Highly recommended route – Newspaper Kommersant No. 207 (7408) dated 11/09/2022

The volume of deliveries of oil cargoes by rail in the east direction in October increased by 1.5 times, according to the data of Russian Railways. However, this is mainly about oil products (fuel oil, naphtha): oil supplies remain small, as the companies could not agree on a discount for transportation by rail. Experts believe that it is unlikely that such transportation will actively grow even in the run-up to the EU embargo on Russian oil.

In October, the volume of oil cargo exports through the ports of the Far East increased by 1.6 times compared to the same period last year, to 703.7 thousand tons, Russian Railways reported. In general, loading in the direction of the Far Eastern ports increased by 1.6%. Traders interviewed by Kommersant confirmed such volumes, noting that they are mainly oil products from Far Eastern refineries (Komsomolsk refinery of Rosneft and Khabarovsk refinery of the Independent Oil Company).

Thus, we are not talking about additional deliveries of oil to the port of Kozmino by rail, interest in which could arise against the backdrop of the introduction of the EU embargo on Russian oil in December. After 2016, when the ESPO pipeline was fully completed, the option with rail transportation to Kozmino was not used, and the infrastructure along the route was mothballed. But at the end of September, the structure of Transneft – Transnefteprodukt – sent a batch of Gazprom Neft oil worth 4.4 thousand tons from the Zuy station in the Irkutsk Region to the port of Kozmino. Argus experts estimated the technically available capacities for such transportation at 7 million tons of oil per year, however, in practice, they expected half the volumes and only under the condition of a suitable railway tariff (see “Kommersant” dated October 4).

Now, Kommersant’s sources in the market assure that the route for railroad deliveries from the Irkutsk region to Kozmino is actually not working, since suppliers could not agree with Russian Railways on a discount on transportation, and without it rail transportation is unprofitable.

Transneft does not comment on the situation.

Now, the head of the Center for Analysis of Strategy and Technologies for the Development of the Fuel and Energy Complex of the Gubkin Russian State University, Vyacheslav Mishchenko, believes that the volume of exports of petroleum products by rail is growing, including fuel oil and naphtha, the demand for which is increasing against the backdrop of an increase in refining volumes. At current prices in Asian markets, the export of petroleum products remains profitable even taking into account the cost of rail logistics.

As for oil, for its cost-effective transportation to the east, it is more logical to expand the ESPO pipeline, but this requires long-term guarantees of loading from oil companies, says Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation. Now Russian oil companies are redirecting oil to Asian markets by sea. The main question is how long-term the reorientation of oil flows to new markets will be and what volumes will be discussed, since expanding the ESPO is unprofitable for small volumes, Mr. Yushkov believes.

Kommersant’s sources estimate the cost of doubling the current capacities of ESPO at no less than 1 trillion rubles, although they acknowledge that from a technical point of view there are no obstacles to this.

It will take time for oil companies to assess the long-term effects of the reorientation of exports, including the dynamics of the Urals discount to Brent, as well as the dynamics of freight costs for Russian oil cargo. Now the Urals discount to Brent is about $25 per barrel in the European market and about $5-7 in the Asian market. Given the need to reorient approximately 2.5 million barrels per day of oil exports from the ports of the European part of the Russian Federation to the Asian market, the losses of Russian oil companies at the discount (if it persists) could amount to $18 billion per year (about 1 trillion rubles at the current exchange rate).

Olga Mordyushenko