Russia’s Pipeline Dreams Under Threat

March 2015, Vol. 242, No. 3

Nicholas Newman, Contributing Editor

Russia is the second-largest producer of dry natural gas and the third-largest liquid fuels producer in the world, and these products are inextricably intertwined with its government. State-controlled company Rosneft dominates oil production while Transneft owns and operates Russia’s oil pipelines.

Gazprom is the country’s dominant gas producer and pipeline operator, and the Ministry of Finance admitted in February that oil and gas royalties, taxes and dividends account for at least 50% of the Russian government’s revenue.

Russia’s oil and gas pipeline network is the world’s most extensive at 222,000 kilometers, and there are plans to construct an additional 20,923 km by 2018 which. If built, the new infrastructure have a substantial impact on natural gas-trade flows into Europe and on crude oil and natural gas exports into Asia.

Transneft: Oil Export Operator

Transneft transports about 88% of Russian crude oil production, over 27% of its oil products, and significant amounts of hydrocarbons and oil products. Transneft oil pipelines link major Russian oilfields with refineries and export markets in Europe and Asia, either directly or via seaports. The company operates 53,600 km of trunk oil pipelines and 19,100 km of oil product pipelines (Figure 1).

Transneft delivers 994,000 bpd of Russian oil to Germany alone, according to Deutsche Wella. It also owns the oil ports at the ends of its pipelines such as the Far Eastern port of Kozmino, which is the terminal point of the Eastern Siberia-Pacific Ocean oil pipeline.
By 2020 Transneft expects to complete the construction of 2,300 km of new trunk pipelines, 38 pumping stations and 125 storage tanks to deliver oil to China, South Korea and Japan.
Gazprom: Producer, Operator

Gazprom, owns 168,900 km of gas pipelines, and delivered 677 Bcm of gas (23.9 Tcf) to its customers, a staggering 20% of global natural gas production. Ilya Skomorokhov, Gazprom representative, said, “There are currently 10 major pipelines in Russia, eight of which are export pipelines.”

Of these, five: Yamal-Europe I, Northern Lights, Soyuz, Bratstvo and Nord Stream carry nearly 6 Tcf/d of Russian gas to East and West European markets via Ukraine, Belarus and across the Baltic Sea.

The other three, Blue Stream, North Caucasus and Mozdok-Gazi-Magomed, connect Russia’s production areas to consumers in Turkey and the Former Soviet Union (FSU) republics in the east.

Pipelines In Development

“Construction is underway at the Bovanenkovo-Ukhta and the Southern Corridor gas pipeline systems as well as the Power of Siberia gas transmission system,” Skomorokhov said, pointing to major projects (Figure 2).

In addition, Gazprom is preparing the groundwork to connect Western Siberian gas fields via the proposed Altai pipeline to China and the Russian Black Sea coast with Turkey.

Threats Facing Operators

Russia’s pipeline operators face many challenges including political disputes over transit through Ukraine, aging infrastructure, weather protection, low oil prices and increasing competition.

The difficulties of transit through Ukraine, combined with the European Union’s (EU’s) decision to reduce its reliance on Russian gas, has encouraged Gazprom to look eastward for customers as seen in the landmark agreement with China in May 2014 to build the Blagoveshchensk (Russia) to Daqing (China) gas pipeline to supply 38 Bcm of natural gas annually starting in 2018.

A major problem is the cost of renewing Russia’s aged infrastructure. At least one-third of the country’s oil pipelines and 38% of the gas pipelines are over 30 years old, according to Russian non-governmental news agency Interfax. Both Gazprom and Transneft are investing heavily in their existing pipelines.

Weather Protection

Protecting pipelines with heat insulation against extreme cold and from permafrost is essential, notably in northern Siberia. Rosneft has a 560-km pipeline linking its Vankor oilfield with the trunk line owned by Transneft. A 200-km portion of this heat-insulated pipeline is built aboveground due to permafrost.

Pipes are typically given 3LPE coatings (three-layer polyethylene) with factory applied polyurethane foam. Weather conditions also require equipment of enhanced durability and reliability, “for example, high-grade cold-resistant steel pipes designed for the operating pressure of 11.8 MPa,” said Skomorokhov.

The lack of real third-party access to Russia’s state-owned pipelines is a causal factor in the wasteful practice of flaring. According to the U.S. National Oceanic and Atmospheric Administration (NOAA), Russia flared an estimated 1,320 Bcf of natural gas or 27% of the world’s total volume of flared gas in 2011.

Moreover, EU objections to Gazprom’s ownership of the proposed South Stream pipeline, together with the gas that was to flow to southern Europe, was cited by Russia as the reason for canceling the project on Dec 1.

The collapse in oil prices together with economic sanctions which bar Russian access to western capital markets and technology are taking a toll on Russia’s energy projects and have affected Arctic projects and expanding pipeline networks to the Chukchi Sea, Laptev Sea and Kara Sea oil and gas fields.

“All these new investments in high-cost and offshore pipelines have been set back by the price fall as well as by sanctions, which apply to offshore and Arctic oil,” noted Jonathan Stern, senior research fellow at the Oxford Institute for Energy Studies.

Russia’s plans to construct pipelines into Europe and Asia are vulnerable to a shortage of funds, slowing demand and competition. As Stern noted, “Yamal-Europe 2 is not happening. Altai will not be affected as long as finance comes from Chinese banks but the contract has yet to be signed.

“In Europe, demand for Russian pipeline gas is not growing as expected, resulting in surplus capacity in Gazprom pipelines that deliver gas to the EU. In addition, Eastern Europe’s pipeline network is becoming less Russia-centric and new LNG terminals could start accepting cheap U.S. gas imports from 2018.”

As a result, it is not surprising that the white elephant known as South Stream was canceled – no doubt the same will occur with its replacement, Turkish Stream.

Figure 2: Power of the Siberia gas pipeline. Source: Gazprom

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