Russian Pipelines Linking up With Chinese Markets


Part of the challenge for extracting rare fossil fuels is being able to cheaply and quickly move them from upstream to downstream. One solution that has been created in Russia is the Caspian Pipeline Consortium (CPC). Rosneft is a member and has been using the CPC's infrastructure since 1996 to ensure its product gets to market from target extraction points. Royal Dutch Shell (NYSE: RDS-A) is heavily invested in pipeline infrastructure in Russia, often partnering with Rosneft in joint ventures. The CPC also represents national will and Russia's desire to control their energy independence. The relative logistical success of the CPC can be a template for other endeavors where Russia and China can create solutions for their energy needs.

Transneft has the monopoly on pipelines within Russia. It has created many joint ventures with the E&P majors to create an infrastructure network that is a virtual spiders web between Russia and China. To handle the increase flow demand Transneft is building China-bound spurs from major pipelines.

The importance of infrastructure
An oil company's ability to affordably transport crude to refineries is crucial. If the upstream and downstream infrastructure is not in place then the economic viability of the deposit will not provide a useful return on investment.

The CPC is capable of moving petroleum products via pipeline from the Tengiz oil fields in Kazakhstan to the port of Novorossiysk, one of Russia's leading Black Sea ports, more than 1,510 km away. This sort of reliable capability is essential for Rosneft as it develops more oil and gas fields farther away from refineries and ports. Royal Dutch Shell has entered into a joint venture with Rosneft under the DBA of Rosneft Shell Ventures LTD. The ownership is spit 51% Rosneft and 49% Shell.

One of the pitfalls of the CPC is that is runs through several nations -- this can complicate pricing schemes and delivery times. The ideal situation would be a pipeline that can cover as much distance as possible with the least amount of interference from trade regulations and laws.

Rosneft owns and operates seven major refineries in Russia and four mini-refineries that are used primarily for regional subsidiaries. Their mini-refineries are mainly used by the many subsidiaries that are partnered with Rosneft. Two of these refineries are located in Siberia and could be used to further process the natural gas and oil coming out of the shale fields of Western China and Siberia.

China's growing dependency upon Russian petroleum was demonstrated when Transneft and Rosneft agreed to expand the Eastern Siberia-Pacific pipeline to China. The spur will run from Skovorodino to the Chinese border. Rosneft recently signed a contract with China National Petroleum Corporation(CNPC) to increase the flow capacity of the Skovorodino-Mohe pipeline to 30 million tons of oil per year until 2025.


The importance of Kazakhstan
Kazakhstan is becoming a petroleum hub for both Russia and China. The success of the CPC shows how important an efficient pipeline can in assuring scheduled deliveries of product and keeping costs low. China has been building a massive pipeline in their western province Xinhua. It will link up with the CPC pipeline and open markets up for both Russia and China as well as creating infrastructure alternatives in case one pipeline is down.

Kazakhstan is part of a larger investment strategy that is on the nation state scale. Russia and China are actively developing their infrastructures to handled larger flow capacity. The increased level of demand could easily go well into the next decade.

As a member of the Customs Union along with Russia and Belarus, Kazakhstan enjoys a preferred trade status with fellow members. This translates into relaxed trade tariffs and expedited cross-border trade.

A note to investors
Dwindling fossil fuel deposits will force E&P efforts to examine more remote areas making it harder to deliver the raw products to refineries. Regardless of where the next strike is, if the closest pipeline or rail-head is too far away then no sizable profits will be realized. One sign of securing profit for the investment is to develop infrastructure projects.

China has contractual agreements with Russia for exclusive oil deliveries well into the next decade. Nationalized oil companies will play an increased role of responsibility as well as provide opportunity for a greater profit.

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