ESPO Pipeline to Be Russia’s Costliest

18.02.2008 (15:17) | RBC

Russia’s biggest oil pipeline project, the East Siberia-Pacific Ocean (ESPO), seems to be the costliest, too.

According to RBC Daily, the ESPO cost estimate stood at $14 billion by the end of October 2007, $2.8 billion more than initially planned by Transneft. If the completion deadline is extended until the autumn of 2009, the construction costs could be higher, experts warn.

The first section of the ESPO, with an annual capacity of 30 million tonnes, had been expected to be completed before the end of this year. However, Transneft President Nikolai Tokarev said last week that the pipeline would not become operational before the fourth quarter of 2009. In January 2007, the project was estimated at $11.2 billion (in 2006 prices), and the estimate was raised to RUB 337.12 billion, or $12.5 billion, in August 2007 (at the exchange rate for the third quarter of 2006, when the dollar was worth RUB 26.86).

The $2.8 billion increase in the project costs follows from the inspection of the construction work by Transneft’s commission (inspection certificate dated November 4, 2007). In rubles, the cost estimate increased by RUB 41.2 billion. This is how Transneft estimates the construction of the special marine and oil port Kozmino, the final destination of the ESPO pipeline.

According to the inspection certificate, from October 26 to November 4 the company inspected the construction work for the ESPO’s first section. As of November 4, the combined project costs stood at RUB 344.5 billion (approx. $14 billion at the current exchange rate). The construction of the section from Taishet to Skovorodino was worth RUB 303.28 billion ($12.3 billion at the current exchange rate and $11.3 billion in 2006 prices). The construction of the Kozmino port is estimated by the company at RUB 41.199 billion ($1.67 billion), but this is a preliminary estimate, which is to be verified later, Transneft stressed.

The Industry and Energy Ministry has not commented on the issue. Transneft Vice President Mikhail Barkov told RBC Daily that the company was not going to take large loans to complete the construction of the ESPO, and hoped to remain within the approved financing. As for the Kozmino costs, Transneft said it could not comment because it did not have the necessary information.

Starting from 2008, the Federal Tariff Service raised Transneft’s tariffs by 19.45 percent, which means that Transneft’s annual revenue will increase $2 billion, according to Vladimir Vedeneyev, an analyst with the Bank of Moscow. So, if the ESPO cost estimate remains unchanged, Transneft will have enough cash to cover the costs.

A source close to Transneft said the initial cost estimate of $11.2 billion did not include the Kozmino project costs, which were estimated at $750 million. At the same time, he said the significant increase in the project price was due to the fact that the initial estimates were based on 2006 prices, while everything is much more expensive today.

In January, Transneft announced a tender for the delivery of equipment and construction of the Kozmino port, the ESPO’s final destination. Construction is scheduled for April 2008 to October 2009, which means that contracts will be based on 2008 prices. Experts say the port’s construction costs could rise markedly once the contracts are signed.

According to Sergei Semenov, Deputy Director of Morskiye Stroitekhnologii, by the end of 2007 prices for construction materials rose by 8 percent on average compared with 2006, while prices for metals and subcontractor services increased even more. Anatoly Kondratyev, a former expert at Stroikomplekt, Transneft’s subcontractor for the ESPO, believes that cargo transportation and underwater operations will be the most expensive services.

Natalya Milchakova, at Otkritie Financial Corporation, says the costs could be higher than $14 billion as Transneft will also have to invest in the construction of the necessary infrastructure for the pipeline. She said Transneft could easily borrow to finance the project, including from western banks.

Mikhail Krutikhin, a partner at Rusenergy consultancy, also expects real costs to be higher, noting that even with the current estimate, the project could take over 40 years to pay off. He said the cost of transportation until the Chinese border alone could be $70 per tonne or more, which would be too much for Transneft.

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