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Russia unveils $25 bn oil link to Pacific

Dmitry Zaks
Russian President Vladimir Putin, pictured during a press conference in Brussels, on December 21, 2012. Putin has unveiled the final extension of a new $25 billion oil pipeline to the Pacific that underscores the energy power's gradual shift away from stagnant European markets.

Russian President Vladimir Putin on Tuesday unveiled the final extension of a new $25 billion oil pipeline to the Pacific that underscores the energy power's gradual shift away from stagnant European markets.

The East Siberia-Pacific Ocean (ESPO) link is also expected to expand sales to the United States and fulfil Putin's dream of cementing Russia's place as a dominant force in international crude markets.

Moscow hopes to turn the price of oil transported through ESPO into a benchmark in the Asia-Pacific region that competes with West Texas Intermediate (WTI) -- the US oil standard whose price some traders believe is too heavily based on domestic political factors.

But analysts worry that Russia may currently lack enough accessible oil in its underdeveloped East Siberia fields to keep the line fully flowing despite strong demand in China and Japan.

"There is just enough East Siberian oil for the existing pipeline," said Sberbank Asset Management energy analyst Valery Nesterov.

"But expanding this pipeline further would be impossible without West Siberian oil -- and that oil is already meant to go west," Nesterov pointed out.

Putin brushed those concerns aside as he joined in the launch ceremony by video link from the Far East city of Khabarovsk.

"By completing the second leg, our potential is expanding," Putin said in televised remarks. "This is a serious event."

The second leg of the 4,200-kilometre (2,600-mile) pipe runs from fields west of Lake Baikal to the Pacific port of Kozmino near the northeastern edge of China.

The port -- previously connected to East Siberian oil fields by rail -- also provides Russia with quick access to Japan and South Korea.

But the head of the Transneft state oil pipeline operator said the lion's share of the crude from the final leg would in fact be destined for the United States.

"The American market will receive 35 percent of Kozmino oil," Nikolai Tokarev said at the opening ceremony in comments reported by the company's website.

"Around 30 percent will go to Japan and 28 percent to China."

Russia has repeatedly tried and failed to make meaningful inroads into the US oil and natural gas markets.

Its gas sales never materialised after the North American shale revolution made both Canada and the United States effectively self-sufficient.

Analysts note that US oil production is also expanding at rates that should see the country outpace Russia and Saudi Arabia in the next few years.

"We can only be talking about a few tankers (going to the United States), and only if they are profitable," said ATON investment house analyst Vyacheslav Bunkov.

But Transneft's Tokarev appeared to be placing his bets on new markets as he dismissed the idea of offering Europe any assurances that the continent could continue to rely on Russian oil.

"We do not owe a single EU country a thing, and we are certainly not obligated to account for ourselves," RIA Novosti quoted Tokarev as saying.

The pipe's first leg had until now pumped 30 million tonnes (220 million barrels) of oil per year from Eastern Siberia to the Chinese border town of Skovorodino.

Half of that oil went along an existing pipeline to the Chinese city of Taishet, while the other was transported by tanker car to Kozmino.

The extension will allow Russia to boost output along the first half of the link to 50 million tonnes (367 million barrels) per year.

China will continue to receive its 15 million barrels while the remaining 35 million barrels will be distributed among various clients at Kozmino.

Transneft's Tokarev said sales to markets besides China had to reach 30 million barrels before ESPO became a meaningful international benchmark.

"If this happens soon, we can safely say that the world has obtained a new grade of oil -- one that we can be proud of."