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The petroleum industry in Russia is one of the largest in the world. Russia has the largest reserves, and is the largest exporter, of natural gas. It has the second largest coal reserves, the eighth largest oil reserves, and is the largest producer of oil. It is the third largest energy user.

Russia produced an average of 10.2 million barrels (1,620,000 m3) of oil per day in 2010. It produces 12% of the world's oil and has a same share in global oil exports. In June 2006, Russian crude oil and condensate production reached to the post-Soviet maximum of 9.7 million barrels (1,540,000 m3) per day. Exceeding production in 2000 by 3.2 Mbbl/d (510,000 m3/d). Russian export consists more than 5 Mbbl/d (790,000 m3/d) of oil and nearly 2 Mbbl/d (320,000 m3/d) of refined products, which go mainly to the Europe market. The domestic demand in 2005 was 2.6 Mbbl/d (410,000 m3/d) in averaged. It is also the main transit country for oil from Kazakhstan.

Russia is by far the world's largest natural gas exporter. Most, but not all authorities believe that Russia has the world's largest proven reserves of natural gas. Sources that consider that Russia has by far the largest proven reserves include the US CIA (47.6 trillion cubic meters), the US Energy Information Administration (47.8 tcm), and OPEC (48.7 tcm). However, BP credits Russia with only 31.3 tcm as of 1 January 2014,[9] which would place it in second place, slightly behind Iran (33.1 to 33.8 tcm, depending on the source). In addition to having the world's largest proved reserves of natural gas, according to US Geological Survey estimations, Russia is also likely to have the world's largest volume of still-undiscovered natural gas: a mean probable volume of 6.7 trillion cubic meters. The USGS estimate of Russia's undiscovered oil is 22 billion barrels, second in the world only to those of Iraq.[10]

The Russian oil industry claims to be in need of huge investment.[11] Strong growth in the Russian economy means that local demand for energy of all types (oil, gas, nuclear, coal, hydro, electricity) is continuing to grow.

FIRST REFINERY OF RUSSIAN FEDERATION-MENDELIEV

RUSSIAN BENCHMARKSOF BLACK GOLD  The Russian crude oil brands and their future on the global markets

Currently traded at the global markets are threeoil markers  and several dozen "regular" brands, of which Russia accounts for six: Urals, Siberian Light, Sokol, Vityaz, REBCO and ESPO. However, two brands - Urals and ESPO - stand good chances for getting marker status in the foreseeable future.

Oil recipe of success

Needless to say that the chemical properties of crude oil delivered to the global markets varies depending on the region and even a field where it was produced. Therefore, in order to distinguish between various crude oils they were divided into brands with gravity and sulfur content being the major criteria. Hence, the lower are the gravity and sulfur content the higher is the quality of a crude oil.

Each oil-rich country features its own one or several brands of "black gold". Normally a brand is tied to an oil field (or a cluster of similar oil fields) if such crude goes straight to export. In case crude oils from several fields are mixed in a pipeline to be sold as a blend the brands are tied to either a pipeline or a port.

It has been a common practice world-wide to use primary benchmarks or marker oils as a pricing basis for all other grades (by means of premium or discount). Dominating the global oil markets are Brent and WTI, which are traded at InterContinental Exchange (ICE) in London and New York Mercantile Exchange in New York accordingly. In should be noted though, that while WTI used to trade at a premium to Brent (about $1/barrel), in 2010 the USA markets were invaded by the Canadian "synthetic" crude oil and the situation changed dramatically - now WTI trades at a significant discount to Brent with the spread exceeding $10. The third primary benchmark is Dubai Crude that has a vast spot market and is used as a yardstick against which all export brands from the Persian Gulf are priced.

As such, currently traded at the global markets are three oil markers and several dozen "regular" brands, of which Russia accounts for six: Urals, Siberian Light, Sokol, Vityaz, REBCO and ESPO.

The major Russian oil brand is Urals - the export blend, which is still used for pricing bulk of the Russian "black gold" going to the global markets. This brand is a marriage of the heavy sour crude oil from the Urals and the Volga Regions - mostly Tatarstan and Bashkortostan (with sulfur reaching 3%) - and Siberia Light produced in the Khanty-Mansiysk Autonomous Area (sulfur content 0.6%).

Quality as top priority

Because of the presence of the sour crude Urals is not highly regarded in terms of quality. And it is discounted to Brent (normally at $1-2 per barrel). Naturally, neither Russian government nor Russian oil companies are happy about that - they lose billions in dollars each year owing to such discount. At first, they attempted to solve it by splitting heavy crude oil from the Volga regions and the light crude from the Khanty-Mansiysk Autonomous Area to introduce Siberian Light, a new brand for the global markets. With the quality as high as the Brent's Siberian Light could have helped avoid discount losses.

However, that option turned out to be technically unfeasible due to the absence of the alternative pipeline capacity. Another option was to use the railway for the new brand transportation (RITEK firm even gave it a try) but at the current railway tariffs the price would be likely to hit the ceiling. As such, a decision was made to either improve the quality of the heavy Volga crude oil or exclude it completely from the export stream and refine it on spot. As a result of this quest in 2005 an initiative was launched at the federal level to build a cluster of refineries and petrochemical plants in Tatarstan, and in 2011 JSC TANECO (Nizhnekamsky refinery) added 7 million tons of capacity to the existing 9 million tons of JSC TAIF-NK. Moreover, in June 2012 the top management of JSC Tatneft (which owns 91% of TANECO) confirmed that, subject to the RF Government support, the capacity of the new refinery complex might be increased from 7 to 14 million tons.

Therefore, in the middle term the quality of the Urals blend may be significantly improved to become equal with Brent benchmark. More importantly, the improved Russian brand may, with time, "dethrone" the North Sea crude. The fact is that as a result of the North Sea oil fields depletion (the peak production rate was achieved in 1984) the Brent's share on the global market dwindles and it becomes increasingly distant from the actual situation on the trading floors. The Urals' production rate remains high and this brand may, subject to the quality improvement, substitute Brent in the benchmarks' group.

The Russian transportation companies are working to make it happen - Summa Capital Group plans on building, with Transneft's support, a transshipment terminal for Urals in Rotterdam thus establishing a dedicated trade floor for this brand and helping it acquire an independent price status. Although this project still has several years to go (the Rotterdam terminal is scheduled for commissioning in 2015) Platts already regards Urals the second best (after Brent) brand traded on the European market.

As for Siberian Light and REBCO - they were both designed to resolve the so called "Urals problem" as mentioned above. However, Siberian Light has been in rather scarce supply on the global markets due to the absence of the alternative ways of transportation.

Another attempt to boost the Urals price was the introduction of REBCO (Russian Export Blend Crude Oil), which was close to Urals in terms of the composition but meant exclusively for open trade, also failed. The new brand was first offered at NYMEX (CME Group) in 2006 to meet poor demand and now is traded out of formality rather than commercial considerations.

Development of the Sakhalin oil and gas fields added two more brands to the Russian crude product range - Sokol (Sakhalin-1) and Vityaz (Sakhalin-2). However, these brands are primarily supplied to the Asia-Pacific Region and, therefore, not offered at the Western Europe markets. It explains why the Urals, Siberian Light and REBCO prices are directly depended upon the Brent quotations while Sokol and Vityaz prices are driven by Dubai Crude.

The quality of the two new brands is rather high - Sokol is the best Russian crude oil. The more so, it tops Brent and WTI not to mention Dubai Crude. Despite all that it stands very poor chances to become a new global benchmark because the Sakhalin crude production and export volumes are clearly too small to make it an equal rival to the current leaders. Besides, there is a new brand, also Russian by the way, that may challenge the "big three" domination. This brand is ESPO.

ESPO: new horizons

ESPO (Eastern Siberian Pipeline Ocean) is the youngest Russian crude oil brand, it first appeared on the global markets in late 2009. It is produced in Western and Eastern Siberia and moved via ESPO pipeline to the Far East of Russia (port of Kozmino, Primorsky Area). Never getting blended with the heavy crude from Tatarstan and Bashkorostan it is therefore better than Urals.

As such, the new brand has been increasingly well received in the Asia-Pacific Region, where ESPO is primarily supplied to. While the first batch was sold (in December 2009) with a $0.5 discount to Dubai (the benchmark for ESPO price determination) in early 2011 the Eastern Siberian crude oil was traded with a premium of $2.2 to Dubai. The sales areal has been rapidly expanding as well, and just in several months after the ESPO debut on the market it was welcomed in the most of the Asia-Pacific Regions countries and USA.

Bulk (80%) of ESPO is purchased by oil traders with one third of it by companies associated with G. Timchenko (Gunvor, Warly International, IPP). The direct consumers (which account for over 20% of deliveries) include BP, Shell, Chevron, Nippon, Total, Petronas, PetroVietnam. The Russian exporters include Rosneft, Surgutneftegaz, Gazprom and TNK-BP.

In 2011 Russia began supplying ESPO to China via a branch from ESPO pipeline in the vicinity of Skovorodino. Under the bilateral agreement between Russia and China the former shall deliver 15 million tons of crude oil per annum during 20 years between 2011 and 2030. This is about 8% of the current Chinese exports or nearly 10% if inclusive of the volumes transported by sea from Kozmino.

In 2010, the share of ESPO at the Asia-Pacific Region market was about 1.5% but the commissioning of the branch pipeline to China helped increase this share to 3%. In other words, it took ESPO brand only two years to win a solid standing in the Asian markets.

Thus, ESPO is likely to continue succeeding on the global markets because of its advantages over the crude oil from Persian Gulf. First, ESPO quality is better than that of both benchmark Dubai and fairly popular Oman - it is sweater, which benefits refineries because desulfurization is a complex and costly process driving the fuel prices upwards. Second, ESPO is closer in terms of transportation time and distance, which is good for price. It takes a Middle East crude 2-3 weeks to reach a buyer as opposed to the Eastern Siberia crude, which can be delivered within 3-5 days. A better delivery time means higher flexibility of the Russian deliveries. Third, it is clearly to ESPO's advantage that the Asia-Pacific Region countries are striving to diversify their oil imports. All that gives reasons to believe that the Russian share in the oil imports by the largest countries of the Asia-Pacific Region may reach 15-20%.

In view of the forgoing it would be safe to assume that ESPO has come very close to becoming a new benchmark in the Asia-Pacific Region market. According to the global market rules to accomplish that goal Russia should be able to comply with two primary criteria: sustainability of deliveries and relatively high sales. As for the first criteria - pipelines are by far more reliable means of transportation than tankers, especially in light of the fact that ESPO pipeline does not cross any borders thus effectively excluding any transit-relating problems (for instance, the Ukrainian gas transit standoff). Of course, one should not completely rule out the possibility of the pipeline accidents, which (according to the third party technical supervision reports outlining numerous regulatory violations during the ESPO pipeline construction) appear quite probable. Anyway, I want to believe that any accident would be repaired as soon as possible to resume crude oil movements via the Eastern Siberian pipeline (such repair will, no doubt, include environmental impact mitigation).

As for the second criteria, to become a benchmark any brand should have at least 10% of the market. The estimated capacity of the Asia-Pacific Region market, where major buyers include China, Japan and South Korea, is 520-550 million tons.

Hence, volume of the benchmark deliveries should be at least 50 million tons. Platts are sharing these views - they even say that 30 million tons would do providing there are no drastic changes in quality. In any case, 50 million tons should be used as a base case scenario coupled with the fact that the Asia-Pacific Region market is gradually growing.

And ESPO sales can reach this critical threshold because Transneft intends to commission the second phase of ESPO pipeline (ESPO-2), expand the transshipment capacity of Kozmino terminal from 15 to 30 million tons per annum and increase the throughput capacity of the pipeline section between Tayshet and Skovorodino (ESPO-1 Expansion) to 50 million tons. It should be noted though that the required linefill volumes would not be available till 2014 when the major ESPO supplier Vankorskoye field currently producing 15 million tons is scheduled to reach the designed production rate (25 million tons). It is only after that when Russia will be able to formally nominate ESPO for benchmark.

It means that the Russia's third attempt to establish the internationally recognized crude oil brand may finally be successful. It is now imperative that Russia does not miss this chance and works consistently to secure the required crude oil exports volumes and takes reasonable approach towards trade with its eastern neighbors. 

Russian Refineries  (Refineries with capacity more than 20,000 bpd)

Rosneft      

Bashneft

Lukoil

Gazprom Neft

Other

EAST SIBERIAN PIPE LINE ROUTE

                     

 

 

 

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