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Home / Issue Archive / 2012 / October #10 / Bye Bye Belarus! Ust-Luga Terminal Routes Russian Oil Direct to Europe

№ 10 (October 2012)

Bye Bye Belarus! Ust-Luga Terminal Routes Russian Oil Direct to Europe

   Russia’s newest oil terminal began commercial operations last week, six months after Russian President Vladimir Putin inaugurated the testing phase of the site that establishes a direct link between Russia and Europe.

By Ben Priddy

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   The new oil terminal is located at the Ust-Luga (Усть-Луга) merchant seaport on the Gulf of Finland, one of Europe’s largest multipurpose seaports with an annual transit capacity of up to 180 million tons of goods per year. The new terminal holds significant strategic implications for Russia’s oil industry – it is the final destination of the Baltic Pipeline System-2 (BTS-2), which will have the capacity to transit up to 15 percent of Russia’s annual oil output without having to pass through former Soviet countries that Moscow currently relies on for oil transshipments to Europe.

   Plans for constructing the BTS-2 pipeline materialized after the 2007 dispute between Russia and Belarus, which tried to increase oil transit tariffs from Russia and, according to Russian authorities, illegally siphon oil destined for Europe. Construction of the BTS-2 commenced after a decree by Russian President Vladimir Putin in December 2008. The pipeline was completed in October 2011, but initial operations at the Ust-Luga oil terminal were delayed for six months due several technical challenges.

   Transneft, which has purchased a 26 percent stake in the Ust-Luga oil terminal’s operator, Neva Pipeline Company, owns the BTS-2. The pipeline diverts north from the Druzhba Pipeline near the Belarusian border and runs approximately 1,000 kilometers to the Ust-Luga seaport, completely bypassing Russia’s troublesome neighbor.

   Ust-Luga oil terminal began test operations in March 2012 after overcoming a number of technical and environmental setbacks. “Unfortunately, construction was carried out before adequately analyzing the project’s adaptability to geological conditions at the site,” according to Anton Vasilevskiy, representative of RusGidro’s Research Institute of Hydrotechnology. Vasilevskiy explained that loose sand around the site led to landslides, which displaced sections of the original moorings at the Ust-Luga oil terminal in late 2011 and caused the six month delay in operations.

   Only one of two moorings at the oil terminal are currently in operation, with the second scheduled to come online by the end of this year, according to Neva Pipeline Company General Director Konstantin Khamlai. Two reservoirs are also currently under construction that will increase the terminal’s shipping capacity to 38 million tons of oil per year.

   At a press conference in Ust-Luga on September 27, Khamlai and a number of lead engineers from Transneft, Rosneftbunker, and Neva Pipeline Company spoke to a group of reporters about the challenges and opportunities presented by the opening of BTS-2 and the new sea terminal. “The commercial launch of the oil terminal is an important step in the development of export channels for Russian hydrocarbons to European countries,” Khamlai said. “Full scale operations of the [BTS-2] system and the oil transit terminal will enable Russian oil companies to improve logistical flows and lower operating costs in the export of oil to European countries.” Khamlai also stated that up to 20 percent of oil transited through BTS-2 and on to ships at the Ust-Luga oil terminal would come from Kazakhstan.

   The Ust-Luga seaport was chosen as the final destination for BTS-2 for it’s ease of access to global markets. According to the port’s website, the Gulf of Finland has a short ice-over period – approximately 40 days – and provides easy access to other major ports in Northern Europe. “Regarding downstream consumers – these will remain the same as before, it’s just a matter of changing the export route,” Khamlai said. “It also of course depends on the buyer. The oil from BTS-2 and Ust-Luga could go to Asia, Southeast Asia, or ports in Poland. This hasn’t changed from before, only the transshipment route is different.”
The Ust-Luga seaport is located far away from the congested St. Petersburg transit hub and is currently undergoing significant infrastructural development. Russia’s Ministry of Transport and Russian Railways have teamed up to construct a number of highways and railways that will strengthen transportation links between the seaport and major commercial hubs in northwest Russia. Furthermore, the seaport is home to a number of other terminals, including ones for the transshipment of coal, natural gas condensate, and light oil products. Practically all terminals are presently operating at below capacity as construction continues.

   According to the Ust-Luga company’s website, the natural gas condensate terminal will reach it’s maximum projected capacity of 6 million tons per year in 2015 or 2016. The seaport’s terminal for light oil products is scheduled to reach full capacity of 4 million tons per year (up to 1.5 million tons of liquefied petroleum gas and 2.5 million tons of light oil) by the end of the fourth quarter 2012.

   Russian investors, including Transneft, Rosneftbunker, Gunvor, and Novatek, have funded the construction of most terminals, including the BTS-2 oil terminal at Ust-Luga.

   The start of commercial operations at the Ust-Luga oil terminal marks a strategic victory for Moscow in its pursuit to reduce reliance on former Soviet transit countries. “The emergence of BTS-2 and the Ust-Luga oil terminal is a cause for serious panic among European transit countries, who became used to receiving remittances from Moscow for transiting Russian oil to European markets,” Khamlai stated. Prior tariff disputes between Russia, Belarus, and Ukraine have hurt Moscow’s image abroad as a reliable oil and gas supplier, including in many European countries. But the BTS-2 pipeline increases Moscow’s control over future oil exports to the West, eliminating the potential for supply disruptions en route to some of Russia’s most valuable end markets, and reducing reliance on unruly transit countries.

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