Baku-Novorossiysk: collision of "Transneft" -1

Yuri Glushkov exclusively for Vestnik Kavkaza

On February 14 Azerbaijan will stop pumping oil via the Baku-Novorossiysk route. This is the date of expiry of the intergovernmental agreement on transit of Azerbaijani oil through Russia, concluded in 1996. In past years, the agreement was automatically renewed, but in May 2013 Russian Prime Minister Dmitry Medvedev signed a decree on withdrawal of Russia from it. During this period, the State Oil Company of Azerbaijan (SOCAR), one of the biggest suppliers of oil to the pipeline, and the Russian pipeline monopolist "Transneft " have not had coherent negotiations on revising the terms of pumping Azerbaijani oil to the Russian port on the Black Sea. It is noteworthy that none of the parties considers the end of cooperation to be a tragedy, as everyone realizes that during the last five years at least the work of the pipeline, using it to supply Azerbaijani oil, had more of a political meaning and wasn’t very close to real economics. It must be explained that, for SOCAR, the presence of a northern oil export route was important to maintain relations with Russia, and the fundamental decision to preserve the route was made by Heydar Aliyev, while many people urged him to abandon it. The pipeline was one of the connections between the two countries. And when these states were still a united country the Baku-Novorossiysk pipeline worked in the opposite direction, delivering oil for processing at the Baku refineries.

 

But times have changed and the pipeline was reversed. In recent years the economics of the project ceased to satisfy both sides, so their negotiations on changing the conditions of the basic agreement were not very active. The claimed pumping volume (up to 5 million tons a year) was beyond SOCAR's capacities, they supplied about 2-2.5 million. The only case when about 4 million tons of raw materials were transported from Azerbaijan to Russia was in 2008, during the five-day war in South Ossetia. The seemingly preferential tariff for pumping Azeri light oil to Novorossiysk (15.67 dollars per ton, or a little more than two dollars per barrel in terms), compared to the supply of oil via the Baku-Tbilisi-Ceyhan pipeline to the Turkish Mediterranean, turned out to be not so cheap. For SOCAR as a BTC project shareholder, the price of a barrel of raw material to Ceyhan costs within 6 dollars. However, from Ceyhan Azeri light oil has always been sold with a premium to "Brent" (according to this North Sea reference, oil traded in Europe) up to $3 or even $5. And in Novorossiysk, hydrocarbons were mixed and sold as Russian "Urals", estimated cheaper than “Brent" by one dollar or even more. As a result, the price difference was leveled in pumping. Azerbaijan estimated annual losses from such regrading to be approximately $40 million. SOCAR’s requests for the introduction of a quality bank in Novorossiysk, which would take into account and cover such clearances of oil qualitative characteristics evaluations, have not been fulfilled by "Transneft". It is noteworthy that the problem of a quality bank in the largest Black Sea port of Russia is typical not only for the Azerbaijani state oil company. Russian exporters of quality oil suffer from it as well. The Russian pipeline monopoly helps "Urals" in their own way. For example, to mitigate the damage to the Russian sort and reduce its sulfur content, in particular, in 2014 "Transneft" plans to redirect up to 3 million tons of heavy oil from "Bashneft" to the east, withdrawing it from Novorossiysk. The Russians, in turn, are not content with spending big money on the maintenance of the pipeline that runs from Azerbaijan. As CEO Nikolai Tokarev stated in the middle of January at a meeting with journalists, "Transneft" spends $52-53 million on maintenance of the section of the Baku-Novorossiysk pipeline from the Azerbaijani border (Shirvanovka) to Makhachkala." This 200-km long pipeline costs a lot to “Transneft", he said. But that's not all. Against Novorossiysk are other related factors, first of all, the infrastructure. In the Russian port, only one berth at Sheskharis terminal can handle tankers that are able to take on board up to 250 tons of oil, while at the same time in Ceyhan two 300-thousanders can be uploaded simultaneously. Mind you, the tankers from Novorossiysk have to pass the Turkish straits to go to the Mediterranean for further transportation of raw materials to processing plants in Europe, Asia and America.

 

This makes the freight more expensive, unlike the Mediterranean port of Ceyhan. All these advantages combined with high oil prices have allowed the BTC project shareholders, led by the British BP, to cover all the costs of its creation and pay off all the loans taken in 2009. For several years, BTC has been one of the most profitable pipelines in the region, despite the fact that barely more than half of its stated capacity (60 million tons) is filled. Oil is pumped through it not only by the members of the consortium on developing the Azeri Caspian Azeri-Chirag-Guneshli fields complex. Turkmen oil producers also use it, as well as the Kazakh consortium "Tengizchevroil" that is producing the "Tengiz" field.

 

 

As for the Baku-Novorossiysk pipeline, it has been announced that the 231-kmAzerbaijani section of the pipeline from Baku to the Russian border will beinspected thoroughly. The Russian side also announced its plans forconservation of the area from the border with Azerbaijan to Makhachkala.According to "Transneft", inert gas will be pumped into the pipeline sectionShirvanovka-Makhachkala.While the rest of the pipeline from Makhachkala to Novorossiysk willcontinue to be used for the transportation of oil coming from Makhachkalafrom "Lukoil's" Yuri Korchagin field in the Russian sector of the CaspianSea, as well as from Kazakhstan and Turkmenistan. And the port of Makhachkala will keep the necessary load for further development. Apart from that, one cannotdiscount the fact that by the beginning of 2016 "Lukoil" will begin usingthe second large field on Russia's Caspian shelf - the "Filanovsky Field". Itspotential is estimated at about 200 million tons, and will give asignificant increase in turnover to Makhachkala and to theMakhachkala-Novorossiysk pipeline.As a result, unless something else happens, after the expiration of theagreement, the unused part of the Baku-Makhachkala pipeline will be stoppedand preserved until better times.As a reasonable option for continuing the work of the Baku-Makhachkalapipeline, its future reverse is being considered, which will redirect thevolumes of Russian oil to be refined in Azerbaijan, transporting part of itto the terminal in Ceyhan (Turkey) via BTC. In August, during the visit ofthe Russian President to Baku, it was announced that SOCAR and "Rosneft"had stated exploring options for mutual deliveries of oil equivalentcircuit, including the use of individual sections of the Baku-Novorossiyskpipeline in reverse mode. By some estimates, the volume of deliveriesmay be about 2 million tons per year.For "Rosneft", an exit to Ceyhan would be an important component fordiversification of supply of raw materials for processing, particularlyat its refinery in Italy. As replacement and swap operations could be used,delivery of finished petroleum products in Azerbaijan or processing inAzerbaijani companies for the fast-growing economy of the SouthCaucasian country. In addition,"Rosneft" owns exploration licenses for several promising offshore fieldsin the shelf of the Russian sector of the Caspian Sea. In the future, theseflows could also be used for cooperation with Azerbaijan.The position of "Transneft" and its head Nikolai Tokarev is certainlyserious, but irresistible for Igor Sechin, head of Russia's largest oilcompany "Rosneft", former vice-premier of the Russian government, whooversaw the entire energy sector. They have already had friction witheach other regarding the expansion of the pipeline system "Eastern Siberia- Pacific Ocean" and oil supplies to China.At "Rosneft" Mr Sechin, in fact, became the ideologue and guide of the newenergy policy of Russia in the global scale - from China and Venezuela tothe Arctic and Western Europe. And here he has carte blanche from VladimirPutin, who supports the ideas of his colleague and friend. Mr Sechin'svisits to Baku last year showed a real interest in cooperating withAzerbaijan and using the potential that the country has created, includingin transport logistics.The situation with the fate of the Baku-Novorossiysk pipeline does notindicate any cooling in relations between the two countries. It's just thatto open a new book, you need to finish reading the old one.

 

As for the Baku-Novorossiysk pipeline, it has been announced that the 231-kmAzerbaijani section of the pipeline from Baku to the Russian border will beinspected thoroughly. The Russian side also announced its plans forconservation of the area from the border with Azerbaijan to Makhachkala.According to "Transneft", inert gas will be pumped into the pipeline sectionShirvanovka-Makhachkala.
While the rest of the pipeline from Makhachkala to Novorossiysk willcontinue to be used for the transportation of oil coming from Makhachkalafrom "Lukoil's" Yuri Korchagin field in the Russian sector of the CaspianSea, as well as from Kazakhstan and Turkmenistan. And the port of Makhachkala will keep the necessary load for further development. Apart from that, one cannotdiscount the fact that by the beginning of 2016 "Lukoil" will begin usingthe second large field on Russia's Caspian shelf - the "Filanovsky Field". Itspotential is estimated at about 200 million tons, and will give asignificant increase in turnover to Makhachkala and to theMakhachkala-Novorossiysk pipeline.

As a result, unless something else happens, after the expiration of theagreement, the unused part of the Baku-Makhachkala pipeline will be stoppedand preserved until better times.
As a reasonable option for continuing the work of the Baku-Makhachkalapipeline, its future reverse is being considered, which will redirect thevolumes of Russian oil to be refined in Azerbaijan, transporting part of itto the terminal in Ceyhan (Turkey) via BTC. In August, during the visit ofthe Russian President to Baku, it was announced that SOCAR and "Rosneft"had stated exploring options for mutual deliveries of oil equivalentcircuit, including the use of individual sections of the Baku-Novorossiyskpipeline in reverse mode. By some estimates, the volume of deliveriesmay be about 2 million tons per year.
For "Rosneft", an exit to Ceyhan would be an important component fordiversification of supply of raw materials for processing, particularlyat its refinery in Italy. As replacement and swap operations could be used,delivery of finished petroleum products in Azerbaijan or processing inAzerbaijani companies for the fast-growing economy of the SouthCaucasian country. In addition,"Rosneft" owns exploration licenses for several promising offshore fieldsin the shelf of the Russian sector of the Caspian Sea. In the future, theseflows could also be used for cooperation with Azerbaijan.
The position of "Transneft" and its head Nikolai Tokarev is certainlyserious, but irresistible for Igor Sechin, head of Russia's largest oilcompany "Rosneft", former vice-premier of the Russian government, whooversaw the entire energy sector. They have already had friction witheach other regarding the expansion of the pipeline system "Eastern Siberia- Pacific Ocean" and oil supplies to China.
At "Rosneft" Mr Sechin, in fact, became the ideologue and guide of the newenergy policy of Russia in the global scale - from China and Venezuela tothe Arctic and Western Europe. And here he has carte blanche from Vladimir Putin, who supports the ideas of his colleague and friend. Mr Sechin'svisits to Baku last year showed a real interest in cooperating withAzerbaijan and using the potential that the country has created, includingin transport logistics.
The situation with the fate of the Baku-Novorossiysk pipeline does notindicate any cooling in relations between the two countries. It's just thatto open a new book, you need to finish reading the old one.