Russian pipeline to Asia may threaten oil exports to Europe

Russian Prime Minister Vladimir Putin on 28 December officially launched the East-Siberia - Pacific Ocean (ESPO) oil pipeline and the first shipment of ESPO oil, but ESPO may threaten oil supplies to Europe if Russia has a problem with filling the new pipeline to Asia, a leading Russian energy analyst told New Europe. “The idea is very good if we will produce more oil in East Siberia because East Siberia is close to Asia,” Konstantin Simonov, director of the independent National Energy Security Fund in Moscow, said on 28 December. “But during the next several years we will take oil from West Siberia and West Siberia is the main export base for our export to Europe and we will take this oil and put it to Asian markets. And the question is: Is it good for Russian business because there will be some decline of our exports to the European Union,” Simonov said.

The oil market is much more portable than gas, and end users can secure alternative supply relatively quickly. “It’s not a good strategy because we see serious competition on European oil markets and if we will go away from European market there will be other countries which want to sell oil to European consumers because the price is very comfortable,” Simonov said.

“Europe is also very fond of this idea of diversification this is why this is Russia’s answer to diversification of oil supply and in the future we want to speak about diversification of gas,” the Russian analyst said. “But some times diversification cannot be a clear and final answer to our problems,” he added.

Putin said on 28 December that oil producers were lining up to pump their crude through the strategic oil pipeline. “We are moving from excessive dependence on (oil) transiting countries,” Putin said.

The Russian premier added that the pipeline would also enable Russia to take up some European oil exports in case there is an unfavorable economic situation or if economic cooperation is politicized. Earlier in the day, he accused transit nations of undermining Russia’s image as an energy supplier, prompting Moscow to seek alternative pipeline routes.

The ESPO pipeline’s first leg is designed to pump 30 million tons of Siberian oil to China, Japan, and Korea. The first stage of the ESPO pipeline will move oil from the Siberian town of Taishet to Skovorodino, from which a spur will run to the Chinese border, where half of the oil is projected to go by 2012. From Skovorodino, crude will be trans-shipped by rail for further delivery to Kozmino. The second stage, to be ready in four years, will extend the pipeline from Skovorodino to Kozmino, and is expected to eventually raise the pipeline’s annual capacity to 80 million tons. Russia, which so far accounts for 5-6% of the Asia-Pacific energy market, has yet much work to do in that direction, Putin said.

Russia is comfortable with oil at its current price near $79 per barrel, making a windfall of extra tax revenue. “Yes, it is a comfortable price, but I think we can earn more money if we continue to sell the same amount of oil to European consumers but sometimes I see that part of our political elite they want to sell oil to China and they don’t want to think about economic profit of such decisions,” Simonov said.

Russia has long been seeking to diversify its oil and gas exports away from the West. “When Europe is speaking about gas-togas competition, no need for Russian pipeline gas, what will be the reaction of Russia?” Simonov asked. “We will speak about selling gas to China. But what will be the result of such policy after for example five years? No gas for Europe, no money for Russia because China will not pay the same price as European consumers,” he said.

The Russian analyst noted that Russian gas monopoly Gazprom benefited from the low temperatures in Russia and Europe in December. “That is why the level of production of Gazprom is very high so there are no such problems as we saw in the beginning of 2009 and we see an increase of our exports to Europe and we hope to see the end of economic crisis in Europe and that means that we will see the increase of consumption of gas in the EU,” Simonov said.

Figures in the first 11 months of 2009 showed that the decline of consumption will be 8-9% in Europe, he said. “This is a high and very dangerous figure for Gazprom but in 2010 the level of consumption will be higher than in 2009 and it will be more looks like the level of consumption in 2008,” he said. “2009 was a unique year. The decrease of European gas consumption is not a long-term trend and we must remember of problems in European production so there will be a decline in European gas upstream also so we see that import of gas will be increased in Europe,” he said.

Simonov also noted that another Ukraine-Russia gas war would be a serious mistake. He said that the issue may be probably linked to the presidential elections in Ukraine. Voting for the 1st round will take place on 17 January and the opinion polls currently show that incumbent President Viktor Yushchenko has little chance of making the second round of voting.

Gazprom announced on 22 December it would grant Ukraine’s Naftogaz a few extra days in January to pay its December natural gas import bill because of the New Year and Christmas break. An agreement was reached to postpone the payment date for December supplies from January 7 to January 11. “No gas crisis until the 11 of January,” Simonov said. “What will happen between the 11th of January and the 17th of January – the election Sunday in Ukraine - we don’t know about it ... What will be the policy of Yushchenko. Naftogaz has no money and if Yushchenko will give an order to the central bank not to give money to Naftogaz there will be no payment so it means Russia can stop the export of gas to Europe.”

But he cautioned Russia not to take the bait. “It will be a serious mistake because we saw the impact of the last gas war. A lot of European politicians begun to speak that Russia is a dangerous country,” Simonov said. “Gazprom doesn’t want another gas war because it will also seriously damage Russia’s and Gazprom’s image as a reliable supplier of European gas. This is why I think from Russian side there will be no serious politician who wants to begin the next gas war with Ukraine. In any case Yushchenko is an unpredictable guy and can do anything and try to provoke Russia, but we must be more accurate and I hope that this year there will be no gas war because it will be very difficult to explain that Russia still wants to sell gas to Europe.”

By Kostis Geropoulos

Source: New Europe, January 3-10, 2010