Looking East

This is an abridged version of an article published in the May 2013 issue ofWorld Pipelines, available for subscribers to download now.

Russia’s share of the global oil and gas exports has been increasing. It now accounts for around 27% of gas and 34% of oil exports (2010) to the EU, its current single largest market. Russia’s share of the EU gas market has increased thanks to the completion of the second line of the Nord Stream in 2012, which is now fully operational. Beginning in December 2012, the construction of the South Stream will further increase the country’s share of the European gas market when the pipeline becomes fully operational by the scheduled date of December 2015. The growing role of Russia as an energy supplier in the EU zone is happening notwithstanding Brussels’ plan to decrease Russia’s influence for strategic reasons by diversifying its oil and gas suppliers. The reverse has actually been happening due to energy nationalism in the EU: arising from a range of reasons such as major differences in the EU countries’ energy requirements and economic capabilities and necessities, which dictate and justify different energy policies. Hence, while some EU countries can afford to back Brussels’ policy due to their secured access to other suppliers, others see no realistic alternative to Russia as their energy supplier. The latter include both an EU heavy (Germany) benefiting from the Nord Stream and small EU economies (e.g. Hungary) to benefit from the South Stream.

Without a doubt, the EU is an important market for Russian oil and gas exports. No sustainable increase in EU energy demand is predicted, as the EU energy requirements will increase, at best, modestly, due to its economic decline and ageing population. However, Russian gas supplies will remain significant because of EU policies of switching to less polluting fossil energy (e.g. natural gas) to curtail CO₂ emissions to mitigate global warming. Given this reality, Russia does not consider the EU market as its main target although it certainly wants to maintain its current role within it. Rather, Asia’s status as the world’s largest economy, which has turned it into the worlds’ largest energy consumer has motivated Russia to change its focus for oil and gas exports from Europe to Asia.

Based on various realistic indicators, the continent’s predicted economic growth at a steady and significant rate coupled with its growing population with upward living standards have guaranteed its large and growing energy consumption not only in the immediate future but also in the long-term. Although many Asian countries, including the large economies (e.g. China, Japan and South Korea) have taken steps to decrease their current heavy dependency on fossil energy (oil, gas and coal) by expanding their non-fossil energy production (renewables and nuclear), the entire continent as a whole is, and will remain, heavily dependent on fossil energy. Coal is the dominant type of fossil energy in especially the largest Asian economies (China and India) to last in the foreseeable future. However, these countries, similar to many others in the Asia-Pacific region, also heavily rely on oil and gas. Excluding oil- and gas-rich West Asia, the rest of the continent’s oil and gas demands cannot be fully met by local production, apart from some exceptions (e.g. Brunei), meaning their respective economies are dependent on imported oil and gas to a varying extent. This situation has guaranteed a large market for the major non-regional suppliers, including Russia.

Russia’s move to eastward exports became symbolically evident in its significant increase in crude oil exports to the Asia-Pacific region through the East Siberia-Pacific Ocean Oil Pipeline (ESPO). The pipeline accounted for 22% of Russia’s daily exports in Q1, 2013, thanks to the pipeline’s second leg becoming operational in December 2012, enabling Russia to export 1.1 million bpd in February 2013. Russia is now planning to increase oil exports to this region to 25% of its daily exports by 2015 when the ESPO will reach its maximum export capacity.

As a result, the Russian plan for expanding its oil and gas exports has been shaped by the mentioned objectives, i.e., supplying its existing large market (EU) and expanding into its future one (Asia-Pacific). Its pipeline projects, including the following major undertakings, have reflected these objectives.

ESPO

Russia fully operationalised the ESPO in December 2012, significantly increasing Russia’s oil exports to the large, expanding and lucrative Asia-Pacific market housing China, Japan and South Korea, as well as the US. The first stage of the 4857 km pipeline, the Taishet-Skovorodino line (2757 km; 48 in.; US$ 12.27 billion) connecting Russia’s Irkutsk to its Amur Region via Yakutia (capacity of 30 million tpy) became operational in January 2010. Its second stage, the Skovorodino-Kozmino (2100 km; 48 in.; US$ 10.6 billion), was completed in November 2012 and went on line on 25^th December 2012, one year ahead of its schedule. Once reaching its full capacity in 2015, the completion of stage two will enable Russia to export 30 million tpy of oil to the Asian-Pacific countries.

The Skovorodino-Kozmino pipeline has replaced the conventional transfer of oil by rail from Skovorodino to the Kozmino sea terminal, and has decreased the cost of oil exported from the sea terminal to increase the margin of profit for the Russian government. It has also made available a larger amount of crude oil for the Asian importers of Russian oil via the ESPO, namely Japan (31%), China (24%) and the US (22%) as well as South Korea, Singapore, the Philippines, Thailand and Malaysia.

Nord Stream

Meant to feed Germany and through there, Belgium, the UK, Denmark, the Netherlands, France, and the Czech Republic with Russian gas, it consists of two parallel 48 in. pipelines across the Baltic Sea, each 1224 km in length with a capacity of 27.5 billion m³/yr. Construction of the first pipeline began at Russia’s Portovaya Bay in April 2010, and was completed in April 2011 to start supplying Germany in mid November 2011. In May 2011, construction of the second pipeline began and it was completed in April 2012, letting the flow of gas in August reach its full capacity by December. The two pipelines connect the Russian onshore feeding pipeline near Vyborg to the German onshore pipeline near Greifswald.

Despite its completion and technical capacity for transferring 55 billion m³/yr of gas, the actual gas exports through the NS have been much smaller than expected. By March 2013, five months after it became fully operational, reportedly, only 6.25 billion m³ of gas passed through the twin pipelines, although Germany has increased its Russian gas imports.

Various factors, including the EU’s severe economic problems that will ensure a lower energy demand in the EU in the near future, have left the NS underutilised. Nonetheless, the Nord Stream consortium, consisting of Russia’s Gazprom (51%), German companies BASF/Wintershall (15.5%) and E.ON Ruhrgas (15.5%), Dutch Gasunie (9%) and France’s GDF SUEZ (9%), is considering two additional pipelines. In August 2012, the Nord Stream Shareholders’ Committee convened at Portovaya Bay, Russia, acknowledged the outcomes of the feasibility study for potential extension to the NS, and confirmed the possibility of one or two additional lines. Nord Stream AG has already applied for survey permits in several countries to investigate the study’s proposed corridor options. Yet, the full co-operation of the countries through whose offshore exclusive economic zones (EEZ) the two proposed pipelines would pass through is not guaranteed.

South Stream

The South European Pipeline or South Stream (SS), similar to the Nord Stream, is meant to help Russia bypass Ukraine for exporting gas to Europe (Italy and Austria), this time via the Black Sea. With an estimated cost of US$ 14.4 - 20 billion and a designed maximum throughput of 63 billion m³/yr, its construction began in Russia’s Black Sea coastal town of Anapa on 7^th December 2012 after a long delay, for planned completion in December 2015.

The pipeline (2400 km) will cross the Black Sea to transfer Russian gas and eventually Central Asian gas via Bulgaria, Serbia, Hungary and Slovenia to Italy. The pipeline has onshore and offshore segments. The Russian onshore section will run from the Pochinki compressor station to the Beregovaya compressor station at Dzhubga. With a maximum depth of 2 km, the 900 km offshore section (63 billion m³) will run from the Beregovaya compressor station on the Black Sea coast to Varna, Bulgaria, where it will split into two branches. The south branch will pass through Bulgaria and Greece from where an offshore stretch will reach Italy. The north branch will connect Serbia to Austria and Slovenia via Hungary.

Despite the engagement of certain EU members in the project, the EU has considered it as a means by Russia to prevent the construction of the EU-envisaged projects to import gas from Turkmenistan and Azerbaijan bypassing Russia, particularly the Nabucco. The project’s initiation has registered another victory for the Russian energy industry and yet another setback for Brussels. The development demonstrates the growth of centrifugal tendencies among the EU countries and a rising nationalism in the regional grouping.

Future outlook

Apart from the current undertakings, the Russian oil and gas companies are involved in numerous negotiations for major projects while envisaging others. One example is the proposed gas pipeline across the Korean peninsula (10 billion m³/yr) to export Russian gas to South Korea via North Korea. Under Kim Jong Il and then-President Dmitry Medvedev, Russia and North Korea reached an agreement for the project in August 2011, which now reportedly enjoys Kim Jong Un’s blessing.

Article written by freelancer Dr. Hooman Peimani, commissioned for the May 2013 issue of World Pipelines.

This is an abridged version of an article published in the May 2013 issue of World Pipelines, available for subscribers to download now.

Read the article online at: https://www.worldpipelines.com/business-news/15052013/looking_east_russia%E2%80%99s_oil_and_gas_pipeline_plans/