Vostok-Oil, a project to develop Rosneft's Payakhskoye field and to connect the Vankorskoye field to it in 2024, has been recently seeking the limelight in media. The plan is to construct an oil terminal on the Kara Sea and lay 770 kilometers of pipelines in the Subarctic Region within three years.
Wek.ru talked about this project with a former oil worker and logistician who had worked both for Rosneft and Transneft. He is now a pensioner working as a consultant for oil companies. The source wished to remain anonymous.
“Why is Transneft not worried about the loss of oil delivery from Vankor Field?”
“A company spokesman told Kommersant that it is impossible to build such infrastructure within this timeframe. Transneft has been laying a similar oil pipeline, Zapolyarye-Purpe, for seven years. Moreover, Rosneft needs to build a port. Given Sechin's stubbornness, the construction will have been completed by 2027-2030 if not by 2024. By that time, Vankor will yield no more than $3 million a year which will not have much effect on Transneft's cargo turnover.”
“So, Transneft does not care whether Payakhskoye field will operate or not?”
“No, it doesn’t, in terms of profitability. What if the new fields are not connected? They will not have to build a pipe to this new remote oilfield. The Kuyumba-Tayshet pipeline was laid when Rosneft made that promise. It cannot be filled with oil for several years despite the signed pumping contracts. In addition, the export direction to the Far East is in high demand among oil companies. Any surplus will be immediately filled up after Rosneft quits. By the way, it will be difficult for the company to come back. One might say that high-quality, low-sulfur oil will not be delivered but Transneft does not care what kind of oil it pumps. The tariff does not depend on the amount of sulfur or oil density.
“So, no one will lose from implementing Rosneft’s project at all?”
“I don't think so. The withdrawal of the low-sulfur Vankor field’s oil and its replacement with the crude with much higher sulfur content will affect the cost of sales abroad and the depth of refining at the Khabarovsk and Komsomolsk-on-Amur refineries. Rosneft supplies 30 million tonnes to China under a long-term contract. The price formula includes a coefficient for sulfur. At present, sulfur in the blend is 0.6%. Under the contract, it can be up to 1.3% but every hundredth of sulfur increase lowers the price. If the sulfur content reaches 0.75% instead of the current 0.6% due to the addition of, for example, Tomsk oil, then, as I remember this formula, the price of oil would fall by $4. In addition, the other exporters using the pipe to Kozmino would lose out. Right now, the premium quality of blend of the Eastern Siberia–Pacific Ocean oil pipeline (ESPO pipeline,) relative to the Pacific Ocean's dominant grade, Dubai, is about $6. The premium will inevitably fall, maybe not by $4, but the Chinese formula will serve as a benchmark.
“But the Northern Sea Route will work at the expense of oil companies' income.”
“Well, it is not my department. Of course, it is cheaper to transport oil by tanker than to pump it through the pipe. The rate from Purpe where Vankor’s oil is now delivered to Kozmino, a port in the Sea of Japan, is 2,846 rubles ($38.67) per tonne. Thus, delivery of 100,000 tonnes (by an Aframax class tanker) costs about $4 million. The freight of such a tanker is about $100,000 per day. It takes about 2 weeks to sail to the Sea of Japan. So, the cost seems to be about $1.4 million. Is it cheaper? More likely, it is comparable because this freight was formed for “warm seas,” and there is no market for such services for the Arctic Ocean. The second thing is the cost of icebreaker support. At the moment, there are two dozen vessels frozen in ice on the Northern Sea Route... We have no large nuclear-powered icebreaker fleet and, consequently, no market for such services. Anyway, to my thinking, the cost of a nuclear-powered icebreaker to escort a tanker is not lower than the cost of a tanker. So, again the cost of transportation will be comparable but huge money will have to be invested in the creation and maintenance of infrastructure. As you can see from the media, the Chinese and Indians have not yet fallen for this project. It seems to me that it would be cheaper to create an icebreaker fleet at the expense of the budget and pay for its barging along the Northern Sea Route. Oil companies’ job is to fill the budget, not to solve the geopolitical issues.