Oil Pipeline and Supply Deals
• Russia: 9 April 2009: Transneft Nears Completion of First Phase of ESPO Oil Pipeline and China Spur
• Russia: 18 February 2009: Russia, China Clinch US$25-bil. Oil-for-Loan Deal
• Russia: 29 October 2008: Russian, Chinese PMs Clinch Key Oil Pipeline Agreement