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Home / Issue Archive / 2009 / May #5 / Novaya Zemlya Pipeline 
Offers Economical Alternative


№ 5 (May 2009)

Novaya Zemlya Pipeline 
Offers Economical Alternative


   Falling oil prices force Russian oil professionals to initiate far-reaching cost reduction policies. Sizeable savings could be provided by cutting transport costs. 

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   This may be achieved if more efficient routes are used to supply oil to the global market. One of such new routes includes oil loading at the Novaya Zemlya archipelago (Arctic Ocean). This would enable double or even triple reduction of funds spent on pipeline oil transportation as the share of tanker shipments, which are cheaper, is increased. However, this requires the construction of an oil loading terminal on the archipelago, as well as the construction of pipelines to provide links between the terminal and oil fields.
 
   The most efficient oil transportation means are the marine shipments using dedicated tankers. In the second half-year 2008 tanker shipments cost $0.15-0.2 per 100 t/km, while average pipeline oil transportation tariff was put by Transneft pipeline monopoly at $0.92 per 100 t/km. Marine routes have virtually unlimited capacity and eliminate the issue of transit via third countries; over the past few years, these points have triggered the growth of tanker shipments for Russian crude. Still, transportation costs remain unreasonably high due to unfortunate geographic location of marine oil terminals, as well as non-optimal transportation routes.
 
   With oil exports, transport cost minimisation requires two conditions. First, marine oil terminals must be located as near as possible to oil production regions. Second, pipelines must link oil production regions and marine terminals by the least distance. Russia’s oil transportation system mismatches these conditions entirely. Primarily this is due to the usage of the infrastructure formed in entirely different economic and geopolitical conditions.
 
    In Soviet times, most of oil was consumed domestically, and the shortest route to oil refining centers in the European part of the country was land-based. Up till late 1970s, the Volga-Urals region was the key oil-producing base of the country, so it became dotted with oil infrastructure installations, including pipelines to neighbouring regions. With the launch of Western Siberia oil projects, an evident solution was to link new fields with the existing infrastructure, having accordingly expanded and upgraded it beforehand. Betting on pipeline routes had no alternative in the conditions the Volga-Urals region, and it had to great extent defined transportation routes for the Siberian crude. Since the key importers of Soviet crude were the socialist states of Eastern Europe, pipeline routes were particularly efficient.
 
   Marine oil transportation as secondary, oil terminals were “attached” to the pipeline system already in place. As a result, the main Soviet  marine oil terminals – Ventspils and Novorossiysk – were located over 3,000 kilometers away from Western Siberia oil fields. After the breakdown of the USSR, the need to cut down oil transportation via the neighbouring states resulted in growing share of tanker shipments and construction of new oil terminals. Still, the commitment to maximum utilization of the existing pipeline network resulted in placing the new terminals in the Gulf of Finland, also at the considerable (some 2,500 kilometers) distance from Western Siberia. The BTS-2 Project on linking the Druzhba pipelines with Ust-Luga and Primorsk oil terminals was the focal point of such approach. If implemented, the project would mean that Siberian oil gets to the Gulf of Finland via Volga river basin and south-western Russia, via the route that looks like a gigantic arch, the length of which approximates 4,500 kilometers (see Map 1).
 
   The drawbacks inherent to the existing oil transportation system indicate the existence of the substantial reserves for performance gains. Cost reduction could be achieved by offsetting the pipeline oil transportation with cheaper marine shipments. This calls for new oil terminals close to oil production regions.
Russia’s key oil production region, Western Siberia, is relatively close to the shore, though this is the Arctic Ocean shoreline – ice conditions make the route extremely difficult for navigation.  In Soviet times the route was open throughout the year thanks to high power ice class ships, including nuclear ice-breakers. Yet, for oil transportation such system is uneconomic.
 
   The west coast of the Novaya Zemlya archipelago is the nearest to Western Siberia location with a year-round navigation without ice-breakers. Favorable ice conditions assured by warm currents in the Barents Sea (Map 2). Even in the winter months, only relatively thin strip of floating ice blocks the route and all that required is a small ice-breaker. The archipelago is rich in deep-water bays that can service even the largest tankers. The Belushya Guba bay already houses small coastal port, housing settlement and an airport. The distance between Belushya Guba and oil fields in the north of Western Siberia (Noyabrsk) is some 1,300 kilometers. This means that the location is fit for the construction of a new oil terminal.
 
   The terminal will be designed primarily for loading of Western Siberian crude, which would require construction of the Western Siberia – Novaya Zemlya oil pipeline. This route is half the length of pipeline route to the Gulf of Finland via Perm – Nizhny Novgorod – Yaroslavl (Map 2), and only one third of the length of the Druzhba – BTS-2 pipeline. According to the author’s estimates, given the tariffs effective in late 2008, transportation of one ton of oil via Perm – Nizhny Novgorod – Yaroslavl route cost some $30, via BTS-2 – over $40, and only $14 to Novaya Zemlya if such pipeline is installed.
 
   In the latter case the marine leg of the route grows somewhat, compared to the terminals in the Gulf of Finland, for example, to ARA region in Western Europe – from 2,700 to 3,700 kilometers. Still, this drawback is compensated by the availability of larger tankers, where freight charges per capacity unit are lower. 
 
   The construction of an oil pipeline link to Novaya Zemlya would enable export of Siberian Light crude blend instead of Urals, which would put up the price by $2 per barrel ($15 per ton) on average. Considering the reduction of transportation costs and a step-up in oil price, the economic benefit is expected at $30-40 per ton.
 
   The Novaya Zemlya terminal also could contribute to shipments of oil produced in Timano-Pechora region, if a short linkage pipeline is installed between Khariaga field pipelines and the new oil pipeline Western Siberia – Novaya Zemlya (see Map 3). This route will be one-third of the BTS-1 pipeline (Pechera – Yaroslavl– Primorsk) length and will provide much better marine navigation conditions than the south coast terminals (Varandey, Indiga).
The main drawback of the project is high investment cost. Therefore, several companies would be required for the project implementation, including Gazprom; the project could include LNG terminal in parallel to the oil terminal.
 
   The favorable ice conditions render Novaya Zemlya a prospective location for the construction of LNG production and loading facility. In early 2009 Gazprom has entered this advanced segment of the global market, having built first LNG production and export facilities in the Far East under the Sakhalin II project. A similar production base is required in Western Siberia or in the European part of Russia for LNG shipments to Europe and the U.S. East Coast. There are draft projects outlining LNG production at Yamal peninsula, but the construction cost is extremely high here, while LNG shipments would be handicapped by ice conditions of the Kara Sea. The Novaya Zemlya project seems as the best option as it provides a year-round navigation and the shortest distance to gas fields (for example, only 500 kilometers from Kharasavey gas field at Yamal to Belushya Guba bay).
 
   For the gas giant, taking part in the project jointly with oil companies would ensure smaller outlays for construction and exploitation of the new terminal. At the same time, Gazprom’s stake-in boosts the chances of project implementation. There are several options for LNG production in Russia’s north, just as well as several alternatives for oil terminals. Yet only Novaya Zemlya could ensure mutual synergy of integrated oil and LNG transportation project.
In the long term, Belushya Guba could specialize as ore terminal as well – the bay’s eastern coast houses Rogachevsko-Taininsky manganese ore deposit, which is the largest in Russia according to estimates. To the north of the bay experts prospecting for lead-zinc ore deposits, to the south-east – for native copper deposits. It is still premature to talk about developing mining industry at Novaya Zemlya – all ore deposits need additional geologic prospecting. Yet there is no doubt that Belushya Guba terminal would provide a good stronghold in developing new oil and gas fields offshore Barents and Kara seas and would improve Russia’s standing in western Arctic.
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