Vladimir Shlyomin

Murmansk’s seaport

Russia’s four largest oil companies YUKOS, LUKOIL, Sibneft and TNK (Tyumen Oil Company) signed a memorandum on implementing a new superproject. The existing plans provide for laying a trunk oil pipeline in the country’s North - from oil fields in Western Siberia to the Murmansk seaport - and construct a high-capacity terminal on the Arctic Ocean coast. By preliminary estimates, the project may cost $5B. Both the pipeline and the oil terminal are to be put in operation in 2007.

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here are two options of a pipeline route under consideration: the by-land route 3,600 km long and the one via the White Sea running for 2,500 km.
The project is of interest not only to consumers of Russian oil. It may give a new impetus to attracting investments in the pipe industry. This industry, which was developing at a slow pace in the past decade, may enjoy a real boom with a start-up of implementing Russia’s strategic initiative to create its own transportation thruways for exporting oil and gas.
At the root of this program is the desire to increase a number of oil and gas "windows" to Europe and, at the same time, to sweep away the monopoly of Ukraine and the Baltic States on transit of Russian hydrocarbons. Besides, oil business officials close to the government are trying to tilt in Russia’s favor the long-drawn dispute over where Azerbaijan’s oil export as well as the soon-expected big oil from Central Asia will go. Finally, there are plans to shift accents in the policy toward CIS putting a major emphasis on integrating the core of states that emerged recently. These are Russia, Byelorussia, Kazakhstan, Kirghizia and Tajikistan, which joined first in the Customs Union and, then, formed the Eurasian Economic Community.
After the break-up of the Soviet Union the transit of hydrocarbons truly became a goldmine for Russia’s western neighbors. Proceeds from moving Russian oil via territories of the Baltic States account for up to 25% of their GDP. For example, Latvia gets about $700M for pumping over oil products through the port of Ventspils. From 1992 to1999 Russia’s costs of oil transit through the Latvian corridor alone exceeded $5B. According to information from Latvian sources, at least one third of Latvia’s budget consists of these receipts. It is worth noting that the mentioned amount is virtually equal to the volume of investments required for constructing the new pipeline and the Murmansk terminal. If harbor dues in Russia amount to about $2 per ton, they equal $5 in the Baltic States and $5.5 in Ukraine. Transit tariffs there also exceed the Russian ones by several times (tariffs of Baltic companies are 4.3 times as high and rates of Ukrainian companies are bigger by 5.4 times). It should be stressed that these states did not make any investments in the existing infrastructure because they inherited it from the Soviet Union. While having abundant oil and gas resources and maintaining their intensive production, Russia at the same time is experiencing troubles due to limited capacities of its own transportation system.
Reactivating construction of trunk oil pipelines started with formation of the Caspian Pipeline Consortium. After that the state company Transneft swiftly completed laying a 300-kilometer section of the Baku-Novorossiysk oil pipeline across Dagestan bypassing Chechnya. That way the unimpeded flow of Azerbaijan’s oil to terminals of Novorossiysk was secured, the tie-up of Kazakhstan and Turkmenistan to this system being in sight. And this is a real alternative to the project of transporting Caspian oil to the Mediterranean via Azerbaijan, Georgia and Turkey (Ceyhan).
Two more priority directions were also determined: the Baltic Oil Pipeline System (BTS) and a trunk oil pipeline to Novorossiysk bypassing Ukraine. The throughput capacity of BTS’ first phase amounts to 12 million tons of oil a year. It is assumed that Transneft will undertake construction of a 270-kilometer oil pipeline, an oil-loading terminal and oil storages. Hundreds of kilometers of pipes have already been laid, several tanks have been mounted at the oil transfer farm, oil pumping stations and port structures are under construction. Besides, there is a plan to construct an oil pipeline across several European countries to the Croatian port of Omisal in the Adriatic Sea (the Druzhba – Adria project).
As Vagit Alekperov, the president of LUKOIL, says, "a thorough analysis proves that it is more expedient to transport oil by sea". "In 2001 such shipments amounted to 10.87 million tons. But only 3.3 million tons of oil passed through Russian ports. At the same time ports in the Baltic States handled 5.3 million tons, the Ukrainian ones accounted for 0.9 million tons and 1.3 million tons fell on other directions. We intend to drastically change the situation and use only Russian ports for our oil products", he stresses.
Russia’s oil terminals have a low throughput capacity. In wintertime it goes down even more, when bays of the Baltic Sea near St. Petersburg get frozen. There is one more shortcoming and that is their inability to receive large-capacity tankers, which are the main oil export carriers today. And because of this West European ports have to be used as trans-shipment points where Russian oil destined for the U.S. is pumped over into more capacious tankers. Analysts believe that these very complications with oil transporting remain the major obstacle today to the full-fledged entry of Russian companies in the North American market.
Construction of an oil terminal in Murmansk will help solve many problems. Despite the fact that the Murmansk port is located beyond the Arctic Circle, it, nevertheless, is capable of receiving ships all year round. Since the warm current of the Gulf Stream flows nearby, the sea does not freeze even during the hardest frost. The depth of the Kola and Pechenga Bays permits to moor tankers with the carrying capacity of 250,000 to 300,000 tons. The way from there to the U.S. coast is shorter than traditional routes: 5,800 miles against 6,038 miles from Croatia’s Omisal, 6400 miles from Turkey’s Ceyhan and 6,685 miles from Novorossiysk. Naturally, exporters’ expenses are also down. Transporting oil by the northern route will cost them $ 24.7 per ton, while using routes via Omisal, Ceyhan and Novorossiysk costs $29.5, $31.9 and $29.9 accordingly.
In the opinion of Mikhail Khodorkovsky, YUKOS chairman, the Arctic terminal will permit to significantly reduce costs of transporting oil from Western Siberia and greatly raise competitiveness of Russian companies in the world’s largest oil market. "A gain or loss of $5 on every ton of Russian oil brought to the U.S. may play a decisive role for the fate of the whole Russian oil industry in the coming years", Khodorkovsky insists. In case world prices for Urals fall back to $17 a barrel, there will be no more than 300 million to 350 million tons of oil produced in Russia on a yearly basis. Neither Russia nor its nearest neighbors will be able to consume more than that but oil export to the West by traditional routes will become unprofitable. In the meantime, Russia’s energy strategy worked out by the Russian Ministry of energy provides for increasing oil production up to 460 million tons a year by 2020. Russian officials make no secret that the major portion of this amount will be destined for Western countries and, above all, the U.S.

One of Sibneft’s production facilities

If the Arctic project is successfully implemented, both sides will become winners. Russian companies will be able to ramp up their share of the U.S. oil market to 13%, while American consumers will, at long last, get a chance to reduce their dependence on oil from the Middle East.
Now specialists are busy with choosing a site for constructing an oil terminal. Meanwhile, Murmansk’s steamship administration together with the seaport office proposed a temporary scheme of transferring oil at the inner offshore mooring in the Kola Bay to load anchored tankers with the carrying capacity of 100,000 tons and more. It will permit to export from Murmansk no less than 200,000 tons of oil a month at the lowest possible costs. After all works under the project are completed, the annual throughput capacity of the Arctic terminal will amount to 60 to 80 million tons of oil.

Russia provides world market with 5.4 million barrels of oil per day and is the second largest exporter yielding only to Saudi Arabia, which ships 7.4 million bbl/d.

The project is quite important for the economy of the northern region. It is expected that in the course of constructing the Murmansk pipeline system 6,000 new jobs will be created and there will be 2,000 more with the start of its operation.
Russian pipe makers are also counting on their active participation in implementing this important and prestigious project. In recent years they managed to strengthen significantly their competitive position. Volzhsky Pipe Plant, Chelyabinsk Tube-Rolling Plant and Vyksa Steel Works, the industry’s largest enterprises, produce pipes with different kinds of insulating coating that make them suitable for construction of the most important sections of pipelines. However, there is a need to solve a number of other technological problems. For example, Russia’s pipe-making plants cannot produce pipes of 1,220 mm in diameter with wall thickness of more than 16 mm. Besides, straight-line-seam pipes are made with two longitudinal joints, i.e. with the welded seam of a doubled length. However, in about 80% of cases construction failures happen exactly at or near welded joints. On average, the extent of welded seams at trunk oil pipelines exceeds by 1.5 times the length of pipelines themselves. In the opinion of leading specialists, so as to improve the quality of welded pipes it is necessary to make pipe steel of increased purity by the content of sulfur and non-metallic inclusions as well as with reduced content of carbon and manganese. There is also a need to switch over to using new, more advanced technologies of pipe welding and welding materials.
At present, pipe-making plants are undertaking a large-scale production modernization. And, obviously, their management will do everything possible so as not to lose such a luring prestigious order.