Russia’s Transneft says Caspian pipeline expansion is running late

A major expansion of the first private pipeline in the former Soviet Union is running late – up to one year behind schedule – a Russian shareholder said, complicating oil exports from the Caspian Sea region ahead of a jump in output.

Oil majors such as Eni, Shell, ExxonMobil and Total are preparing to launch one of the world's biggest fields, Kashagan in Kazakhstan, and hope to obtain access to as many export routes as they can. Delays in expanding the CPC Pipeline from Kazakhstan to Russia will therefore limit export options from the landlocked region, pushing more crude towards Russian state pipelines, China and costly Caspian Sea routes.

Delays for CPC

"There will be no material pipeline expansion this year, as the project is six months to a year behind schedule," Russian pipeline monopoly Transneft's Vice President Mikhail Barkov told Reuters, citing "technical reasons".

Russia is a big shareholder in the CPC pipeline, alongside Kazakhstan and US oil major Chevron.

Barkov said shareholders would convene in Almaty next week to discuss the project.

The expansion plans

The consortium had planned to expand the pipeline's capacity to just under 1 million bpd from the current 640 000 bpd as early as the middle of 2013. It wants to boost capacity further to 1.3 million bpd by 2015.

Currently, CPC is primarily shipping oil from Kazakhstan's large Tengiz and Karachaganak fields to an export terminal near the Russian Black Sea port of Novorossiisk. The conduit was launched more than 10 years ago and gave the Caspian Sea region a viable alternative to Russian state pipelines.

Production at Kashagan is due to start later this year, almost 10 years later than planned, and ultimately reach 1 million bpd - more than 1% of global oil output.

Delays in CPC's expansion have already made Russia a surprise favourite to ship the first oil from Kashagan to world markets, adding to headaches for the world's most expensive oil development.

Export cuts announced

The Caspian Pipeline Consortium, operator of the only oil-export link in Russia that has shared foreign ownership, will cut daily September crude exports from the Black Sea to the lowest in six months. CPC will ship 2.57 million t this month, compared with 2.87 million t in August, according to the schedule. That’s equal to 664 724 bpd, the least since March and down 7.6% from last month.

Costs for Kashagan have soared because the Eni-led consortium developing it revised expenditures up fivefold in the last decade – to almost US$ 50 billion – as a result of building artificial islands and infrastructure in the Caspian Sea.

Caspian crude - history

Debates about oil-evacuation options from the landlocked Caspian sea have run on for a decade, with Russian pipeline monopoly Transneft initially among the outsiders.

Other routes considered by Eni and its partners ExxonMobil, Royal Dutch Shell and Total included a BP-led Azeri-Turkish link; a Chevron-led Russian-Kazakh CPC pipeline to the Black Sea; and a route to China.

Over the past few years, several of those options have become less likely, making Transneft the unexpected frontrunner to ship the bulk of oil from Kashagan, at least during the first years.

Kashagan crude could go via Atyrau, or China

Several sources among oil majors said a large portion of oil from Kashagan would go via Transneft's Atyrau-Samara pipeline, connecting Kazakhstan to Russian trunk pipelines and allowing oil exports via the Black Sea, Baltic Sea or Central Europe.

"They are asking to ship up to 5 million t (100 000 bpd) via Atyrau from September. We said yes," a Transneft source said. The company declined official comment.

The Atyrau-Samara pipeline currently ships 300 000 bpd, has a capacity of 400 000 bpd and can be boosted to 600 000 bpd with modest investments, the source said.

Sources said some Kashagan volumes, which could amount to 140 000 bpd next year, gradually rising to 300 000 bpd, may still go toward other routes such as CPC or China.

Russia has long suffered a decline in its transit role for oil from Kazakhstan, its former Soviet neighbour, with global oil majors and then China gaining significant influence.

Transneft’s transportation decisions: mixing it up?

Transporting the first Kashagan crude via Russian pipelines will allow Transneft to earn significant fees, but is also important in determining where the oil emerges in world markets.

Transneft has the flexibility of sending oil to Europe's north or south. Most oil is expected to flow to the Mediterranean, which has seen a fall in supplies due to sanctions on Iran and Iraqi outages. 

It remains unclear whether Transneft will ship Kashagan oil intact or mix it with Russia's main export grade, Urals.

"We can separate flows without mixing them up," the Transneft source said. Traders, however, said they expected to get Urals.

Complicating preparations is the fact that the market has yet to see the quality of Kashagan oil, which is believed to be light but containing unwelcome parts such as mercaptans, leading to high crude viscosity.

Quality is the main reason why the currently underused BP-led pipeline to the Turkish port of Ceyhan has refrained from taking Kashagan because it is shipping high-quality Azeri Light.

Chevron's CPC pipeline would accept Kashagan's quality but its own expansion has been repeatedly delayed.

Other companies hope to buy into Kashagan

Once completed, CPC will start taking Kashagan, especially from majors such as Exxon and Shell – which are big shareholders in CPC and the field – and Kazakh state oil firm KazMunaiGas.

"CPC is a priority route for KazMunaiGas," said a source at the firm, adding that some volumes could be sent by tanker via the Caspian Sea and then by rail to the Mediterranean.

China National Petroleum Corp, which hopes to buy into Kashagan after ConocoPhillips sells out, will most likely want to send oil to China using modest amounts of spare pipeline capacity.

"If output at Kashagan hits 300 000 bpd, it is clear that all these capacities taken together will not be enough," a source in Kazakhstan said. "But first you have to launch output at the field," he added. 

Several market sources have suggested the consortium could be forced to postpone the commercial start to next year. Eni has insisted it would start before October as otherwise it would have to pay fines to Kazakhstan.

Edited from various sources by Elizabeth Corner

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