Kozmino Cozies Up With Eastern Importers

Less than three months ago, Russia began operations at its newest tanker terminal at Kozmino—strategically located in Eastern Siberia on the Asian Pacific. As Russia aims to diversify its energy exports, boosting trade to oil-hungry nations in the Far East, the Kremlin takes a solid position in the middle of what many argue has been the saving grace of tanker demand. But as Kozmino barrels replace long-haul trades from the Arab Gulf and West Africa, Russia’s entrance into feeding the hungry tiger may wind up leaving tanker demand short-changed. Prime Minister Vladimir Putin noted the strategic importance of greater access to Asian markets, personally overseeing the departure of the first tanker from the port. “This is definitely a serious event. It’s a strategic project, because it gives us access to completely new markets – the Asian and pacific markets, which are growing and have a huge potential. Today Russia is present on these market, but on a very small scale. Today’s opening gives us completely new possibilities.” Exports by tanker of Russia’s Eastern Siberia-Pacific Ocean (ESPO) crude have grown from 850,000 tons in January to 1.16 million tons in February, and are poised to grow further to 1.25 million tons this month. Shipments have been made via Aframax and Suezmax tankers, with cargoes typically of the 80, 100, or 130 thousand ton sizes from Kozmino’s 21m deep berth. Japan, South Korea and Malaysia have been taking most of the ESPO crude, but China and even the US have entered the market as well. To importers, ESPO blend has more desirable properties as it is lighter and sweeter than most Arabian crudes, allowing refiners to yield more gasoline and kerosene per barrel. Atop favorable quality, the reduced cost of transporting these barrels to the East has attracted a growing list of purchasers. The emerging tanker trade from Kozmino / Japan takes just three days, versus the TD 3 route (Arab Gulf / Japan) which lasts 20 days. Kozmino’s 1.25 million tons for export this month generate about 1.1 billion ton-miles assuming all barrels are sourced to Japan. If we further assume that these barrels replace Ras Tanura’s, tankers lose about 8.2 billion ton-miles of demand, or a net 7.1 billion ton-miles by substituting with the short-haul trade. While the potential effect on tanker demand caused by replacing long-haul barrels with those from Kozmino may be alarming, there is a cap to just how far Russia can feed the Asian crude markets. Siberian regions estimate that new fields under development will not be able to produce more than 35 million tons of crude per year for ESPO, with the majority sourced from the Vankor and Samotlor fields despite a target capacity of 80 million tons. This means that even should all ESPO crude go to Asian buyers, it would only cover 4.6% of the Far East’s total liquids demand (up from 2% at current output levels). The only thing more detrimental to tanker demand than a growing short-haul trade is a pipeline. 2012 will see the completion of the Skovorodino/Manchuria pipeline, bringing output up to 600,000 barrels per day from 300,000 barrels per day forecast for late-2010. By further reducing transportation costs, Russia’s infrastructure investments will enable them to further capitalize on exports to China–a nation whose growing demand for crude is forecast to outpace all others in the coming years. Although Russian pipelines cannot answer all of the East’s demand, 600,000 barrels per day via land could mean that China will require nine less VLCC cargoes per month by 2012. Furthermore, Kozmino’s short-haul barrels can potentially detract from 7.1 billion ton-miles of tanker demand typically taken by the VLCC sector as well. While Russia’s entrance into the Eastern markets is a comfortable position for the Kremlin, the long term effects on tanker demand may not yield cozy results for all.