Thursday, May 27, 2010

TNK-BP expects ESPO oil blend price to grow within 3-6 months

Anglo-Russian oil venture TNK-BP expects the price of Russia's new East
Siberian crude export blend ESPO in the Asian market to rise within the next
three to six months as consumers become more familiar with the grade, TNK-BP
vice president Jonathan Kollek said Thursday.

At present, ESPO is being traded some $1.50/barrel lower than its market
value, Kollek added, speaking on the sidelines of an industry conference in

ESPO, which started being exported from a new export terminal at Kozmino
on Russia's Pacific coast at the end of last year, is currently traded at a
discount to Middle East benchmark Oman/Dubai blend.

In recent weeks, the price of ESPO crude has been rising relative to
other grades.

In its latest tender, Rosneft sold ESPO cargoes loading in July and early
August at discounts to Dubai of 35-66 cents/barrel, compared with bigger
discounts of 89 cents/b to $1.47/b for June and early-July cargoes.

Since coming onto the market in late 2009, ESPO crude has been brought by
many refiners in Asia, with smaller volumes also being shipped to the US.

Kollek said ESPO's price would rise, as the blend's quality and the
stability of supply have been confirmed.

ESPO is likely to become a benchmark within two to three years, when the
second stage of the ESPO pipeline project is completed, boosting the route's
throughput, he told the conference.

At the same time, further development of the project--allowing the linkup
of new fields to the route--will change the quality of the blend, he said.

Russia launched the first, 600,000 b/d stage of the ESPO line running
across East Siberia to Skovorodino in Russia's Far East, near the border with
China, in late December. From Skovorodino, 300,000 b/d is transported by rail
to a new export terminal of Kozmino on the Pacific coast.

The first stage of the ESPO project also includes a 300,000 b/d offshoot
from Skovorodino to China, due to be completed at the end of 2010.

Transneft has already started work on the pipeline's second stage, which
is to extend the route to Kozmino and simultaneously to expand its capacity to
1 million b/d by the end of 2012. At a later stage, the route could be
expanded further to 1.6 million b/d.


Separately, Kollek said an expected increase in Russia's transportation
capacity in the coming years would allow oil producers to re-direct volumes
between westward and eastward directions, providing flexibility for producers'
sales strategy for the first time.

Russia is expected to bring 78 million mt/year of new transportation
capacity by 2014, with crude production estimated to grow by nearly 40 million
mt/year by that time, he said.

"This is a very good thing for oil producers because [the extra capacity]
will give us alternatives, options to choose where to go," he said.

As a result, oil producers will be able to make decisions on crude supply
directions depending on where the price is better, he said.

Transneft, which is also expanding pipeline capacity westwards, is doing
"a fantastic" job, he added.

When asked if this would lead to cuts in supplies of Russia's main export
blend Urals to western markets and how this could affect Urals prices, Kollek
said: "I expect a tightening in the deliveries to the west and consequently a
tightening in the prices."

In theory, he said, the discount at which Urals is currently being traded
to Brent could narrow.

"Those days [of large discounts to Brent] are over," he said.

At the same time, he added that it is hard to say how significant a
change to Urals price could take place, as Urals' quality is lower than that
of Brent.

In June 2009, Russia started building a new 30 million mt/year pipeline
dubbed BPS 2, which is a link from Russia's key westward oil pipeline Druzhba
at Unecha to a loading terminal in Ust-Luga on the Baltic coast, to export
crude westwards bypassing neighboring Belarus.

--Nadia Rodova,

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