Russian crude oil exports to the Pacifi c Basin â€“ ESPO starts

S P E C I A L R E P O R T

Russian crude oil exports to the Pacifi c Basin – ESPO starts fl owing May 2010

OIL

2 |

SPECIAL REPORT: RUSSIAN CRUDE OIL EXPORTS TO THE PACIFIC BASIN – ESPO STARTS FLOWINGSPECIAL REPORT: RUSSIAN CRUDE OIL EXPORTS TO THE PACIFIC BASIN – ESPO STARTS FLOWING

ESPO (Eastern Siberian Pipeline Ocean) crude, a substantial new crude stream out of Russia, began flowing in December 2009 out of the Russian port of Kozmino, near Vladivostok in the Far East. Since December, this crude has been delivered on both sides of the Pacific Basin — Asia and the US — and exports have averaged around 325,000 b/d.

Platts, the energy information division of The McGraw-Hill Companies, launched crude oil price assessments for Russia’s ESPO in December 2009. Platts consulted widely in the development of this new crude — with Russian producers and Pacific Basin consumers, as well as with Russian energy ministry officials.

Prices for ESPO are assessed at the close of business in Singapore and again at the London close. ESPO barrels are currently priced as a differential to a commonly used benchmark — Platts Dubai — but due to its location, ample production levels and wide equity ownership, the ESPO crude stream has attributes that could, over time, lead to it to become a major flat price indicator of spot oil volumes in Asia. The Asian markets are heavily dependent on imported oil and the role of Russian oil has been growing in recent years.

ESPO CRUDE PIPELINE

Russia’s crude oil production rose to 10.07 million barrels/day in April, gaining 2.7% year on year. According to the president of Russia’s national oil pipeline operator Transneft, Nikolai Tokarev, Russia’s production is expected to grow to 11 million b/d after 2012. One of the major contributors to production growth is Siberia, which has begun piping crude oil to the east.

Crude passing through the new ESPO (Eastern Siberian Pacific Ocean) pipeline started to be exported from the Russian port of Kozmino in the Far East on December 28, 2009, when a 100,000 mt Rosneft cargo departed for Hong Kong.

So far, ESPO crude has been delivered to customers in both Asia and the US. The ESPO pipeline will enable crude supplies from remote Eastern Siberian fields to supply some of the rising energy needs in Asia, where the fastest-growing economies are heavily dependent on imported oil.

The start-up of ESPO crude exports is also a major step for Russia’s oil export infrastructure, which so far has been heavily focused on moving oil west toward Europe.

Sea ofOkhotsk

LakeBalkhash

LakeBaikal

Sea ofJapan

West Siberianoil & gas �elds

Kozmino

ESPO Phase 1

Taishet-Skovorodino

ESPO Phase 2

Skovorodino-Kozmino

East Siberian oil and gas fields

Omsk

Angarsk

Tomsk

PavlodarPavlodar

NakhodkaDaqing

Khabarovsk

VaninoTaishet Skovorodino

Tynda

JAPAN NORTHKOREANORTHKOREA

MONGOLIA

KAZAKHSTAN

RUSSIA

CHINA

Oil pipeline

Oil pipeline under construction

Tanker terminal

Eastern Siberian Pacific Ocean Pipeline

Source: Platts, ERINA

SPECIAL REPORT: RUSSIAN CRUDE OIL EXPORTS TO THE PACIFIC BASIN – ESPO STARTS FLOWING

| 3

SPECIAL REPORT: RUSSIAN CRUDE OIL EXPORTS TO THE PACIFIC BASIN – ESPO STARTS FLOWING SPECIAL REPORT: RUSSIAN CRUDE OIL EXPORTS TO THE PACIFIC BASIN – ESPO STARTS FLOWING

STAGES OF DEvELOPmENT

The initial stage of the ESPO pipeline, which runs for 2,757 km from Taishet in East Siberia to Skovorodino in the Amur region of Russia’s Far East, near the border with China, has a capacity of 600,000 b/d. Capacity is slated to grow to 1 million b/d by 2013 in the second stage of the project, and potentially to as much as 1.6 million b/d at a later date.

From Skovorodino, 300,000 b/d is transported by rail to a new export terminal at Kozmino on the Pacific coast, and another 300,000 b/d will be delivered to China after an offshoot from Skovorodino to China is completed at the end of 2010. Deliveries into China by pipeline are expected to start in January 2011, with the pipeline fill to commence in September/October 2010. The bulk of the offshoot from Skovorodino to Daqing in China will be built by Chinese oil company CNPC, with only a 64-kilometer stretch to the border to be constructed by Transneft.

Vostoknefteprovod, a company affiliated with Transneft, was created to operate the ESPO pipeline.

The Skovorodino delivery station has a storage capacity of 80,000 mt and a loading installation for 82 rail tanks, with a current loading capacity of 35,000 mt/day, which is expected to increase to 43,000 mt/day (close to 323,000 barrels/day) in the near future.

The terminal at Kozmino currently has a tank farm with capacity of 350,000 cubic meters (close to 2.2 million barrels) and a loading capacity of 300,000 b/d. Exports of ESPO crude via the Kozmino port have reached 5.45 million mt (39.785 million barrels), or one third of the total planned 2010 volume.

COSTS AND FUTURE DEvELOPmENT

Transneft estimates the cost for the first stage of the ESPO pipeline at Rb420 billion, or $14.4 billion. The company expects the second stage of the pipeline, which would expand capacity from the initial 600,000 b/d to 1 million b/d, as well as extend the pipeline all the way from Skovorodino to Kozmino, to cost around Rb350 billion, or $11.97 billion.

Beyond the second stage, capacity could be extended further to 1.6 million b/d.

When the route is expanded to the planned maximum capacity, 300,000 b/d will go to China, 400,000 b/d will be sent to a new refinery Rosneft plans to build near Kozmino, and around 200,000-

300,000 b/d will be sent through the route to existing Far Eastern refineries in Komsomolsk-on-Amur and Khabarovsk, according to Transneft. This implies that the remaining 600,000-700,000 b/d will be exported from the terminal at the Pacific coast, although it is not currently clear when the route might be expanded to this maximum capacity.

For 2010, Transneft’s transportation schedule projects deliveries of 15 million mt or 300,000 b/d via the route. However, Transneft has not ruled out some changes at the initial stage when the new transportation system is tested.

Rosneft has said it expects to export some 4-6 million mt of oil from Kozmino in 2010, while TNK-BP expects to export a total of 2.0-2.2 million mt.

Russia has also not ruled out sending additional volumes of West Siberian crude to the ESPO pipeline if there is not enough crude produced in East Siberia to fill the line.

Russia’s energy minister Sergei Shmatko, however, has said that he believes East Siberia will produce

Quality specificationsESPO and other key crudes API Sulphur

ESPO 34.8 0.62%Brent 37.5 0.46%Forties 40.6 0.59%Dubai 30.4 2.13%Oman 32.95 1.14%Urals 31.55 1.30%Sokol 39.7 0.17%Vityaz 34.4 0.22%

Million b/d

9.5

9.6

9.7

9.8

9.9

10.0

10.1

Apr-10Apr-09Apr-08

Russian crude oil production

Source: Russia’s Ministry of Energy

4 |


enough crude to fully fill the pipeline and account for all of the ESPO exports.

COmmERCIAL ARRANGEmENTS

Rosneft has signed a 20-year contract with China’s CNPC for the delivery of 300,000 b/d from Skovorodino, and supplies to China through the pipeline could increase beyond this in the future, according to Rosneft. The price at Skovorodino for deliveries into China will be equal to the FOB Kozmino price, with no premiums or discounts being applied, according to sources involved in negotiations .

Russia’s deputy prime minister Igor Sechin estimated the contract signed between Rosneft and CNPC to be worth at least $100 billion. The contract envisages total oil deliveries of 300 million mt (close to 2.26 billion barrels) over 20 years.

TENDERS

Russia’s Rosneft sold the first ESPO cargo through a tender on November 23, 2009, agreeing to sell a 100,000 mt cargo loading FOB Kozmino on December 27-29 to International Petroleum Products OY at a $0.50 premium to average Platts Dubai prices published for December.

LOADINGS

So far some 86% of ESPO crude exports have gone to Asian countries, with South Korea (39%) receiving more than any other country. The remaining 14% has moved to the US, as can be seen in the chart below.

The table on pages 5 and 6 displays the ESPO loading program from Kozmino and tracks the buyers, loading vessels, and prices where applicable. Platts has also published data in its publications regarding the destination of the shipments, which have included China, South Korea, Japan and the US. A total of 1.4 million mt (14 cargoes of 100,000 mt) of ESPO crude is scheduled to load at Kozmino in May, up from 1.3 million mt in the previous month’s loading program. In addition, 1.3 million mt of ESPO crude is expected to load in June.

End-users that have bought ESPO crude include South Korea’s GS Caltex and SK Energy, China’s Sinopec, Philippines’ Petron, US refiner Tesoro, ExxonMobil, which is taking it to its joint venture refinery with Japan’s TonenGeneral, and BP at its refinery in Carson, California.

TAX EXEmPTION

The Russian government announced in late November 2009 an exemption from crude export duty for East Siberian crude, to be implemented from December 1. The exemption is designed to encourage companies to invest in development of the new oil-rich but remote province of East Siberia, which requires massive spending on infrastructure.

The long-awaited zero rate is applied to crude with a density of between 694.7-872.4 kg/cubic meters at 20 degree Celsius (equivalent approximately to API gravity of 30-70 at 15.5 degrees Celsius) and with a sulfur content of between 0.1% and 1%, according to the document signed by Russian Prime Minister Vladimir Putin.

A total of 22 separate fields in East Siberia are currently eligible for the zero rate, including Vankor, Yurubcheno-Tokhomskoye, Talakan – including the East Block, Alinskoye, Srednebotuobinskoye, Dulisminskoye, Verkhnechonskoye, Kuyumbinskoye, North Talakan, East Alinskoye, Verkhnepeleduyskoye, Pilyudinskoye, and Stanakhskoye. The fields are owned by several entities including Rosneft, Surgutneftegaz, TNK-BP and Gazprom Neft.

Russia’s finance and energy ministries are considering a possibility to lift the tax exemption or impose a reduced export duty for East Siberia’s three producing fields – Vankor developed by Rosneft, Surgutneftegaz’s Talakan and TNK-BP’s Verkhnechonsk – in January 2011. Crude production at these three fields is already profitable and the companies developing them can pay taxes, without hampering the business, according to the ministries.

Singapore (4%)

South Korea (39%)

Japan (20%)

US (14%)

China (11%)

Thailand (8%)

Taiwan (4%)

ESPO Crude Exports by Destination

Source: Platts


| 5


ESPO loading program from Kozmino*

Date Size Supplier Buyer vessel Price

Dec 27-29 100k Rosneft IPP OY Moscow University Dec Dubai + $0.5

Jan 1-2 100k TNK-BP Trafigura Libya Jan Dubai - $0.55

Jan 4-5 100k Surgutneftegaz Gunvor Ashahda

Jan 10-11 100k Surgutneftegaz Gunvor Pacific Energy

Jan 15-16 100k Rosneft IPP OY Moscow University Jan Dubai - $2

Jan 18-19 100k Rosneft IPP OY Ashahda Jan Dubai - $2.1

Jan 21-22 100k Rosneft IPP OY Atlantic Explorer Jan Dubai - $2

Jan 24-25 100k Rosneft IPP OY Sky Lady Jan Dubai - $1.16

Jan 27-28 100k Rosneft IPP OY Bunga Kelana 7 Jan Dubai - $0.95

Jan 30-31 100k Gazprom Neft Mitsubishi KWK Esteem Jan Dubai - $0.75 (CIF North Asia basis)

Feb 2-3 100k Surgutneftegaz Gunvor

Feb 5-6 100k TNK-BP BP British TBN Feb Dubai - $2

Feb 8-9 100k Rosneft Mitsubishi Torm Gudrun Feb Dubai - $1.3

Feb 10-11 100k Surgutneftegaz Gunvor Bunga Kelana 4

Feb 12-13 100k Rosneft Crudex Atlas Explorer Feb Dubai - $1.25

Feb 15-16 100k Rosneft Vitol Bunga Kelana 4 Feb Dubai + $0.02

Feb 18-19 100k Rosneft Petronas Oasis River Feb Dubai + $0.2

Feb 21-22 100k Rosneft Crudex Feb Dubai + $0.25

Feb 24-25 100k TNK-BP BP Castor Voyager Feb Dubai + $0.80

Feb 27-28 100k Gazprom Neft Mitsubishi Maersk Phoenix Feb Dubai + $1.10 (CIF North Asia basis)

Mar 1-2 100k Rosneft Crudex Ruby Mar Dubai + $0.29

Mar 5-6 145k Surgutneftegaz Gunvor Pacific Virgo

Mar 7-8 100k Rosneft Crudex Mar Dubai - $1.25

Mar 9-10 100k Gazprom Neft Gunvor Jag Lyall Mar Dubai + $0.35



Mar 17-18 100k Rosneft Unipec Bai Lu Zhou Mar Dubai + $0.12

Mar 19-20 100k Surgutneftegaz Gunvor Mar Dubai plus small premium

Mar 22-23 100k TNK-BP BP

Mar 24-25 100k TNK-BP Mitsubishi

Mar 27-28 100k Rosneft Crudex Al Qadisia Mar Dubai + $0.15

Mar 30-31 100k Rosneft Crudex Al Buhaira Mar Dubai + $0.24

Apr 1-2 100k Rosneft Crudex Apr Dubai + $0.04

Apr 4-5 100k Surgutneftegaz Gunvor British Swift

Apr 6-7 100k Rosneft Chevron BM Bonanza Apr Dubai + $0.14

Apr 8-9 100k Rosneft Crudex Amba Bhakti Apr Dubai - $0.46

Apr 11-12 100k Rosneft Crudex CSK Valiant Apr Dubai - $0.75

6 |


Apr 13-14 100k Rosneft BP Apr Dubai - $0.25

Apr 15-16 100k Gazprom Neft Gunvor TH Sound Apr Dubai + $0.20/$0.30

Apr 18-19 100k TNK-BP Gunvor Amba Bhakti Apr 20-21 100k Surgutneftegaz Talmay NS Commander Apr 22-23 100k Rosneft Mitsubishi Apr Dubai - $0.64Apr 24-25 100k Rosneft Vitol Badr Apr Dubai - $0.55Apr 27-28 100k TNK-BP Mitsubishi New Amity Apr 29-30 100k Gazprom Neft SK Energy May 1-2 100k Rosneft Mitsubishi May Dubai - $0.32May 3-4 100k Surgutneftegaz Lukoil North Sea Jun Dubai - $0.40May 5-6 100k Rosneft BP Monterey May Dubai -$1.49May 8-9 100k Rosneft Shell NS Commander May Dubai -$0.81May 10-11 100k Rosneft Shell Desh Prem May Dubai -$0.75May 12-13 100k Rosneft Shell May Dubai -$0.68May 15-16 100k Gazprom Neft Mitsubishi May Dubai plus small discountMay 17-18 100k Surgutneftegaz SK Energy Maersk Phoenix May Dubai -$1.40/-$1.35May 20-21 100k TNK-BP BP Asian Jade/Zaliv Amursky May 23-24 100k Rosneft Vitol May Dubai -$1.26May 25-26 100k Rosneft Chevron May Dubai -$1.03May 27-28 100k TNK-BP May 29-30 100k Gazprom Neft Mitsubishi May Dubai plus small premiumMay 30-31 100k Surgutneftegaz Vitol May Dubai -$1.50/-$1.40Jun 2-3 100k Rosneft RBS Sempra Jun Dubai -$1.10Jun 4-5 100k Rosneft RBS Sempra Jun Dubai -$1.10Jun 6-10 100k Rosneft BP Jun Dubai -$1.47Jun 8-12 100k Rosneft BP Jun Dubai -$1.37Jun 10-14 100k Rosneft Jun Dubai -$1.25Jun 12-15 100k Surgutneftegaz Itochu Jun Dubai -$0.90Jun 15-18 100k Gazprom Neft Jun 17-20 100k TNK-BP Mitsubishi Jun 19-22 100k TNK-BP Jun 21-25 100k Surgutneftegaz Glencore Jun Dubai -$0.80Jun 24-27 100k Gazprom Neft Jun 26-29 100k TNK-BP Jun 28-Jul 2 100k Rosneft Shell Jun Dubai -$0.89Jul 1-5 100k Rosneft Mitsui Jun Dubai -$0.98Jul 3-6 100k Surgutneftegaz Jul 21-22 100k * Some trade details are not official, and are listed as reported by market sources

ESPO loading program from Kozmino* (continued)

Date Size Supplier Buyer vessel Price


| 7


Russian oil producers including TNK-BP have argued for the tax breaks to remain in place for at least three years in order to make the development of this remote area feasible.

But the finance ministry, as well as some independent market analysts, believes that there is little economic rationale for the tax breaks at present as price levels in the global oil market have improved dramatically since early 2009 when the decision was first taken to exempt ESPO crude from export duty .

Russia’s Federal Tariffs Service has approved a through transportation fee for crude deliveries via the new export oil pipeline across East Siberia towards the Pacific Ocean of Rb 1,598/mt ($52.68/mt or $7.21/barrel).

Platts ESPO Crude Assessments Asian Close

Source: Platts

$/b

70

75

80

85

90

12-May15-Apr17-Mar17-Feb18-Jan

Platts ESPO vs Dubai

Source: Platts

$/b

-2.0

-1.5

-1.0

-0.5

0.0

0.5

12-May15-Apr17-Mar17-Feb18-Jan

The fee includes services for crude deliveries via the pipeline, by railroad, and for crude re-loading at terminals including at Kozmino for onward export.

CRUDE QUALITy

An ESPO crude assay became available in early February. The assay came from a sampling of the first cargo that loaded from Kozmino over December 27-29. The test, conducted by SGS, is based on a composite sample taken from the ship’s tanks after the cargo loaded.

The assay puts the sulfur content of the crude at 0.535% and its gravity at 34.7 API. The assay also shows the crude having a total acid number of 0.05 mg KOH/g, water content of 0.35% and a pour point of minus 30 degrees Celsius.

Using a cut point of 10-148 for naphtha, 148-232 for kerosene, 232-343 for gasoil and 343 and above for residue, the crude is able to yield slightly over 15% of naphtha, 13-14% of kerosene, slightly above 20% of gasoil and 51-52% of residue. The diesel-rich crude appeals to most Asian refiners.

The most recent ESPO assay reviewed by Platts came in March, sourced from multiple cargoes loading at Kozmino on February 13 (see page 8). This test, conducted by Intertek Caleb Brett, is derived from a composite sample taken during the loading process.

This assay puts the sulfur content of the crude at 0.54% and its gravity at 34.7, close in quality to the first cargo assay. The assay also shows the crude having a total acid number of less than 0.05 mg KOH/mg and a pour point of less than minus 36 degrees Celsius. Again, this is similar in quality to the initial assay.

American refiners also have produced an assay for the crude showing a sulfur content of close to 0.5%. But some market participants expect the crude to become slightly more sulfurous and heavier in the coming months.

As with all new crudes, the quality of ESPO is still somewhat unstable, with some cargoes showing different properties from others.

For further details, please contact [email protected] with a CC to [email protected]

8 |


ESPO crude quality specifications

Test Units method Result

Density at 15oC kg/L ASTM D 5002 0.8508Specific Gravity at 60/60°F kg/L ASTM D 5002 0.8512API gravity ASTM D 1250 34.Kinematic viscosity at 20°C CST ASTM D 445 6.949Total acid Number mg KOH/g ASTM D 664 <0.050Pour Point °C ASTM D 5853 <=-36Water by distillation mass% ASTM D 4006 0.35Sediment by extraction mass % ASTM D 473 0.01Chloride salt content mg/dm3 GOST 21534-75(A) 17Organic chlorine content mg/kg ASTM D 4929(B) *1Sulphur content mass% ASTM D 4294 0.535Hydrogen Sulphide ppm UOP 163 less 1Mercaptan Sulphur ppm UOP 163 111Ash content mass % ASTM D 482 0.011Nickel ppm IP 470 4Sodium ppm IP 470 1Iron ppm IP 470 19Copper ppm AAS less 1Vanadium ppm IP 470 4Calcium ppm IP 470 2Paraffin Wax content mass % UOP 46 3.3RVPE kPa ASTM D 5191 40.4Asphaltenes (heptane insolubles) content mass % IP 143 0.20Distillation ASTM D 5236 Cut Range (°C) Cum % vol LPG % vol. 2.2C5-65 % vol. 6.165-100 % vol. 9.8100-150 % vol. 16.7150-200 % vol. 25.1200-250 % vol. 32.7250-300 % vol. 42.0300-350 % vol. 50.9350-370 % vol. 54.2370-475 % vol. 70.0475-515 % vol. 74.6515-525 % vol. 76.0525-553 % vol. 79.9


| 9


© 2010 Platts, a Division of The McGraw-Hill Companies, Inc.

Reproduction of this publication in any form is prohibited except with the written permission of Platts. Because of the possibility of human or mechanical error by Platts’ sources, Platts does not guarantee the accuracy, adequacy, completeness, or availability of any Platts information and is not responsible for any errors or omissions or for the use of such Platts information. Platts gives no express or implied warranties, including, but not limited to, any implied warranties of merchantability or fitness for a particular purpose or use. In no event shall Platts be liable for any direct, indirect, special, or consequential damages in connection with subscribers’ or others’ use of this publication.

About Platts

Platts, a division of The McGraw-Hill Companies (NYSE: MHP), is the market leader for independent real-time news, pricing, and data for the energy and metals markets. From our 17 worldwide offices, we create market transparency and drive better decision-making for traders and investors in more than 150 countries. More information is available at www.platts.com.

For information on Platts publications, please contact the Platts sales office nearest to you:

North America EMEA Latin America Asia-Pacific Russia www.platts.com +1-800-PLATTS8 (toll-free) +44-(0)20-7176-6111 +54-11-4804-1890 +65-6530-6430 +7-495-783-4141 [email protected] +1-212-904-3070 (direct)

Russian crude oil exports to the Pacifi c Basin â€“ ESPO starts

Documents

Transcript of Russian crude oil exports to the Pacifi c Basin â€“ ESPO starts