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.
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, 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.
The Russian oil
industry claims to be in need of huge investment. 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
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
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
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
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
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
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.