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Vol. 15, No. 28 Week of July 11, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Cashing in on tragedy

Single-hull tankers carry Siberia crude to US; Russians hope to replace Alaska oil

Kay Cashman

Petroleum News

The actions of the Obama administration to halt all offshore Alaska drilling and deepwater drilling in the Gulf of Mexico as it tightens regulations for the oil and gas industry is bolstering the prospects of yet another source of foreign crude imports for the United States, this time from Russia, a country with a less than sterling environmental and safety record.

Moreover, Siberian crude, like other foreign oil, is being transported to U.S. West Coast refineries in single-hull tankers that were outlawed in U.S. ports following the 1989 Exxon Valdez spill, which demonstrated that double-hull vessels were needed to prevent oil spills in the case of a grounding or collision.

According to a July 6 Wall Street Journal report the Siberian crude is “challenging” domestically produced Alaska oil in the West Coast market which, depending on the refiner, is mixed with crude from Mexico, South America or the Middle East in a 20-40 percent blend.

In the space of the last few months Russian oil exports to the United States went from zero barrels per day to 100,000 bpd.

Produced in eastern Siberia by Gazpromneft, Rosneft, Surgutneftegaz and TNK-BP, the oil is being exported via the Eastern Siberia-Pacific pipeline, or ESPO, a pipeline system for exporting Russian crude oil to Asia-Pacific markets, including Japan, China, Korea and the U.S. states of California, Oregon and Washington.

Russian officials have said ESPO crude might someday include Western Siberia production.

Russia’s leaders look to increase domestic output

ESPO’s $14.4 billion, 1,713-mile long, first phase has two sections. The first, which was operational in late 2009, runs from Taishet to Skovorodino in Russia’s Amur region. The second section, a smaller diameter line from Skovorodino to Daqing, China, will be completed and operational by the end of the year. The line to Skovorodino ships 315,000 bpd; by the end of 2010 it will reach a capacity of 600,000 bpd, 300,000 of which will go to China.

The crude is currently shipped by rail from Skovorodino to a new export terminal at Kozmino on Russia’s Pacific coast. After the $11.97 billion, 1,300-mile long, second phase from Skovorodino to Kozmino is complete in 2013, ESPO will carry 1 million bpd. A third, as yet unscheduled, phase will bring that flow rate to1.5-plus million bpd.

Unlike the U.S. Obama administration which is already implementing changes that will increase the regulatory burden and costs of the oil and gas industry in the United States, Russia’s leaders are focusing on increasing domestic production for export.

According to Jorge Montepeque, global editorial director of markets and price assessments for Platts, ESPO crude currently accounts for 4 percent of U.S. West Coast refining capacity, a percentage he sees as growing in the years to come as pipeline capacity from Siberia increases.

In a July 7 interview with RT.com, Montepeque said if the United States tightens offshore exploration, which it “most likely will do” because of the blowout and oil spill in the Gulf of Mexico, exploration costs offshore will go up and U.S. offshore production will go down, while the “appetite” for oil in the United States will either stay the same or “moderately grow.” Factor in declining oil production from Alaska and more oil will have to come from foreign sources, he said.

Russia better than Iraq, but Alaska best

Kevin Banks, director of the State of Alaska’s Division of Oil and Gas, is not much concerned about where the foreign oil comes from. He told Petroleum News July 7 that Russia is much better than Iraq, which used to be a major supplier to West Coast refiners.

But single-hull foreign oil tankers in West Coast ports does bother him, as does declining production from Alaska, a problem exacerbated by the Obama administration on and offshore.

Banks, who just returned from vacation with relatives in Santa Monica, Calif., said “Californians just don’t get it. … There is a significant risk with these foreign tankers. …The new fleet of double-hulled ships that come in from Alaska, they are cleaner burning vessels … and a lot safer if they bump into something, as they are less likely to leak.”

“Where the U.S. has imported oil from has never made a difference because price has always been the determining factor. The market will favor origins that are closer to the West Coast, such as Alaska, because the netbacks are higher. But if we’re not going to produce as much oil here, then the West Coast will have to import more oil.”

What needs to be made clear, Banks said, is that while the State of Alaska has one of the most stringent environmental protection regimes in the world, it has offered up all kinds of financial incentives to entice oil companies to explore for and develop more oil and gas within its borders, which includes the near-shore. Many of those incentives also apply to federal onshore leases.

“We’ve pushed it as far as we can” financially, but there are “a lot of prospects that lie offshore in federal waters that we need to proceed cautiously with but with all speed to develop. Not just offshore but onshore,” such as in the National Petroleum Reserve-Alaska.

“The federal government, even BLM (the department of Interior’s Bureau of Land Management), is getting kind of whacked out in how they manage their onshore lands,” Banks said.

“To the extent that (environmental and safety) oversight can be improved, then let’s improve it where it is necessary. If the state needs to be engaged in a proactive way, such as with BP’s offshore Liberty project — and the state does have significant oversight in the drilling of those wells because they are being drilled from state land — then let’s get on with it. … But let’s do all we can to boost our production,” Banks said, noting the oilfield technology recently displayed by executives visiting Alaska from a major Russian oil company was “technology oil companies in Alaska were using in the 1970s.”



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