Kazakh pipelines to help Russia raise oil exports to China

By bne IntelliNews November 12, 2013

bne -

Looking to take the next step in a long-winded effort to raise energy exports to China, but nearing the capacity limit of its eastbound pipelines, Russia has sealed a preliminary agreement with Kazakhstan to route crude through the Central Asian country's transit network.

Igor Sechin, CEO of Russia's growing state-owned oil giant Rosneft signed off on the deal on November 11. Sauat Mynbayev, head of Kazakhstan's state oil company KazMunaiGas, and the general director of Kazakh pipeline operator KazTransOil, Kairgeldy Kabyldin represented the Central Asians, according to Prime.

Under the agreement, Rosneft will export 7m tonnes of oil to China a year, or 140,000 barrels per day, via Kazakhstan. Rosneft said in a statement that "key terms" have been agreed. However, details were not disclosed.

In a bid to reduce its huge reliance on European consumers, Russia has been seeking to boost exports to its energy hungry neighbour for years. However, the pair has consistently failed to agree on price.

Recently, however, progress has been made on raising crude oil supplies. Rosneft has contracted to triple oil exports to China to around one million barrels per day within the next five years or so. Yet the long and winding road towards increased sales means infrastructure is lagging. The huge investment cost and jealous grasp on control of the export market by Russian pipeline operator Transneft has also held back route development.

All of which leaves Rosneft without the infrastructure to meet its commitment to Beijing, which is already paying for the extra oil. The Chinese spur of the Eastern Siberia-Pacific Ocean (ESPO) pipeline is already operating at its full capacity of 300,000 barrels a day. Transneft has said it will expand ESPO, but is yet to move.

With China having pushed hard to tap Central Asian energy resources in recent years, infrastructure has been rapidly built, powered by soft loans from Beijing. Kazakhstan opened an oil pipeline to China in 2006, a full five years before ESPO - the first Russian route linking to China - started operations.

That not only feeds the need of China's huge and expanding economy, but also free Kazakhstan from its previous heavy dependence on Russian export routes. Astana is pushing hard to boost energy production, and the capacity of oil and gas pipelines leading east are consistently growing. The deal offering Rosneft access to that route is expected to be finalized by the end of the year.

Meanwhile, Russia is also sniffing around that growing output, as it faces the challenges of complex offshore projects in hostile environments if it is to significantly boost output at home. The Rosneft statement reports that Sechin also held working meetings concerning exploration and production in Kazakhstan.

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