Transneft Opposes Rosneft Plans to Increase Chinese Oil Supply via Kazakhstan

By Ben Priddy, April 5, 2013

WEB EXCLUSIVE, Moscow. After signing a new supply agreement with CNPC on the sidelines of Chinese President Xi Jinping's visit to Moscow in late March, Rosneft is now looking for additional supply routes to China. Russian news sources have reported recently on a possible Russo-Kazakh oil swap deal to increase crude supply to China from a western route starting in 2014. Yet, Russia's state-owned pipeline operator Transneft stands in the way, proposing an alternative transit route via railroad through Mongolia instead.

The March supply agreement between CNPC and Rosneft foresees doubling crude deliveries to 31 million tons annually.  "At present, we supply 15 million tons per year, [even] 50 million is not something unattainable," Igor Sechin told Russian television station "Rossiya 24" prior to Jinping's visit to Moscow in March. "This is a priority market, there is corresponding infrastructure and other supply options available," he said. Yet, Sechin acknowledged that Rosneft is unable to rely solely on its Far Eastern supply routes to satisfy its new supply agreement with CNPC.

Although phase two of the East Siberia-Pacific Ocean (ESPO) pipeline came online in December 2012, connecting the pipeline to Kozmino port and increasing the pipeline's capacity to 30 million tons per year, Rosneft's other supply contracts prevent it from directing the pipeline's full capacity towards China. "The new agreement provides for an increase in supply to up to 31 million tons via three routes," Interfax quoted Sechin in March. Rosneft current supply routes in Russia's Far East include the Skovorodino-Mokhe branch of Transneft's ESPO pipeline and tanker deliveries from the oil terminal at Kozmino. The company is now considering a third possible route via Kazakhstan or Mongolia to reach its 31 million ton supply target.

Kazakhstan began exporting crude oil to China in 1997 and gradually increased its supply deliveries to a peak of 220,000 barrels per day in 2011, according to a new paper by Yelena Kalyuzhnova, Centre for Euro-Asian Studies, and Julian Lee, Centre for Global Energy Studies in the UK. "However, exports appear to have slipped slightly, to 210,000 bpd in 2012, despite the extension of the Kazakhstan-China oil pipeline back to the Aktyubisnk oilfields [near Aktobe on Kazakhstan's northwest border with Russia]," Kalyuzhnova and Lee write. KazTransOil, Kazakhstan's state-run pipeline company, already announced plans in mid-March to expand the capacity of the Atasu-Alashankou oil pipeline to China to up to 20 millions over the next several years from its current capacity of 14 million tons, leaving open the opportunity to increase transit of Russian crude through the pipeline. Yet, Transneft, Russia's state-owned pipeline operator, opposes the idea.

"Kazakhstan is prepared to offer a discount for transiting [Russian] crude via the Atasu-Alashankou pipeline, then push us out of the business to pump its own oil," Igor Demin, Transneft's press secretary, told Russian newspaper RBC Daily. According to Demin, this could lead to a loss of $1.5 billion in transit revenue for the company. Instead, Rosneft should consider using Mongolia to transit additional oil to China, Demin said.